-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H8B4iIMKeaLHSgTDLO/+I3QFSuYf9Y+jVqxroPcYUuHlTn2ku8WMwNhwlqRZ0Pq0 NM1NLB9M+Kn0/zrH7MRC8w== 0000950120-96-000294.txt : 19961225 0000950120-96-000294.hdr.sgml : 19961225 ACCESSION NUMBER: 0000950120-96-000294 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19961224 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INITIAL ACQUISITION CORP CENTRAL INDEX KEY: 0000899394 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 133197002 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-18725 FILM NUMBER: 96685655 BUSINESS ADDRESS: STREET 1: 810 SEVENTH AVE 27TH FLR CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2123332620 MAIL ADDRESS: STREET 1: 810 SEVENTH AVE STREET 2: 27TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10019 S-4 1 FORM S-4 OF INITIAL ACQUISITION CORP. AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 24, 1996 REGISTRATION NO. 333- =========================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 __________________ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ___________________ INITIAL ACQUISITION CORP. (Exact name of registrant as specified in its charter) Delaware 6778 (a blank check company) 13-3197002 (Jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation) Classification Code Number) Identification Number) 810 Seventh Avenue New York, New York 10019 (212) 333-2620 (Address, including zip code, and telephone number, including area code, of Registrant's Principal Executive Offices) Salvatore J. Zizza, Chairman and President 810 Seventh Avenue New York, New York 10019 (212) 333-2620 (Name, address, including zip code, and telephone number, including area code, of agent for service) ___________________ with a copy to: Leonard Gubar, Esq. Reid & Priest LLP 40 West 57th Street New York, New York 10019 (212) 603-2000 ___________________ Approximate date of commencement of proposed sale to the public: As soon as practicable after the Registration Statement becomes effective and the consummation of the Merger (as defined below). If the securities being registered on this Form are to be offered in connection with the formation of a holding company and there is compliance with Instruction G, check the following box. [ ] CALCULATION OF REGISTRATION FEE ========================================================================== PROPOSED TITLE OF EACH AMOUNT TO PROPOSED MAXIMUM CLASS OF BE MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE OFFERING REGISTRATION REGISTERED (1) PER SHARE(2) PRICE(2) FEE(2) -------------------------------------------------------------------------- Common Stock, $.01 par value per 7,190,654 Not share shares Applicable $73,272,764 $22,203 ========================================================================== (1) Represents the number of shares of common stock, $.01 par value per share (the "IAC Common Stock"), (i) issuable by the Registrant upon consummation of the merger (the "Merger") of Hollis-Eden, Inc. with and into the Registrant and (ii) underlying certain warrants and options to be issued by the Registrant in connection with the Merger. (2) Pursuant to Rules 457(f)(1) and 457(c) of the Securities Act of 1933, as amended, the registration fee was computed on the basis of the average of the closing bid and asked prices per share of IAC Common Stock on December 20, 1996, as reported on the OTC Electronic Bulletin Board of the National Association of Securities Dealers, Inc. ($10.19). THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. =========================================================================== CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY PRELIMINARY COPIES INITIAL ACQUISITION CORP. 810 SEVENTH AVENUE NEW YORK, NEW YORK 10019 , 1996 Dear Stockholder: You are cordially invited to attend a Special Meeting of Stockholders of Initial Acquisition Corp., a Delaware corporation ("IAC"), to be held on . , 1997 at 10:00 a.m., local time, at . , New York, New York . (the "Meeting"). At this important Meeting, you will be asked to consider and vote upon proposals to: (1) Approve and adopt a certain Agreement and Plan of Merger (the "Merger Agreement"), dated as of November 1, 1996, among IAC, Hollis-Eden, Inc., a Delaware corporation ("Hollis-Eden"), Mr. Salvatore J. Zizza and Mr. Richard B. Hollis, providing for, among other things, (i) the merger of Hollis-Eden with and into IAC, with IAC being the surviving corporation (the "Surviving Corporation") to the merger (the "Merger") and (ii) the issuance to the stockholders of Hollis-Eden and to the holders of warrants and options to acquire Hollis-Eden capital stock as a result of the Merger of (a) an aggregate of 4,911,004 shares of common stock, $.01 par value per share, of the Surviving Corporation (the "Surviving Corporation Common Stock"), subject to possible adjustment, (b) warrants to purchase an aggregate of 1,501,603 shares of Surviving Corporation Common Stock upon the same terms as currently outstanding Hollis-Eden warrants and (c) options to purchase an aggregate of 778,047 shares of Surviving Corporation Common Stock upon the same terms as currently outstanding Hollis- Eden options, in exchange for all of the issued and outstanding capital stock of Hollis-Eden; (2) Elect six directors to hold office effective upon the consummation of the Merger; and (3) Approve and adopt IAC's 1996 Incentive Stock Option Plan. Upon the consummation of the Merger, the Surviving Corporation will change its name to Hollis-Eden Pharmaceuticals, Inc. and the business of the Surviving Corporation will be that of Hollis-Eden immediately prior to the Merger. Stockholders have certain redemption and appraisal rights in connection with the Merger. A detailed description of the Merger and such rights is set forth in the accompanying Joint Proxy Statement/Prospectus (the "Joint Proxy Statement/Prospectus"). Please review the Joint Proxy Statement/Prospectus carefully with respect to your choices. THE BOARD OF DIRECTORS OF IAC HAS UNANIMOUSLY APPROVED THE MERGER AND THE OTHER PROPOSALS TO BE VOTED UPON AT THE MEETING AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER AND SUCH OTHER PROPOSALS. THE BOARD OF DIRECTORS OF IAC BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, IAC AND IAC'S STOCKHOLDERS. Whether or not you are able to attend the Meeting, please complete, sign and date the enclosed proxy and return it in the enclosed envelope as soon as possible. Proxies are revocable, either in writing at any time prior to the Meeting or at the Meeting prior to voting, or by voting at the Meeting. Your prompt cooperation is greatly appreciated. Regardless of the number of shares of IAC Common Stock you own, your vote is important. Very truly yours, Salvatore J. Zizza Chairman of the Board and President INITIAL ACQUISITION CORP. PRELIMINARY COPIES 810 SEVENTH AVENUE NEW YORK, NEW YORK 10019 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON . , 1997 NOTICE IS HEREBY GIVEN that a Special Meeting of the stockholders of Initial Acquisition Corp. a Delaware corporation ("IAC"), will be held at 10:00 a.m., local time, on . , 1997 at . , New York, New York . (the "Meeting") for the following purposes: (1) To approve and adopt a certain Agreement and Plan of Merger (the "Merger Agreement"), dated as of November 1, 1996, among IAC, Hollis-Eden, Inc., a Delaware corporation ("Hollis-Eden"), Mr. Salvatore J. Zizza and Mr. Richard B. Hollis, providing for, among other things, (i) the merger of Hollis-Eden with and into IAC, with IAC being the surviving corporation (the "Surviving Corporation") to the merger (the "Merger") and (ii) the issuance to the stockholders of Hollis-Eden and to the holders of warrants and options to acquire Hollis-Eden capital stock as a result of the Merger of (a) an aggregate of 4,911,004 shares of common stock, $.01 par value per share, of the Surviving Corporation (the "Surviving Corporation Common Stock"), subject to possible adjustment, (b) warrants to purchase an aggregate of 1,501,603 shares of Surviving Corporation Common Stock upon the same terms as currently outstanding Hollis-Eden warrants and (c) options to purchase an aggregate of 778,047 shares of Surviving Corporation Common Stock upon the same terms as currently outstanding Hollis- Eden options, in exchange for all of the issued and outstanding capital stock of Hollis-Eden; (2) To elect six directors to hold office effective upon the consummation of the Merger; (3) To approve and adopt IAC's 1996 Incentive Stock Option Plan; and (4) To transact such further or other business as may properly come before the Meeting or any adjournments or postponements thereof. Upon the consummation of the Merger, the Surviving Corporation will change its name to Hollis-Eden Pharmaceuticals, Inc. and the business of the Surviving Corporation will be that of Hollis-Eden immediately prior to the Merger. A copy of the Merger Agreement is attached to the accompanying Joint Proxy Statement/Prospectus as Appendix A and is incorporated herein by reference. STOCKHOLDER APPROVAL AND ADOPTION OF THE MERGER AGREEMENT WILL RESULT IN A CHANGE OF BOTH THE MAJORITY EQUITY OWNERSHIP AND MANAGEMENT OF IAC AS WELL AS THE BUSINESS OF IAC. Only IAC stockholders of record at the close of business on . , 1996 (the "Record Date") are entitled to receive notice of and to vote at the Meeting and any adjournments or postponements thereof. Holders of shares of IAC common stock, $.01 par value per share (the "IAC Common Stock"), are entitled to one vote on each matter considered and voted on at the Meeting for each share of IAC Common Stock held of record as of the close of business on the Record Date. The affirmative vote of two-thirds of the outstanding shares of IAC Common Stock voting at the Meeting, either in person or by proxy, is necessary to approve and adopt the Merger Agreement and the transactions contemplated thereby. All holders of IAC Common Stock prior to IAC's initial public offering (the "IPO") in May 1995 (the "Initial IAC Stockholders") are obligated to vote their respective shares of IAC Common Stock in accordance with the vote of the majority in interest of all shares voted by all other holders of IAC Common Stock (the "IAC Non-Affiliate Stockholders") with respect to the Merger Agreement. The affirmative vote of the holders of a plurality of the outstanding shares of IAC Common Stock voting is required for the election of each director. The affirmative vote of a majority of the outstanding shares of IAC Common Stock voting is required for the approval and adoption of the IAC 1996 Incentive Stock Option Plan. IF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE NOT APPROVED BY THE REQUISITE VOTE, THE MERGER AGREEMENT WILL BE TERMINATED AND THE MERGER WILL BE ABANDONED. IN SUCH EVENT, THE PROPOSAL TO ADOPT THE IAC 1996 INCENTIVE STOCK OPTION PLAN WILL NOT BE IMPLEMENTED EVEN IF SUCH PROPOSAL IS APPROVED BY THE REQUISITE VOTE. Each of the IAC Non-Affiliate Stockholders (and each Initial IAC Stockholder who (i) participated in the February 1993 private placement of IAC securities and (ii) purchased shares of IAC Common Stock in the open market after the IPO (the "After Acquired Stock"), but only to the extent of the After Acquired Stock) has the right (the "Redemption Right") to elect to have any or all of his or her shares of IAC Common Stock redeemed for $[10,78] per share (the "Redemption Value"), by indicating such election on his or her proxy card and depositing such proxy card in the United States mail postmarked within 30 calendar days of the mailing of this Joint Proxy Statement/Prospectus (such 30 calendar day period being hereinafter referred to as the "Redemption Period"). The Redemption Value has been calculated by dividing (a) the amount of the proceeds of IAC held in the escrow account (including interest thereon) established in connection with the IPO as of the Record Date by (b) the number of shares of IAC Common Stock held by the IAC Non-Affiliate Stockholders as of the Record Date. If IAC Non-Affiliate Stockholders elect to redeem 15% or more of their shares of IAC Common Stock within the Redemption Period, IAC will not proceed with the Merger and will not redeem such shares. If IAC Non- Affiliate Stockholders elect to redeem less than 15% of their shares of IAC Common Stock within the Redemption Period, and assuming that IAC otherwise satisfies the required conditions for the Merger, IAC may proceed with the Merger, but will be required to redeem the shares of IAC Common Stock requested by the IAC Non-Affiliate Stockholders at their Redemption Value upon the consummation of the Merger. An IAC Non-Affiliate Stockholder may exercise his or her Redemption Right only if he or she expressly votes against the Merger within the Redemption Period. IAC Non-Affiliate Stockholders may not exercise their Redemption Rights if they are seeking their appraisal rights. An IAC Non-Affiliate Stockholder who votes against the Merger after the Redemption Period will not be entitled to have any of his or her shares redeemed. Any IAC Non-Affiliate Stockholder returning a proxy card which expressly votes for the Merger or returning an executed proxy card which fails to indicate how his or her shares should be voted, shall be deemed to have waived his or her Redemption Right. A proxy card which indicates that an IAC Non-Affiliate Stockholder expressly abstains from voting on the proposal to approve the Merger shall not be deemed an exercise of such IAC Non-Affiliate Stockholder's Redemption Rights. AN IAC NON-AFFILIATE STOCKHOLDER WHO SELLS ANY OF HIS OR HER SHARES OF IAC COMMON STOCK AFTER ELECTING TO HAVE SUCH SHARES REDEEMED SHALL FORFEIT THE RIGHT TO RECEIVE THE REDEMPTION VALUE WITH RESPECT TO SUCH SHARES. A holder of IAC Common Stock may dissent from the Merger and, if the Merger is consummated, such holder shall receive payment of the fair value of his or her shares in cash if the holder files with IAC a written demand for appraisal prior to the vote with respect to the Merger being taken at the Meeting and does not vote his or her shares of IAC Common Stock in favor of the Merger. Holders of IAC Common Stock are also entitled to certain redemption rights as described in the Joint Proxy Statement/Prospectus. For further discussion of both appraisal rights and redemption rights, see "GENERAL INFORMATION - IAC Special Meeting; Redemption Rights" and " - Appraisal Rights" in the accompanying Joint Proxy Statement/Prospectus. A complete list of the stockholders entitled to vote at the Meeting shall be open to the examination of any stockholder, for any purpose germane to the Meeting, at the offices of IAC, during ordinary business hours, for a period of ten days prior to the Meeting. (ii) Whether or not you plan to attend the Meeting, please complete, date and sign the accompanying proxy card and mail it promptly in the enclosed pre-addressed envelope, which requires no postage if mailed in the United States. Any holder of IAC Common Stock who executes and returns a proxy card may revoke such proxy at any time before it is voted by (i) notifying in writing the Secretary of IAC at 810 Seventh Avenue, New York, New York 10019, (ii) granting a subsequent proxy or (iii) appearing in person and voting at the Meeting. Attendance at the Meeting will not in and of itself constitute revocation of a proxy. THE BOARD OF DIRECTORS OF IAC UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. BY ORDER OF THE BOARD OF DIRECTORS Salvatore J. Zizza Chairman of the Board and President New York, New York . , 1996 (iii) HOLLIS-EDEN, INC. PRELIMINARY COPIES 808 SW Third Avenue, Suite 540 Portland, Oregon 97204 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON . , 1997 NOTICE IS HEREBY GIVEN that a Special Meeting of the stockholders of Hollis-Eden, Inc., a Delaware corporation ("Hollis-Eden"), will be held at 10:00 a.m., local time, on . , 1997 at . , Portland, Oregon . (the "Meeting") for the following purposes: (1) To approve and adopt a certain Agreement and Plan of Merger (the "Merger Agreement"), dated as of November 1, 1996, among Initial Acquisition Corp., a Delaware corporation ("IAC"), Hollis-Eden, Mr. Salvatore J. Zizza and Mr. Richard B. Hollis, providing for, among other things (i) the merger of Hollis-Eden with and into IAC, with IAC being the surviving corporation (the "Surviving Corporation") to the merger (the "Merger") and (ii) the issuance to the stockholders of Hollis-Eden and to the holders of warrants and options to acquire Hollis-Eden capital stock as a result of the Merger of (a) an aggregate of 4,911,004 shares of common stock, $.01 par value per share, of the Surviving Corporation (the "Surviving Corporation Common Stock"), subject to possible adjustment, (b) warrants to purchase an aggregate of 1,501,603 shares of Surviving Corporation Common Stock upon the same terms as currently outstanding Hollis-Eden warrants and (c) options to purchase an aggregate of 778,047 shares of Surviving Corporation Common Stock upon the same terms as currently outstanding Hollis- Eden options, in exchange for all of the issued and outstanding capital stock of Hollis-Eden; and (2) To transact such further or other business as may properly come before the Meeting or any adjournments or postponements thereof. Upon the consummation of the Merger, the Surviving Corporation will change its name to Hollis-Eden Pharmaceuticals, Inc. and the business of the Surviving Corporation will be that of Hollis-Eden immediately prior to the Merger. A copy of the Merger Agreement is attached to the accompanying Joint Proxy Statement/Prospectus as Appendix A and is incorporated herein by reference. Only Hollis-Eden stockholders of record at the close of business on . , 1996 (the "Record Date") are entitled to receive notice of and to vote at the Meeting and any adjournments or postponements thereof. Holders of shares of Hollis-Eden common stock, $.0001 par value per share (the "Hollis-Eden Common Stock"), are entitled to one vote on each matter considered and voted on at the Meeting for each share of Hollis-Eden Common Stock held of record as of the close of business on the Record Date. The affirmative vote of a majority of the outstanding shares of Hollis-Eden Common Stock voting at the Meeting, either in person or by proxy, is necessary to approve and adopt the Merger Agreement and the transactions contemplated thereby. A holder of Hollis-Eden Common Stock may dissent from the Merger and, if the Merger is consummated, such holder shall receive payment of the fair value of his or her shares in cash if the holder files with Hollis- Eden a written demand for appraisal prior to the vote with respect to the Merger being taken at the Meeting and does not vote his or her shares of Hollis-Eden Common Stock in favor of the Merger. For further discussion of appraisal rights, see "GENERAL INFORMATION Appraisal Rights" in the accompanying Joint Proxy Statement/Prospectus. Whether or not you plan to attend the Meeting, please complete, date and sign the accompanying proxy card and mail it promptly in the enclosed pre-addressed envelope, which requires no postage if mailed in the United States. Any holder of Hollis-Eden Common Stock who executes and returns a proxy card may revoke such proxy at any time before it is voted by (i) notifying in writing the Secretary of Hollis-Eden at 808 SW Third Avenue, Suite 540, Portland, Oregon 97204, (ii) granting a subsequent proxy or (iii) appearing in person and voting at the Meeting. Attendance at the Meeting will not in and of itself constitute revocation of a proxy. THE BOARD OF DIRECTORS OF HOLLIS-EDEN UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. BY ORDER OF THE BOARD OF DIRECTORS Richard B. Hollis Chairman of the Board, President and Chief Executive Officer Portland, Oregon . , 1996 (ii) INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED DECEMBER 24, 1996 PRELIMINARY COPIES PROSPECTUS ---------- INITIAL ACQUISITION CORP. COMMON STOCK (PAR VALUE $.01 PER SHARE) JOINT PROXY STATEMENT --------------------- INITIAL ACQUISITION CORP. HOLLIS-EDEN, INC. Special Meeting of Stockholders Special Meeting of Stockholders to be Held on . , 1997 to be Held on . , 1997 ------------------------- This Joint Proxy Statement/Prospectus is being furnished to holders (the "IAC Stockholders") of common stock, par value $.01 per share (the "IAC Common Stock"), of Initial Acquisition Corp., a Delaware corporation ("IAC"), in connection with the solicitation of proxies by the IAC Board of Directors for use at the Special Meeting of Stockholders of IAC to be held at 10:00 a.m., local time, on . , 1997, at . , New York, New York . , and at any adjournments or postponements thereof (the "IAC Special Meeting"). The principal purpose of the IAC Special Meeting is to consider and vote upon a proposal to approve the Agreement and Plan of Merger, dated as of November 1, 1996 (the "Merger Agreement"), by and among IAC, Hollis- Eden, Inc., a Delaware corporation ("Hollis-Eden"), Mr. Salvatore J. Zizza and Mr. Richard B. Hollis, which provides for, among other things, the merger of Hollis-Eden with and into IAC, with IAC being the surviving corporation (the "Surviving Corporation") to the Merger (the "Merger"). Upon the consummation of the Merger, Hollis-Eden will cease to exist as a separate corporation. At the time the Merger becomes effective, each outstanding share of Hollis-Eden common stock, $.0001 par value per share (the "Hollis-Eden Common Stock"), shall cease to be outstanding and shall be converted into the right to receive one share of IAC Common Stock. In addition, all outstanding warrants and options to acquire shares of Hollis- Eden Common Stock (collectively, the "Hollis-Eden Warrants and Options") shall cease to be outstanding and shall be converted into the right to receive warrants and options, as the case may be, to acquire the same number of shares of Surviving Corporation Common Stock (collectively, the "Merger Warrants and Options") upon the same terms as the corresponding Hollis-Eden Warrants and Options. Upon the consummation of the Merger, the Surviving Corporation will change its name to Hollis-Eden Pharmaceuticals, Inc. and the business of the Surviving Corporation will be that of Hollis- Eden immediately prior to the Merger. See "SUMMARY," "THE MERGER," and ANNEX A to this Joint Proxy Statement/Prospectus. This Joint Proxy Statement/Prospectus is also being furnished to holders of Hollis-Eden Common Stock (the "Hollis-Eden Stockholders") in connection with the solicitation of proxies by the Hollis-Eden Board of Directors for use at the Special Meeting of Stockholders of Hollis-Eden to be held at 10:00 a.m., local time, on . , 1997, at . , Portland, Oregon, and at any adjournments or postponements thereof (the "Hollis-Eden Special Meeting"). The purpose of the Hollis-Eden Special Meeting is to consider and vote upon a proposal to approve the Merger and the Merger Agreement. See "SUMMARY," "THE MERGER," and ANNEX A to this Joint Proxy Statement/Prospectus. This Joint Proxy Statement/Prospectus also constitutes the prospectus of IAC relating to IAC's issuance of the 4,911,004 shares of Surviving Corporation Common Stock to the Hollis-Eden Stockholders upon the consummation of the Merger (and the 2,279,650 shares of Surviving Corporation Common Stock underlying the Merger Warrants and Options issuable in connection with the Merger). Upon the consummation of the Merger, the Hollis-Eden Stockholders will collectively acquire approximately 85% of the outstanding Surviving Corporation Common Stock (without giving effect to the exercise of any Merger Warrants and Options, outstanding warrants and options to acquire shares of IAC Common Stock (the "IAC Warrants and Options") or options granted under IAC's or Hollis-Eden's respective option plans (collectively, the "Plan Options"), and their designees will comprise five of the six members of the Surviving Corporation's newly-elected Board of Directors. Assuming the exercise of all of the outstanding Merger Warrants and Options and IAC Warrants and Options (but not any Plan Options), the Hollis-Eden Stockholders would collectively own approximately 74% of the then outstanding shares of Surviving Corporation Common Stock upon the consummation of the Merger. If the Merger Agreement is approved at each of the IAC and Hollis-Eden Special Meetings and all of the other conditions to the obligations of the parties to consummate the Merger are either satisfied or waived,the Merger will be consummated. A copy of the Merger Agreement is set forth in Annex A to this Joint Proxy Statement/Prospectus. It is expected that the Surviving Corporation Common Stock will be approved for quotation or listing, as the case may be, subject to consummation of the Merger, on the Nasdaq National Market ("NASDAQ NMS") or the American Stock Exchange ("AMEX"). ANY HOLDER OF IAC COMMON STOCK OR HOLLIS-EDEN COMMON STOCK WHO: (I) FILES WITH IAC OR HOLLIS-EDEN, AS THE CASE MAY BE, A WRITTEN DEMAND FOR APPRAISAL OF HIS OR HER SHARES OF IAC COMMON STOCK OR HOLLIS-EDEN COMMON STOCK, AS THE CASE MAY BE, PRIOR TO THE VOTE WITH RESPECT TO THE MERGER AGREEMENT BEING TAKEN AT THE IAC SPECIAL MEETING OR THE HOLLIS-EDEN SPECIAL MEETING, AS THE CASE MAY BE, AND (II) DOES NOT VOTE FOR THE APPROVAL OF THE MERGER AGREEMENT, SHALL BE ENTITLED TO THE PAYMENT OF FAIR VALUE OF SUCH SHARES UNDER THE APPLICABLE PROVISIONS OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE (THE "DGCL"), AS SET FORTH IN ANNEX E TO THIS JOINT PROXY STATEMENT/PROSPECTUS. HOLDERS OF IAC COMMON STOCK ARE ALSO ENTITLED TO CERTAIN REDEMPTION RIGHTS AS DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS. FOR FURTHER DISCUSSION OF BOTH APPRAISAL RIGHTS AND REDEMPTION RIGHTS, SEE "GENERAL INFORMATION - IAC SPECIAL MEETING; REDEMPTION RIGHTS" AND "-APPRAISAL RIGHTS." No person is authorized to give any information or to make any representation other than those contained in this Joint Proxy Statement/Prospectus, and if given or made, such information or representation should not be relied upon as having been authorized. This Joint Proxy Statement/Prospectus does not constitute an offer to sell or a solicitation of an offer to purchase, the securities offered by this Joint Proxy Statement/Prospectus, or the solicitation of a proxy, in any jurisdiction to or from any person to whom or from whom it is unlawful to make such offer, solicitation of an offer or proxy solicitation in such jurisdiction. Neither the delivery of this Joint Proxy Statement/Prospectus nor any distribution of securities pursuant to this Joint Proxy Statement/Prospectus shall, under any circumstances, create any implication that there has been no change in the information set forth herein or in the affairs of IAC or Hollis-Eden since the date of this Joint Proxy Statement/Prospectus or that the information herein is correct as of any time subsequent to its date. However, if any material change occurs during the period that this Joint Proxy Statement/Prospectus is required to be delivered, this Joint Proxy Statement/Prospectus will be amended or supplemented as required. All information regarding IAC in this Joint Proxy Statement/Prospectus has been supplied by IAC, and all information regarding Hollis-Eden has been supplied by Hollis-Eden. OWNERSHIP OF SURVIVING CORPORATION COMMON STOCK AND THE BUSINESS TO BE CONDUCTED BY THE SURVIVING CORPORATION SUBSEQUENT TO THE CONSUMMATION OF THE MERGER INVOLVE CERTAIN ELEMENTS OF RISK DISCUSSED UNDER "RISK FACTORS" LOCATED ON PAGE 16 OF THIS JOINT PROXY STATEMENT/PROSPECTUS. THE SECURITIES TO WHICH THIS JOINT PROXY STATEMENT/PROSPECTUS RELATE HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES BOARD PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------------------------------- The last reported sale price of IAC Common Stock on the OTC Electronic Bulletin Board of the National Association of Securities Dealers, Inc. (the "NASD") on December . , 1996 was $ . per share. The date of this Joint Proxy Statement/Prospectus is . , 1996, and it is first being mailed or otherwise delivered to IAC Stockholders and Hollis-Eden Stockholders on or about . , 1996. -2- 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." -3- TABLE OF CONTENTS PAGE ---- AVAILABLE INFORMATION . . . . . . -3- FORWARD LOOKING STATEMENTS . . . -3- SUMMARY . . . . . . . . . . . . . -5- ANNEX A COMPARATIVE PER SHARE DATA . . . -14- Agreement and Plan of Merger SELECTED HISTORICAL FINANCIAL INFORMATION . . . . . . . . . . -15- ANNEX B SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION -16- Form of Certificate of Merger (which includes the form of RISK FACTORS . . . . . . . . . . -17- Certificate of Incorporation of the Surviving Corporation) GENERAL INFORMATION . . . . . . . -24- MARKET PRICE OF IAC'S SECURITIES AND DIVIDEND INFORMATION . . . . . . . . . . -30- ANNEX C THE MERGER . . . . . . . . . . . -33- Form of By-Laws of the Surviving Corporation IAC SELECTED HISTORICAL ANNEX D FINANCIAL INFORMATION . . . . . -46- IAC 1996 Incentive Stock Option Plan HOLLIS-EDEN SELECTED HISTORICAL ANNEX E FINANCIAL INFORMATION . . . . . -47- Appraisal Rights Provisions of the Delaware General UNAUDITED PRO FORMA FINANCIAL Corporation Law STATEMENTS OF INITIAL ACQUISITION CORP. AND HOLLIS-EDEN . . . . . . . . . . -48- HOLLIS-EDEN'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . -51- IAC'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . -53- HOLLIS-EDEN'S BUSINESS . . . . . -54- IAC'S BUSINESS . . . . . . . . . -64- MANAGEMENT OF IAC . . . . . . . . -66- PERFORMANCE GRAPH . . . . . . . . -67- PROPOSAL TO ELECT DIRECTORS OF THE SURVIVING CORPORATION . . . -68- SECURITY OWNERSHIP OF IAC PRIOR TO THE MERGER . . . . . . -71- SECURITY OWNERSHIP OF THE SURVIVING CORPORATION AFTER THE MERGER . . . . . . . . . . -71- PROPOSED MANAGEMENT OF THE SURVIVING CORPORATION . . . -73- PROPOSAL TO APPROVE AND ADOPT THE 1996 IAC INCENTIVE STOCK OPTION PLAN . . . . . . . -76- DESCRIPTION OF IAC'S SECURITIES . -81- COMPARISON OF STOCKHOLDERS' RIGHTS . . . . . . . . . . . . -82- TRANSFER AGENTS AND REGISTRARS . -83- LEGAL MATTERS . . . . . . . . . . -83- EXPERTS . . . . . . . . . . . . . -83- INDEX TO FINANCIAL STATEMENTS . . F-1 -4- 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. -5- Hollis-Eden is a Delaware corporation which was formed in August 1994, with executive offices located at 808 SW Third Avenue, Suite 540, Portland, Oregon 97204, and its telephone number is (503) 226-1277. For additional information regarding Hollis-Eden, see "--Selected Historical Financial Information; Hollis-Eden" and "HOLLIS-EDEN'S BUSINESS." IAC. IAC has been formed to serve as a vehicle to effect a merger, exchange of capital stock, asset acquisition or other business combination (a "Business Combination") with an operating business (a "Target Business"). IAC's business objective has been to effect a Business Combination with a Target Business which IAC believes has significant growth potential. In May 1995, IAC consummated an initial public offering of its equity securities (the "IPO") from which it derived net proceeds of approximately $6,300,000. Of the net proceeds from the IPO, $6,000,000 (representing the gross proceeds received from the sale in the IPO of Units (each Unit comprised of one share of IAC Common Stock and one Class A Warrant to purchase one share of IAC Common Stock)) together with interest earned thereon, are currently held in an interest-bearing escrow account (the "Escrowed Funds") and will be released upon the earlier of the consummation of a Business Combination in which at least 50% of the Escrowed Funds are committed to a specific line of business as a result of such consummation of a Business Combination (including any redemption payments) or the liquidation of IAC. At the Effective Time of the Merger, the Escrowed Funds will be released to IAC and all voting agreements previously in effect with respect to the IAC Common Stock (including those relating to the approval of a Business Combination by IAC Stockholders) will terminate. IAC is a Delaware corporation which was formed in November 1992, with executive offices located at 810 Seventh Avenue, 27th Floor, New York, New York 10019, and its telephone number is (212) 333-2620. For additional information regarding IAC, see "AVAILABLE INFORMATION," "--Selected Historical Financial Information; IAC" and "IAC'S BUSINESS." THE IAC SPECIAL MEETING; IAC RECORD DATE; VOTE REQUIRED; RECOMMENDATION The IAC Special Meeting is scheduled to be held at 10:00 a.m., local time, on . , 1997, at . , New York, New York . . At the IAC Special Meeting, IAC Stockholders will be asked to consider and vote upon the proposal to approve and adopt the Merger Agreement and the transactions contemplated thereby, to elect a new slate of six directors as of the Effective Time, and a proposal to approve and adopt the IAC 1996 Incentive Stock Option Plan. The Board of Directors of IAC (the "IAC Board") has fixed the close of business on . , 1996 as the record date (the "IAC Record Date") for the determination of IAC Stockholders entitled to notice of and to vote at the IAC Special Meeting. As of the close of business on the IAC Record Date, there were 833,250 shares of IAC Common Stock outstanding and entitled to be voted at the IAC Special Meeting. IAC Stockholders are entitled to one vote on each matter considered and voted on at the IAC Special Meeting for each share of IAC Common Stock held of record as of the close of business on the IAC Record Date. See "GENERAL INFORMATION-IAC Special Meeting." Vote Required. The presence, either in person or by proxy, of the holders of a majority of the outstanding shares of IAC Common Stock entitled to vote at the IAC Special Meeting is necessary to constitute a quorum at the IAC Special Meeting. The affirmative vote of two-thirds of the outstanding shares of IAC Common Stock voting at the IAC Special Meeting, either in person or by proxy, is necessary to approve and adopt the Merger Agreement and the transactions contemplated thereby. The affirmative vote of the holders of a plurality of the outstanding shares of IAC Common Stock voting is required for the election of each director. The affirmative vote of a majority of the outstanding shares of IAC Common Stock voting is required for the approval and adoption of the IAC 1996 Incentive Stock Option Plan. All holders of IAC Common Stock prior to IAC's IPO in May 1995 (the "Initial IAC Stockholders"), which include IAC's directors and executive officer, collectively holding an aggregate of approximately 28% of the outstanding shares of IAC Common Stock before giving effect to the Merger (and without giving effect to the exercise of any Merger Warrants and Options, IAC Warrants and Options or Plan Options), by reason of their prior agreement with IAC, will vote their respective shares of IAC Common Stock with respect to the Merger Agreement in accordance with the vote of the majority in interest of all other holders of IAC Common Stock (the "IAC Non-Affiliate Stockholders"). Consequently, if a majority of the outstanding shares of IAC Common Stock held and voted by IAC Non-Affiliate Stockholders is voted in favor of the Merger Agreement and the transactions contemplated thereby, the Initial IAC Stockholders will vote their shares of IAC Common Stock in favor of the Merger Agreement and the transactions -6- contemplated thereby. If the Merger Agreement and the transactions contemplated thereby are not approved by the requisite vote, the Merger Agreement will be terminated and the proposed Merger will be abandoned. In such event, the proposal to approve and adopt the IAC 1996 Incentive Stock Option Plan will not be implemented, even if such proposal is approved by the requisite vote. As of the IAC Record Date, Hollis-Eden, its directors and executive officers, and their affiliates (except as set forth below), held no shares of IAC Common Stock. Mr. James D. Bowyer, however, an employee of Laidlaw Equities, Inc. ("Laidlaw Equities"), and one of the persons who introduced Hollis-Eden to IAC, beneficially owns, to IAC's knowledge, 58,800 shares of IAC Common Stock. Laidlaw Equities, which currently owns warrants to purchase up to 134,100 shares of Hollis-Eden Common Stock and is entitled to receive warrants to purchase up to an additional 452,830 shares of Surviving Corporation Common Stock upon the consummation of the Merger, serves as Hollis-Eden's investment banker. Mr. J. Paul Bagley, one of Hollis-Eden's directors and a proposed director of the Surviving Corporation following the Merger, was the Chief Executive Officer of Laidlaw Equities' parent company until November 1996. See "THE MERGER - Interests of Certain Persons in the Merger." In addition, if 15% (approximately 90,000 shares) or more of the shares of IAC Common Stock held by IAC Non-Affiliate Stockholders (including After Acquired Stock held by Initial IAC Stockholders) are voted against the Merger and such holders elect, within the applicable redemption period, to have at least such number of shares redeemed by IAC, IAC will not proceed with the Merger or redeem such shares. See "GENERAL INFORMATION - IAC Special Meeting; Redemption Rights." Recommendation of the IAC Board of Directors. The Board of Directors of IAC believes that the Merger is in the best interests of IAC and its stockholders and has unanimously approved the Merger Agreement and the consummation of the transactions contemplated thereby. The IAC Board of Directors unanimously recommends that IAC Stockholders vote FOR adoption of the Merger Agreement and the consummation of the transactions contemplated thereby, FOR the election of the new slate of directors and FOR the proposal to approve and adopt the IAC 1996 Incentive Stock Option Plan. In deciding to approve the Merger Agreement and the consummation of the transactions contemplated thereby, IAC's Board of Directors considered a number of factors, including the terms of the Merger, the future prospects of Hollis-Eden and relevant business, legal and market factors. See "THE - MERGER - Recommendations of the Boards of Directors and Reasons for the Merger; IAC." THE HOLLIS-EDEN SPECIAL MEETING; HOLLIS-EDEN RECORD DATE; VOTE REQUIRED; RECOMMENDATION The Hollis-Eden Special Meeting is scheduled to be held at 10:00 a.m., local time, on . , 1997, at . , Portland, Oregon . . At the Hollis-Eden Special Meeting, Hollis-Eden Stockholders will be asked to consider and vote upon the proposal to approve and adopt the Merger Agreement and the transactions contemplated thereby. The Board of Directors of Hollis-Eden (the "Hollis-Eden Board") has fixed the close of business on . , 1996 as the record date (the "Hollis-Eden Record Date") for the determination of Hollis-Eden Stockholders entitled to notice of and to vote at the Hollis- Eden Special Meeting. As of the close of business on the Hollis-Eden Record Date, there were 4,911,004 shares of Hollis-Eden Common Stock outstanding and entitled to be voted at the Hollis-Eden Special Meeting. Hollis-Eden Stockholders are entitled to one vote on each matter considered and voted on at the Hollis-Eden Special Meeting for each share of Hollis- Eden Common Stock held of record as of the close of business on the Hollis-Eden Record Date. See "GENERAL INFORMATION-Hollis-Eden Special Meeting." Vote Required. The presence, either in person or by proxy, of the holders of a majority of the outstanding shares of Hollis-Eden Common Stock entitled to vote at the Hollis-Eden Special Meeting is necessary to constitute a quorum at the Hollis-Eden Special Meeting. The affirmative vote of a majority of the outstanding shares of Hollis-Eden Common Stock voting at the Hollis-Eden Special Meeting, either in person or by proxy, is necessary to approve and adopt the Merger Agreement and the transactions contemplated thereby. As of the Hollis-Eden Record Date, Hollis-Eden's directors and executive officers and their affiliates held approximately 71% of the outstanding shares of Hollis-Eden Common Stock entitled to vote at the Hollis-Eden Special Meeting. In addition, Mr. Richard B. Hollis, Chairman of the Board of Hollis-Eden and the beneficial owner of approximately 58% of the outstanding shares of Hollis-Eden Common Stock, has agreed with IAC to vote all shares of Hollis-Eden Common Stock which he is entitled to vote at the Hollis-Eden Special Meeting in favor of the Merger Agreement and the transactions contemplated thereby. As of the Hollis-Eden Record Date, IAC, its directors and executive officer, and their affiliates, held no shares of Hollis-Eden Common Stock. -7- Recommendation of the Hollis-Eden Board of Directors. The Board of Directors of Hollis-Eden believes that the Merger is in the best interests of Hollis-Eden and its stockholders and has unanimously approved the Merger Agreement and the consummation of the transactions contemplated thereby. The Hollis-Eden Board of Directors unanimously recommends that Hollis-Eden Stockholders vote FOR adoption of the Merger Agreement and the consummation of the transactions contemplated thereby. In deciding to approve the Merger Agreement and the consummation of the transactions contemplated thereby, Hollis-Eden's Board of Directors considered a number of factors, including the terms of the Merger, the financial condition of IAC and Hollis-Eden, the future prospects and capital requirements of Hollis-Eden and relevant business, legal and market factors. See "THE MERGER-Recommendations of the Boards of Directors and Reasons for the Merger; Hollis-Eden." THE MERGER General. The Merger Agreement provides that Hollis-Eden shall merge with and into IAC, with IAC being the Surviving Corporation to the Merger. Upon the consummation of the Merger, Hollis-Eden will cease to exist as a separate corporation. At the time the Merger becomes effective, each outstanding share of Hollis-Eden Common Stock shall cease to be outstanding and shall be converted into the right to receive one share of Surviving Corporation Common Stock. In addition, all outstanding Hollis-Eden Warrants and Options shall cease to be outstanding and shall be converted into the right to receive the same number of Merger Warrants and Options upon the same terms as the corresponding Hollis-Eden Warrants and Options. As of the Hollis-Eden Record Date, 4,911,004 shares of Hollis-Eden Common Stock were outstanding and an aggregate of 2,279,650 shares of Hollis-Eden Common Stock were underlying the Hollis-Eden Warrants and Options. Consequently, upon the consummation of the Merger, the Surviving Corporation will issue an aggregate of 4,911,004 shares of Surviving Corporation Common Stock to the Hollis-Eden Stockholders and Merger Warrants and Options entitling the holders thereof to acquire an aggregate of 2,279,650 shares of Surviving Corporation Common Stock. None of the outstanding shares of IAC Common Stock will be converted or otherwise modified in the Merger and all of such shares will continue to be outstanding capital stock of the Surviving Corporation after the Effective Time. Upon the consummation of the Merger, the Surviving Corporation will change its name to Hollis-Eden Pharmaceuticals, Inc. and the business of the Surviving Corporation will be that of Hollis-Eden immediately prior to the Merger. Upon the consummation of the Merger, the Hollis-Eden Stockholders will collectively acquire approximately 85% of the outstanding Surviving Corporation Common Stock, without giving effect to the exercise of any Merger Warrants and Options, IAC Warrants and Options or Plan Options, and their designees will comprise five of the six members of the Surviving Corporation's newly-elected Board of Directors. Assuming the exercise of all of the outstanding Merger Warrants and Options and IAC Warrants and Options (but not any Plan Options), the Hollis-Eden Stockholders would collectively own approximately 74% of the then outstanding shares of Surviving Corporation Common Stock upon the consummation of the Merger. If the Merger Agreement is approved at each of the IAC and Hollis-Eden Special Meetings and all of the other conditions to the obligations of the parties to consummate the Merger are either satisfied or waived, the Merger will be consummated. A copy of the Merger Agreement is set forth as Annex A to this Joint Proxy Statement/Prospectus. See "THE MERGER." Background. Since its IPO in May 1995, IAC has conducted a search for a Target Company with which it would consummate a Business Combination. Hollis-Eden was one of two companies extensively evaluated by IAC. Hollis- Eden was introduced to IAC in March 1996. On November 1, 1996, IAC and Hollis-Eden entered into the Merger Agreement. See "THE MERGER-Background of the Merger." Additional Merger Shares. In connection with the Merger, IAC will offer all IAC Non-Affiliate Stockholders the opportunity to exchange their respective Redemption Rights for the right to receive additional shares of Surviving Corporation Common Stock (the "Additional Merger Shares") if, at no time during the 24-month period immediately following the Effective Time (as defined below) of the Merger (the "Holding Period"), the average closing price per share of Surviving Corporation Common Stock over a period of 20 consecutive trading days equals or exceeds $20.00 per share (subject to adjustment). See "THE MERGER-Additional Merger Shares." -8- 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 -9- Agreement, the final opinion of independent patent counsel, shall not have resulted in an opinion of a patent infringement which will have an "unavoidable" material adverse effect upon certain of Hollis-Eden's Products (a "Patent Infringement"); and (viii) the receipt of written opinions of counsel to IAC and Hollis-Eden as to certain matters. In addition to the conditions set forth above, the obligations of IAC and Hollis-Eden to consummate the Merger are subject to the absence, since the date of the Merger Agreement, of any material adverse change in the business, operations, assets, liabilities, results of operations, cash flows, condition (financial or otherwise) or prospects of IAC and Hollis- Eden, which is materially adverse to IAC or Hollis-Eden, as the case may be. See "THE MERGER-Conditions to Consummation." Termination. The Merger Agreement may be terminated, and the Merger abandoned, at any time prior to the Effective Time, by mutual consent of all parties to the Merger Agreement. In addition, the Merger Agreement may be terminated, and the Merger abandoned, generally, (i) prior to, but not after, the approval of the Merger Agreement by the stockholders of each of Hollis-Eden and IAC, by Hollis-Eden or IAC, as the case may be, if the Merger shall not have become effective by February 15, 1997 (or such later date as permitted by the Merger Agreement to allow the parties to complete their patent analyses within the permitted time parameters), provided, however, that such termination right shall not be available to any party whose failure to fulfill any obligation under the Merger Agreement has been the cause of or resulted in the failure of the Merger to become effective by such date; (ii) by any party to the Merger Agreement if any court of competent jurisdiction in the United States or other United States governmental body shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the Merger or any of the other transactions contemplated by the Merger Agreement and such order, decree, ruling or other action shall have become final and non appealable; (iii) By IAC, if IAC Non-Affiliate Stockholders holding 15% or more of the shares of IAC Common Stock shall have exercised their Redemption Rights or (iv) by IAC, if its patent infringement and, if necessary, patent validity analyses, and, if given in accordance with the terms of the Merger Agreement, the final opinion of independent patent counsel, shall have resulted in an opinion of a Patent Infringement which will have an "unavoidable" material adverse effect upon certain of Hollis- Eden's Products. See "THE MERGER-Termination." Expenses and Fees. The Merger Agreement provides that each party shall bear its own expenses with respect to the transactions contemplated by the Merger Agreement. In addition, Hollis-Eden has agreed to pay IAC a fee of $100,000 (the "Fee"), which has been placed into escrow, in the event Hollis-Eden terminates the Merger Agreement and abandons the Merger for any reason other than those reasons permitted under the Merger Agreement. Moreover, in the event IAC terminates the Merger Agreement and abandons the Merger as a result of a Patent Infringement, IAC shall be entitled to such portion of the Fee as may be necessary to reimburse IAC for its costs and expenses in connection with the Merger Agreement and the proposed Merger. See "THE MERGER-Expenses and Fees." Accounting Treatment. For accounting and financial reporting purposes, the Merger will be treated as a recapitalization of Hollis-Eden by an exchange of Hollis-Eden Common Stock for the net assets of IAC, consisting primarily of cash. Since IAC has had no business operations other than the search for a suitable Target Business, IAC's assets will be recorded in the balance sheet of the combined company (i.e., the Surviving Corporation) at book value. The unaudited pro forma financial information contained in this Joint Proxy Statement/Prospectus has been prepared on this basis. See "THE MERGER-Accounting Treatment." Regulatory Approvals. No governmental regulatory approvals are required with respect to the Merger except for the filing of the Certificate of Merger with the Secretary of State of the State of Delaware and the filing with the Commission of the Registration Statement and this Joint Proxy Statement/Prospectus. See "THE MERGER-Regulatory Approvals." Interests of Certain Persons in the Merger. In considering the recommendation of the Hollis-Eden Board of Directors with respect to the Merger Agreement and the transactions contemplated thereby, Hollis-Eden Stockholders should be aware that certain members of Hollis-Eden's management and the Hollis-Eden Board of Directors have certain interests in the Merger that are in addition to the interests of Hollis-Eden Stockholders generally. See "THE MERGER-Interests of Certain Persons in the Merger" and "PROPOSED MANAGEMENT OF THE SURVIVING CORPORATION- Employment Agreements." -10- Conduct of Business Pending the Merger. Each of IAC and Hollis-Eden has agreed in the Merger Agreement to, among other things, operate its business only in the ordinary and usual course consistent with past practice and to use reasonable commercial efforts to preserve intact its present business organization, preserve its goodwill and advantageous relationships with employees and other persons material to its operations and business and not permit any action or omission within its control which would cause any of its representations or warranties to become inaccurate in any material respect or any of its covenants to be breached in any material respect. In addition, each of IAC and Hollis-Eden has agreed not to take certain actions relating to its operations pending consummation of the Merger without the prior written consent of the other. See "THE MERGER-Conduct of Business Pending the Merger and Covenants of the Parties." Restriction on Sales of Shares by Hollis-Eden Stockholders. In connection with the Merger Agreement, Hollis-Eden has agreed to use its reasonable commercial efforts to obtain signed letters from as many Hollis- Eden Stockholders as possible, which letters shall acknowledge such Hollis- Eden Stockholders' agreement not to sell any shares of the Surviving Corporation Common Stock to be issued, directly or indirectly, to them in, and as a result of, the Merger, for the nine-month period immediately following the Effective Time. In addition, Mr. Richard B. Hollis and Dr. Patrick T. Prendergast, the owners of approximately 71% of the outstanding Hollis-Eden Common Stock, agreed with Hollis-Eden not to sell more than an aggregate of 1,000,000 shares of Surviving Corporation Common Stock to be received by them as a result of the Merger for the two-year period commencing upon the Effective Time of the Merger. See "THE MERGER-Conduct of Business Pending The Merger and Covenants of the Parties." Comparison of Stockholder Rights. The rights of IAC's Stockholders currently are determined by reference to the DGCL and IAC's Certificate of Incorporation ("IAC's Charter") and Bylaws ("IAC's Bylaws"). The rights of Hollis-Eden's Stockholders are currently determined by reference to the DGCL and Hollis-Eden's Certificate of Incorporation, as amended, and Bylaws. Following the Effective Time, and pursuant to the terms of the Merger Agreement, the Hollis-Eden charter and Hollis-Eden Bylaws in effect immediately prior to the Effective Time will become the charter and bylaws of the Surviving Corporation, notwithstanding the fact that IAC will be the Surviving Corporation to the Merger. Copies of the form of Hollis-Eden's Certificate of Incorporation and Bylaws to be in effect immediately prior to the Effective Time are attached to this Joint Proxy Statement/Prospectus as Annexes B and C, respectively. In addition, IAC Non-Affiliate Stockholders shall no longer have any Redemption Rights or other benefits or protections described in the IAC Prospectus (as defined below) and, other than as provided by the DGCL, no right to unilaterally approve subsequent Business Combinations. See "COMPARISON OF STOCKHOLDER RIGHTS" for a summary of the material differences between the rights of holders of IAC Common Stock and Hollis-Eden Common Stock. IAC STOCKHOLDERS' APPROVAL AND ADOPTION OF THE MERGER AGREEMENT WILL RESULT IN A CHANGE OF BOTH THE MAJORITY EQUITY OWNERSHIP AND MANAGEMENT OF IAC AS WELL AS A CHANGE IN THE BUSINESS OF IAC. RISK FACTORS Ownership of Surviving Corporation Common Stock and the business to be conducted by the Surviving Corporation subsequent to the consummation of the Merger involve certain elements of risk discussed under "Risk Factors" located on page 16 of this Joint Proxy Statement/Prospectus. These risk factors include, among others, risks relating to the Surviving Corporation's failure to successfully develop commercially acceptable products or carry out its research and development plans, the loss of key executives, competition, including specifically, the intensification of price competition, the entry of new competitors and the development of new products by new and existing competitors, general economic and business conditions and unanticipated changes in pharmaceutical industry trends. See "RISK FACTORS." APPRAISAL RIGHTS Under the DGCL, holders of IAC and Hollis-Eden Common Stock may dissent from the Merger and receive payment of the "fair value" of his or her shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be, in cash, if the Merger is consummated by following certain procedures set forth in Section 262 of the DGCL, the text of which is attached to this Joint Proxy Statement/Prospectus as Annex E. Any IAC or Hollis-Eden Stockholder wishing to dissent from the Merger and obtain cash payment of the fair value of his or her shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be, must: (i) deliver to IAC or Hollis-Eden, as the case may be, before the vote is taken at the IAC or Hollis-Eden Special Meeting, as the case may be, a written demand for appraisal of his or her shares; (ii) not vote his or her shares of IAC or Hollis-Eden Common -11- Stock, as the case may be, in favor of the Merger; and (iii) follow the other procedures set forth in the DGCL as more fully described in this Joint Proxy Statement/Prospectus. See also Annex E to this Joint Proxy Statement/Prospectus. Failure to follow such procedures may result in a loss of such appraisal rights. A proxy card which expressly votes in favor of the Merger or which fails to indicate how the shares should be voted will constitute a waiver by such IAC Stockholder or Hollis-Eden Stockholder, as the case may be, of such Stockholder's right to seek appraisal. Consequently, any IAC or Hollis-Eden Stockholder who desires to preserve his or her rights of appraisal should either refrain from returning a proxy card or expressly indicate on such proxy card that such IAC Stockholder or Hollis-Eden Stockholder, as the case may be, votes against the Merger or expressly abstains from voting on the approval of the Merger. For a more complete discussion of the procedures to be followed by an IAC or Hollis-Eden Stockholder who desires to perfect his or her appraisal rights, see "GENERAL INFORMATION-Appraisal Rights." REDEMPTION RIGHTS Each of the IAC Non-Affiliate Stockholders (and each Initial IAC Stockholder who (i) participated in the February 1993 private placement of IAC securities and (ii) purchased shares of IAC Common Stock in the open market after the IPO (the "After Acquired Stock"), but only to the extent of the After Acquired Stock)) has the right (the "Redemption Right"), pursuant to IAC's prospectus dated May 15, 1995 (the "IAC Prospectus"), to elect to have any or all of his or her shares of IAC Common Stock redeemed for $ [10.78] per share (the "Redemption Value"), by indicating such election on his or her proxy card and depositing such proxy card in the United States mail postmarked within 20 calendar days of the mailing of this Joint Proxy Statement/Prospectus (such 20 calendar day period being hereinafter referred to as the "Redemption Period"). The proxy card containing the exercise of Redemption Rights must be received by IAC prior to the IAC Special Meeting. The Redemption Value has been calculated by dividing (a) the amount of the Escrowed Funds as of the IAC Record Date by (b) the number of shares of IAC Common Stock held by the IAC Non-Affiliate Stockholders as of the Record Date. If IAC Non-Affiliate Stockholders elect to redeem 15% or more of their shares of IAC Common Stock within the Redemption Period, IAC will not proceed with the Merger and will not redeem such shares. If IAC Non-Affiliate Stockholders elect to redeem less than 15% of their shares of IAC Common Stock within the Redemption Period, and assuming that IAC otherwise satisfies the required conditions for the Merger, IAC may proceed with the Merger, but will be required to redeem the shares of IAC Common Stock requested by the IAC Non-Affiliate Stockholders at their Redemption Value upon the consummation of the Merger. An IAC Non- Affiliate Stockholder may exercise his or her Redemption Right only if he or she expressly votes against the Merger within the Redemption Period. IAC Non-Affiliate Stockholders may not exercise their Redemption Rights if they are seeking appraisal rights. An IAC Non-Affiliate Stockholder who votes against the Merger after the Redemption Period will not be entitled to have any of his or her shares redeemed. Any IAC Non-Affiliate Stockholder returning a proxy card which expressly votes for the Merger or returning an executed proxy card which fails to indicate how his or her shares should be voted, shall be deemed to have waived his or her Redemption Right. A proxy card which indicates that an IAC Non-Affiliate Stockholder expressly abstains from voting on the proposal to approve the Merger shall not be deemed an exercise of such IAC Non-Affiliate Stockholder's Redemption Rights. AN IAC NON-AFFILIATE STOCKHOLDER WHO SELLS ANY OF HIS OR HER SHARES OF IAC COMMON STOCK AFTER ELECTING TO HAVE SUCH SHARES REDEEMED SHALL FORFEIT THE RIGHT TO RECEIVE THE REDEMPTION VALUE WITH RESPECT TO SUCH SHARES. IN ADDITION, AN IAC NON-AFFILIATE STOCKHOLDER WHO EXERCISES HIS OR HER REDEMPTION RIGHTS SHALL FORFEIT THE RIGHT TO RECEIVE ADDITIONAL MERGER SHARES, IF ANY ARE ISSUED. IAC NON-AFFILIATE STOCKHOLDERS MAY NOT EXERCISE THEIR REDEMPTION RIGHTS IF THEY ARE EXERCISING THEIR APPRAISAL RIGHTS AND, CONVERSELY, IAC NON-AFFILIATE STOCKHOLDERS WHO SEEK REDEMPTION RIGHTS MAY NOT EXERCISE THEIR APPRAISAL RIGHTS. MARKET PRICES OF IAC'S SECURITIES Shares of IAC Common Stock, as well as IAC Class A Common Stock Purchase Warrants ("Class A Warrants"), IAC Class B Unit Purchase Warrants ("Class B Warrants") and IAC Units are quoted and traded on the OTC Electronic Bulletin Board of the NASD under the symbols "IACQ," "IACQW," "IACQZ" and "IACQU," respectively. Each Class A Warrant entitles the holder thereof to purchase one share of IAC Common Stock at a price of $9.00 commencing upon the consummation of a Business Combination and expiring on May 15, 2000. Each Class B Warrant entitles the holder thereof to purchase one Unit at a price of $.25 commencing upon the consummation of a Business Combination and expiring on the first anniversary of the Business Combination. Each Unit consists of one share of IAC Common Stock and one Class A Warrant. -12- On November 5, 1996 (the last trading day prior to the public announcement of the execution of the Merger Agreement), the closing bid prices for the IAC Common Stock, Class A Warrants, Class B Warrants and Units were $9.250, $0.625, $2.250 and $9.500, respectively. On . , 1996 (the last day before the printing of this Joint Proxy Statement/Prospectus), such closing bid prices were $ . , $ . , $ . and $ . , respectively. IAC has never paid any cash dividends with respect to its shares of Common Stock. It is presently intended that all available cash will be utilized to further the growth of the Surviving Corporation's business subsequent to the Effective Time and for the foreseeable future thereafter, including the funding of Hollis-Eden's (and consequently, the Surviving Corporation's) working capital and capital expenditure requirements. The payment of any cash dividends will be in the discretion of the Surviving Corporation's Board of Directors and will be dependent upon the Surviving Corporation's results of operations, financial condition and other factors deemed relevant by the Surviving Corporation's Board of Directors. It is expected that the IAC Common Stock will be approved for listing, subject to the consummation of the Merger, on either the NASDAQ NMS or the AMEX. See "MARKET PRICES OF IAC'S SECURITIES AND DIVIDEND INFORMATION" and "DESCRIPTION OF IAC'S SECURITIES." OPERATIONS AFTER THE MERGER As a result of the Merger, Hollis-Eden will be merged with and into IAC, with IAC being the Surviving Corporation to the Merger. Upon the consummation of the Merger, Hollis-Eden will cease to exist as a separate corporation and the Surviving Corporation will change its name to Hollis- Eden Pharmaceuticals, Inc. The business of the Surviving Corporation will be that of Hollis-Eden immediately prior to the Merger. In accordance with the Merger Agreement, at the Effective Time, and subject to their election by the IAC Stockholders, the Board of Directors of the Surviving Corporation will consist of six directors, five of whom shall be Hollis-Eden's designees. In addition, all of the current officers of IAC will resign effective at the Effective Time, to be replaced by the current officers of Hollis-Eden designated by the Surviving Corporation's Board of Directors as detailed in the Merger Agreement. See "THE MERGER- Operations After the Merger." -13- COMPARATIVE PER SHARE DATA The following table set forth (i) net income (loss) per share of IAC Common Stock and Hollis-Eden Common Stock for the year ended December 31, 1995 and the nine months ended September 30, 1996 on a historical basis and (ii) book value per common share of IAC Common Stock and Hollis-Eden Common Stock as of December 31, 1995 and September 30, 1996 on a historical basis. The information presented in this tabulation should be read in conjunction with the pro forma combined condensed financial information and the separate financial statements and information of the respective companies and notes thereto appearing elsewhere herein. YEAR ENDED NINE MONTHS ENDED DECEMBER 31, 1995 SEPTEMBER 30, 1996 ----------------- ------------------ HISTORICAL - IAC Net income per common share. . $0.16 $0.12 Book value per common share at period end . . . . . . . . . $ 7.72 $7.84 HISTORICAL - HOLLIS-EDEN Net loss per common share . . . $(0.17) $(0.10) Book value per common share at period end . . . . . . . . . $(0.37) $(0.07) COMBINED PRO FORMA Net loss per share . . . . . $(1.22) $(0.07) Book value per common share at period end . . . . N/A $ 0.77 -14- SELECTED HISTORICAL FINANCIAL INFORMATION IAC The following data, insofar as it relates to each of the fiscal years 1995, 1994 and 1993, has been derived from audited financial statements, including the balance sheets at December 31, 1995, 1994 and 1993 and the statements of operations of stockholders' equity and of cash flows for the years ended December 31, 1995, 1994 and 1993 and notes thereto appearing elsewhere herein. The data for the nine months ended September 30, 1996 and 1995 has been derived from unaudited financial statements also appearing herein and which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for unaudited interim periods. No cash dividends have ever been declared or paid on IAC Common Stock. YEAR ENDED DECEMBER 31, -------------------------- STATEMENT OF 1995 1994 1993 OPERATIONS DATA: ---- ---- ---- Interest income . . $ 224,305 $ -0- $ -0- General and administrative expenses . . . . . $ 71,782 $ 7,000 $ 7,186 Net income (loss) . $ 100,523 $ (7,000) $ (7,186) Net income (loss) per common share . $ 0.16 $ (.03) $ (.03) Weighted average shares outstanding 608,250 233,250 233,250 BALANCE SHEET DATA: Total assets . . . $6,518,759 $ 74,139 $ 81,139 Redeemable common stock . . . . . . . $ 932,316 $ -0- $ -0- Stockholders' equity. . . . . . . $5,496,803 $ 68,139 $ 75,139 NINE MONTHS ENDED SEPTEMBER 30, ------------------------- STATEMENT OF 1996 1995 OPERATIONS DATA: ---- ---- Interest income . . $ 264,986 $ 123,228 General and administrative expenses . . . . . $ 132,152 $ 15,405 Net income (loss) . $ 100,684 $ 107,823 Net income (loss) per common share . $ 0.12 $ 0.20 Weighted average shares outstanding 833,250 533,250 BALANCE SHEET DATA: Total assets . . . $6,692,264 $6,438,919 Redeemable common stock . . . . . . . $ 969,703 $ -0- Stockholders' equity. . . . . . . $5,560,100 $6,436,419 HOLLIS-EDEN The following data, insofar as it relates to each of the periods 1995 and 1994, has been derived from audited financial statements, including the balance sheet at December 31, 1995 and 1994 and the related statements of operations, of stockholders' equity and of cash flows for the year ended December 31, 1995 and the periods from inception (August 15, 1994) to December 31, 1994 and September 30, 1996 and notes thereto appearing elsewhere herein. The data for the nine months ended September 30, 1996 and 1995 has been derived from unaudited financial statements also appearing herein and which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited interim periods. The interim results of operations are not necessarily indicative of results which may occur for the full fiscal year. No cash dividends have ever been declared or paid on Hollis-Eden Common Stock. PERIOD FROM INCEPTION PERIOD FROM (AUGUST 15, INCEPTION (AUGUST YEAR ENDED 1994) TO 15, 1994) TO DECEMBER 31, DECEMBER 31, SEPTEMBER 30, ------------ ------------ ----------------- STATEMENT OF 1995 1994 1996 OPERATIONS DATA: ---- ---- ---- Research and development . . . . . $ 463,000 $ 1,166,762 $ 1,753,855 General and administrative expenses . . . . . . $ 170,929 $ 103,564 $ 620,722 Total operating expenses . . . . . . $ 633,929 $ 1,270,326 $ 2,374,577 Other income (expense), net . . . $ (37,762) $ (6,720) $ (44,416) Net loss . . . . . . $ (671,691) $(1,277,046) $(2,418,993) Net loss per share . $ (0.17) $ (0.38) $ (0.61) Weighted average number of common shares outstanding . . . . . 3,867,924 3,396,226 3,945,783 BALANCE SHEET DATA: Total assets . . . . $ -0- $ -0- $ 344,191 Notes and accounts payable and accrued interest to related party . . . . . . . . $ 367,522 $ 216,720 $ -0- License fees payable . . . . . . . $ 928,000 $ 927,000 $ 600,000 Stockholders' deficit . . . . . . . $(1,537,633) $(1,143,720) $ (368,264) NINE MONTHS ENDED SEPTEMBER 30, ------------------------- STATEMENT OF 1996 1995 OPERATIONS DATA: ---- ---- Research and development . . . . . $ 124,093 $ 463,000 General and administrative expenses . . . . . . $ 346,229 $ 138,429 Total operating expenses . . . . . . $ 470,322 $ 601,429 Other income (expense), net . . . $ 66 $ (28,322) Net loss . . . . . . $(470,256) $ (629,751) Net loss per share . $ (0.10) $ (0.17) Weighted average number of common shares outstanding . . . . . 4,573,199 3,773,585 BALANCE SHEET DATA: Total assets . . . . $ 344,191 $ -0- Notes and accounts payable and accrued interest to related party . . . . . . . . $ -0- $ 335,582 License fees payable . . . . . . . $ 600,000 $ 943,000 Stockholders' deficit . . . . . . . $(368,264) $(1,495,693) -15- SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION The selected pro forma combined condensed balance sheet as of September 30, 1996 gives effect to (i) the Merger and the assumed use of $1,973,500 in IAC net cash (assuming no payments are required in connection with the exercise of Redemption Rights), less expenses of IAC and Hollis- Eden incurred in connection with the Merger, with the balance to be used for Surviving Corporation working capital purposes. The selected pro forma adjustments are described in the "Notes to Unaudited Pro Forma Combined Balance Sheet". Stockholders are urged to read such Notes carefully. The Unaudited Pro Forma Combined Balance Sheet is not necessarily indicative of the financial position that would have occurred had the events referred to above been consummated on the dates for which the consummation of such events is being given effect, nor is it necessarily indicative of the future financial position. See "UNAUADITED PRO FORMA COMBINED BALANCE SHEET". Year Ended SEPTEMBER 30, 1996 ------------------ BALANCE SHEET INFORMATION: Total assets . . . . . . . . $5,041,856 Total liabilities . . . . . . $ 551,416 Stockholders' equity . . . . $4,490,440 Book value per share . . . . $ 0.77 -16- RISK FACTORS The following risk factors, together with the other information set forth in this Joint Proxy Statement/Prospectus, should be considered carefully by Stockholders in evaluating whether to approve the transactions contemplated by the Merger. This Joint Proxy Statement/Prospectus contains forward-looking statements that involve risks and uncertainties. The Surviving Corporation's actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences, include, but are not limited to, those discussed in the following section and in "Hollis-Eden's Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Hollis-Eden's Business." DEPENDENCE ON NEW PRODUCTS AND FDA APPROVAL Hollis-Eden's principal development efforts are currently centered around two of four new Products licensed by Hollis-Eden which Hollis-Eden management believes show promise for the treatment and prevention of HIV/AIDS. Neither INACTIVIN nor any other of the Products has been approved for commercial sale and no assurance can be given that approvals will be obtained. Hollis-Eden's current primary focus is on INACTIVIN, which has a current and open Investigational New Drug (IND) file open with the FDA and which has completed Phase I of its approval process. While limited clinical trials of INACTIVIN have to date produced favorable results, significant additional trials are required, and no assurance can be given that the drug will ultimately be demonstrated to be safe or efficacious. Hollis-Eden has never commercially introduced a product, and no assurance can be given that commercialization of any of the Products in any country in which any of them may be approved will be financially successful. See "HOLLIS-EDEN'S BUSINESS." EARLY STAGE OF PRODUCT DEVELOPMENT; SUBSTANTIAL OPERATING LOSSES; MERGER Hollis-Eden has not yet generated any operating revenues. Hollis-Eden cannot predict when marketing approvals for any of its Products will be obtained, if ever. Even if such approvals are obtained, there can be no assurance that the Products will be successfully commercialized. Hollis- Eden has experienced significant operating losses due to substantial expenses incurred to acquire and fund development of the Products, and, as of September 30, 1996, had an accumulated deficit of $2,418,993. Hollis- Eden expects its operating expenses to increase over the next several years as it funds development, clinical testing and other expenses of seeking FDA approval. Hollis-Eden's (and consequently, the Surviving Corporation's) ability to achieve a profitable level of operations is dependent in large part on obtaining regulatory approvals for its Products, entering into agreements for product development and commercialization, and expanding from development into successful marketing, all of which will require significant amounts of capital. There can be no assurance that Hollis-Eden (or the Surviving Corporation) will ever achieve a profitable level of operations. Concurrently with the Merger, the Surviving Corporation will incur significant non-recurring charges to operations that will be recorded and evidenced in its first Quarterly Report to be filed with the Commission subsequent to the Effective Time of the Merger. In particular, there will be (i) a $1,500,000 payment for research and development fees, and (ii) a $500,000 charge relating to the issuants of warrants to a certain officer. See "HOLLIS-EDEN'S BUSINESS" and "HOLLIS-EDEN'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." PATENTS AND PROPRIETARY RIGHTS Although certain of the Products are patented, patents are not a guarantee of protection from competitors, especially in an area characterized by rapid advances, and enforcement of patents and proprietary rights in many countries can be expected to be problematic or unpredictable. There can be no assurance that any patents issued or licensed to Hollis-Eden will not be challenged, invalidated, infringed upon, or designed around by others or that the claims contained in such patents will not infringe the patent claims of others. Furthermore, there can be no assurance that others will not independently develop similar products. Hollis-Eden's (and consequently, the Surviving Corporation's) business may be adversely affected by competitors who develop substantially equivalent technology. Patent litigation can be extremely expensive, and Hollis-Eden (and the Surviving Corporation) may find that it is unable to fund litigation necessary to defend its rights. See "HOLLIS-EDEN'S BUSINESS-Patents." -17- GOVERNMENT REGULATION AND PRODUCT APPROVALS The research, preclinical development, clinical trial, manufacturing, marketing and sale of pharmaceuticals are subject to extensive regulation by governmental authorities. Products developed by Hollis-Eden cannot be marketed commercially in any jurisdiction in which they have not been approved. The process of obtaining regulatory approvals is lengthy and extremely expensive. Approval by United States authorities does not guarantee, nor at times even facilitate or expedite, approval in other countries. Further, government regulations are subject to change and it is possible that additional criteria may be established or imposed which could prevent or delay regulatory approval of any Products. Additionally, the facilities that manufacture the Products will need to adhere to regulatory guidelines. There can be no assurance that Hollis-Eden (or the Surviving Corporation) will not be required to incur significant costs to comply with laws and regulations in the future or that laws and regulations will not have a material adverse effect on Hollis-Eden's (or the Surviving Corporation's) business, financial condition or results of operations. See "HOLLIS-EDEN'S BUSINESS. POSSIBLE INABILITY TO MEET CASH OBLIGATIONS Hollis-Eden (and consequently, the Surviving Corporation) is likely to experience cash flow difficulties due to its substantial capital needs. For the foreseeable future following the expenditure of the cash to be infused into the Surviving Corporation as a result of the Merger, the Surviving Corporation's ability to meet its cash obligations as they become due and payable will substantially depend on its ability to sell its securities and borrow funds. There can be no assurance that the Surviving Corporation will be able to raise capital when needed to sustain or expand its operations. See "-Substantial Capital Needs" and "HOLLIS-EDEN'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." SUBSTANTIAL CAPITAL NEEDS Hollis-Eden's operations to date have consumed substantial capital without generating any revenues, and Hollis-Eden (and consequently, the Surviving Corporation) will continue to require substantial and increasing amounts of funds to conduct necessary research and development and preclinical and clinical testing of its Products, and to market any Products that receive regulatory approval. Hollis-Eden (and consequently, the Surviving Corporation) does not expect to generate revenue from operations for the foreseeable future, and Hollis-Eden's (and consequently, the Surviving Corporation's) ability to meet its cash obligations as they become due and payable is expected to depend for at least the next several years on its ability to sell securities, borrow funds or some combination thereof. Based upon its current plans, Hollis-Eden management believes that the cash to be infused into the Surviving Corporation as a result of the Merger, together with interest thereon, will be sufficient to meet the Surviving Corporation's operating expenses and capital requirements through at least the end of 1997. There can be no assurance, however, that changes in the Surviving Corporation's research and development plans or other events affecting the Surviving Corporation's operating expenses will not result in the expenditure of such cash before that time. No assurance can be given that the Surviving Corporation will be successful in raising necessary funds. The Surviving Corporation's future capital requirements will depend upon many factors, including progress with preclinical testing and clinical trials, the time and costs involved in obtaining regulatory approvals, competing technological and market developments, the ability of the Surviving Corporation to establish collaborative arrangements and effective commercialization and marketing activities and other arrangements. In any event, Hollis-Eden (and consequently, the Surviving Corporation) will continue to incur increasing negative cash flows and net losses for the foreseeable future. See "HOLLIS-EDEN'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." TECHNOLOGICAL CHANGE AND COMPETITION The pharmaceutical industry is characterized by intense competition and is subject to rapid and significant technological change. Rapid technological development may cause the Products to become obsolete before Hollis-Eden (and consequently, the Surviving Corporation) recoups all or -18- any portion of the related expenses. Hollis-Eden's (and consequently, the Surviving Corporation's) competitors include major pharmaceutical companies, biotechnology firms and universities and other research institutions, both in the United States and abroad, which are actively engaged in research and development of products in the therapeutic areas being pursued by Hollis-Eden. Most of Hollis-Eden's (and consequently, the Surviving Corporation's) competitors have substantially greater financial, technical, manufacturing, marketing, distribution and human resource capabilities than Hollis-Eden (or the Surviving Corporation). Recently, Hoffman-LaRoche and Abbot Laboratories announced a new family of antiviral AIDS drugs that block the production of protease, an enzyme critical to the virus' survival. In addition, many of Hollis-Eden's (and consequently, the Surviving Corporation's) competitors have significantly greater experience in testing new or improved therapeutic products and obtaining regulatory approvals of products. Accordingly, Hollis-Eden's (and consequently, the Surviving Corporation's) competitors may succeed in obtaining regulatory approval for products more rapidly than Hollis-Eden (or the Surviving Corporation). If Hollis-Eden (or the Surviving Corporation) commences significant commercial sales of its products, it will also be competing with respect to manufacturing efficiencies and marketing and distribution capabilities, areas in which it has little experience. See "HOLLIS-EDEN'S BUSINESS-Manufacturing." NO SALES AND MARKETING EXPERIENCE Hollis-Eden's efforts to date have focused on the development and evaluation of the Products. As Hollis-Eden continues clinical studies and prepares for commercialization of the Products, it must build a sales and marketing infrastructure. Hollis-Eden (and consequently, the Surviving Corporation) has no experience in the sales and marketing of its Products. It is possible that Hollis-Eden (and consequently, the Surviving Corporation) will not be able to attract and retain the skilled personnel necessary to develop the infrastructure to effectively market the Products. See "HOLLIS-EDEN'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "-Dependence on Officers and Future Employees." DEPENDENCE ON LICENSE AGREEMENTS Hollis-Eden licenses the Products from Dr. Patrick T. Prendergast and from Edenland, Inc. ("Edenland") and Colthurst Limited., two organizations Dr. Prendergast controls. See "Certain Relationships and Related Transactions." Hollis-Eden is obligated to make license payments and provide certain funding, including funding for the development and testing of the Products, at specified times. There can be no assurance that Hollis-Eden (and consequently, the Surviving Corporation) will be able to meet future payment or funding obligations, in which event Hollis-Eden (and consequently, the Surviving Corporation) could lose all rights to one or more of the Products, which would have a material adverse effect on Hollis- Eden (and consequently, the Surviving Corporation). See "HOLLIS-EDEN'S BUSINESS-License Agreements." DEPENDENCE ON OFFICERS AND FUTURE EMPLOYEES Hollis-Eden (and the Surviving Corporation) is (and will be) highly dependent upon its Chief Executive Officer, Richard B. Hollis, and its Chief Scientific Officer, Dr. Patrick T. Prendergast, the loss of either of whose services would adversely affect Hollis-Eden (and the Surviving Corporation) and impede the achievement of Hollis-Eden's (and consequently, the Surviving Corporation's) research and development objectives. Recruiting and retaining additional management personnel, as well as qualified scientific personnel to perform research and development work in the future, will also be critical to Hollis-Eden's (and consequently, the Surviving Corporation's) success. Because competition for experienced scientific personnel among numerous pharmaceutical and biotechnology companies and research and academic institutions is intense, there can be no assurance that Hollis-Eden (or the Surviving Corporation) will be able to attract and retain such personnel. See "PROPOSED MANAGEMENT OF THE SURVIVING CORPORATION" and "HOLLIS-EDEN'S BUSINESS." -19- TECHNOLOGICAL UNCERTAINTIES All of Hollis-Eden's product development efforts are based upon technologies and therapeutic approaches that have not been widely used in humans for therapeutic purposes. There is, therefore, significant risk that these approaches will not prove to be successful. While Hollis-Eden believes that the positive results obtained to date in preclinical and limited clinical human studies support further research and development, those positive results are not necessarily indicative of results that will be obtained in further human clinical testing. See "HOLLIS-EDEN'S BUSINESS." PHARMACEUTICAL PRICING; PENDING HEALTH CARE REFORMS Government health administration authorities, together with private health insurers, increasingly are attempting to contain health care costs by limiting the price or reimbursement levels for medical products and services. In certain foreign markets, pricing or profitability of prescriptive pharmaceuticals is subject to government control. In the United States, there have been a number of federal and state proposals to implement similar government controls or otherwise significantly reform the existing health care system. Due to uncertainties as to the ultimate features of this or any other reform initiatives that may be enacted, Hollis-Eden cannot predict which, if any, of such reform proposals will be adopted, when they may be adopted, or what impact they may have on Hollis- Eden (and consequently, the Surviving Corporation). It is possible that any legislation that is enacted will include provisions resulting in price limits, utilization controls or other consequences that may adversely affect Hollis-Eden (and consequently, the Surviving Corporation). MANUFACTURING LIMITATIONS AND UNCERTAINTIES Hollis-Eden currently relies on outside manufacturers for the production of INACTIVIN and the other Products to supply sufficient quantities of compounds to conduct clinical trials on the Products. If Hollis-Eden (or the Surviving Corporation) is unable to contract on acceptable terms or to obtain a sufficient supply of the Products or such supplies are delayed or contaminated, Hollis-Eden (and consequently, the Surviving Corporation) could experience significant delays in bringing INACTIVIN and the other Products to market as well as delays in human clinical testing schedules and delays in submissions of the Products for regulatory approval and initiation of further development progress, any of which could have a material adverse effect on Hollis-Eden's (and consequently, the Surviving Corporation's) business and results of operations. If Hollis-Eden (and consequently, the Surviving Corporation) should encounter delays or difficulties in establishing relationships with manufacturers to produce, package and distribute its finished pharmaceutical products, market introduction and subsequent sales of such products would be adversely affected. Moreover, contract manufacturers that Hollis-Eden (or the Surviving Corporation) may use must adhere to current Good Manufacturing Practices ("GMP") regulations enforced by the FDA through its facilities inspection program. These facilities must pass a pre-approval plant inspection before the FDA will issue a pre-market approval of the Products. If Hollis-Eden (or the Surviving Corporation) is unable to obtain or retain third party manufacturing on commercially acceptable terms, it may not be able to commercialize pharmaceutical products as planned. Hollis-Eden's (and consequently, the Surviving Corporation's) dependence upon third parties for the manufacture of pharmaceutical products may adversely affect Hollis-Eden's (and consequently, the Surviving Corporation's) profit margins and its ability to develop and deliver pharmaceutical products on a timely and competitive basis. Even if Hollis-Eden (and consequently, the Surviving Corporation) is successful in raising the substantial amounts of capital it requires (as to which there can be no assurance), Hollis-Eden (and consequently, the Surviving Corporation) does not intend to manufacture any pharmaceutical products itself, although it may choose to do so in the future. Hollis- Eden has no experience in manufacturing pharmaceutical products in clinical quantities or for commercial purposes. Hollis-Eden believes that its strategy of outsourcing manufacturing is cost effective since it avoids the high fixed costs of plant, equipment and large manufacturing staff and thereby enables Hollis-Eden to conserve its resources. Should Hollis-Eden (and consequently, the Surviving Corporation) determine to manufacture products itself, Hollis-Eden (and consequently, the Surviving Corporation) -20- 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." -21- INDEMNIFICATION AND LIMITED MONETARY DAMAGES The Surviving Corporation's Certificate of Incorporation will provide that the Surviving Corporation's directors shall not be liable for monetary damages to the Surviving Corporation's stockholders except as required by law. In addition, the Surviving Corporation's Bylaws will provide indemnification of the Surviving Corporation's officers and directors to the fullest extent permitted by the DGCL. To the extent that stockholders are unable to prevail in actions for monetary damages against the Surviving Corporation's directors, such stockholders' rights in this regard are limited in comparison to rights of stockholders of a corporation that has not adopted such provisions. In addition, to the extent that the Surviving Corporation's officers and directors may obtain indemnification from the Surviving Corporation, the Surviving Corporation may incur substantial financial losses. DIVIDENDS UNLIKELY Neither IAC nor Hollis-Eden has ever paid dividends on its shares of Common Stock. The payment of dividends after the Merger, if any, will be contingent upon the Surviving Corporation's revenues and earnings (i.e., Hollis-Eden's revenues and earnings), if any, capital requirements and general financial condition subsequent to consummation of the Merger. The payment of any dividends subsequent to the Merger will be within the discretion of the Surviving Corporation's Board of Directors. IAC, Hollis- Eden and the Surviving Corporation intend to retain all earnings, if any, for use in Hollis-Eden's business operations and, accordingly, the boards of directors for such companies do not anticipate declaring any dividends in the foreseeable future. See "DESCRIPTION OF IAC'S SECURITIES- Dividends." IMMEDIATE SUBSTANTIAL DILUTION Upon the issuance of shares of Surviving Corporation Common Stock in the Merger to Hollis-Eden Stockholders, IAC Stockholders will suffer an immediate and substantial dilution of their ownership interests in IAC. Upon the exercise, if ever, of the Merger Warrants and Options, the IAC Stockholders would suffer further dilution of their ownership interests in IAC and, as a result of the Merger, the Surviving Corporation. CONCENTRATION OF OWNERSHIP Following the Merger, Hollis-Eden Stockholders will own approximately 85% of the then outstanding shares of Surviving Corporation Common Stock (without giving effect to the exercise of any Merger Warrants and Options, IAC Warrants and Options or Plan Options). Accordingly, the Hollis-Eden Stockholders will be able to elect the members of the Surviving Corporation's Board of Directors and control the business, policies and affairs of the Surviving Corporation. Assuming the exercise of the Merger Warrants and Options and the IAC Warrants and Options (but not any Plan Options), the Hollis-Eden Stockholders would collectively own approximately 74% of the then outstanding shares of Surviving Corporation Common Stock, with Mr. Richard B. Hollis owning approximately 37%. SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON PRICE OF SURVIVING CORPORATION COMMON STOCK Future sales of Surviving Corporation Common Stock by current IAC and Hollis-Eden Stockholders, option holders and warrant holders could adversely affect the market price of the Surviving Corporation's Common Stock. All of the shares of Surviving Corporation Common Stock issuable in the Merger, other than to affiliates (generally including, without limitation, directors, certain executive officers and beneficial owners of 10% or more of any class of common stock) of Hollis-Eden, will be eligible for sale under Rules 144 and 145 promulgated under the Securities Act immediately upon consummation of the Merger. In addition, the shares of Surviving Corporation Common Stock issuable in the Merger, other than to affiliates of Hollis-Eden, can be resold pursuant to this Proxy Statement/Prospectus. However, pursuant to the Merger Agreement, Hollis- Eden is using its best efforts to secure the agreement of each Hollis-Eden Stockholder to such Stockholder's not selling any shares of Surviving Corporation Common Stock issuable in the Merger for the nine-month period -22- (and in the case of Mr. Hollis and Dr. Prendergast, no more than an aggregate of 1,000,000 shares in the two-year period) immediately following the consummation of the Merger. In addition, all of the Surviving Corporation Common Stock owned by the Initial IAC Stockholders are "restricted securities" as that term is defined in Rule 144 promulgated under the Securities Act. Under such rule, once two years have elapsed from the date of the acquisition, an affiliate of an issuer may, every three months, sell in ordinary brokerage transactions or in transactions directly with a market maker an amount equal to the greater of one percent of the issuer's outstanding common stock or the average weekly trading volume during the four calendar weeks prior to the sale. Once three years have elapsed, a person who has not been an affiliate of an issuer for 90 days immediately prior to the proposed sale may sell his shares without restriction. As of the date of this Joint Proxy Statement/Prospectus, all of the shares of Surviving Corporation Common Stock held by IAC Stockholders are eligible for sale without restriction, except that Mr. Salvatore J. Zizza, Chairman of the Board of IAC and a proposed member of the Surviving Corporation's Board of Directors following the Merger (beneficially owning 220,000 shares), will continue to be restricted pursuant to Rule 144. See "THE MERGER-Resales of Surviving Corporation Common Stock." The shares of Surviving Corporation Common Stock issuable upon exercise of the Merger Warrants and Options are also being registered pursuant to the Registration Statement of which this Joint Proxy Statement/Prospectus forms a part, for permitted resale following their issuance. EXERCISE OF REDEMPTION RIGHTS; 15% IAC NON-AFFILIATE STOCKHOLDER REDEMPTION CAP In the event that the Merger is approved at the IAC Special Meeting and IAC Non-Affiliate Stockholders elect to redeem less than 15% of the shares of IAC Common Stock held by such IAC Non-Affiliate Stockholders, IAC may proceed with the Merger and redeem such shares at their Redemption Value upon consummation of the Merger. Payments made to redeem such shares will reduce the cash available for satisfying outstanding obligations and planned capital expenditures of Hollis-Eden and, consequently, will reduce cash available after the Merger for capital spending. IN ADDITION, IF 15% (APPROXIMATELY 90,000 SHARES) OR MORE OF THE SHARES OF IAC COMMON STOCK HELD BY IAC NON-AFFILIATE STOCKHOLDERS ARE VOTED AGAINST THE MERGER, AND SUCH IAC NON-AFFILIATE STOCKHOLDERS ELECT, WITHIN THE REDEMPTION PERIOD, TO HAVE AT LEAST SUCH NUMBER OF SHARES REDEEMED BY IAC, IAC WILL NOT PROCEED WITH THE MERGER OR REDEEM SUCH SHARES. See "GENERAL INFORMATION-IAC Special Meeting; Redemption Rights." CLASSIFIED BOARD OF DIRECTORS; POSSIBLE DETERRENT TO TAKEOVERS, CHANGES IN BOARD AND OTHER CHANGES IN CONTROL The Surviving Corporation's Board of Directors will be a "classified board," with only one-third of its directors coming up for election each year. This provision is applicable to every election of directors. As a result of having a classified board, two annual meetings will be necessary to change a majority of the directors. The existence of a classified board may, in certain circumstances, deter or delay mergers, tender offers, other possible takeover attempts or changes in management of the Board of Directors which may be favored by some or a majority of the Surviving Corporation's stockholders. POSSIBLE VOLATILITY IN STOCK PRICE Although it is anticipated that the Surviving Corporation Common Stock will be accepted for listing or trading, as the case may be, on either the NASDAQ NMS or the AMEX upon the consummation of the Merger, there is no assurance that a market for securities of the Surviving Corporation will continue to exist. The prices at which the Surviving Corporation Common Stock trades after the Merger will depend on many factors, including prevailing interest rates, markets for similar securities, industry conditions, and the performance of, and investor expectations for, Hollis- Eden's (and consequently, the Surviving Corporation's) prospects. -23- GENERAL INFORMATION IAC SPECIAL MEETING The IAC Special Meeting will be held at 10:00 a.m., local time, on . , 1997, at . , New York, New York . . At the IAC Special Meeting, IAC Stockholders will be asked to consider and vote upon the proposal to approve and adopt the Merger Agreement and the transactions contemplated thereby, to elect a new slate of six directors as of the Effective Time, and a proposal to approve and adopt the IAC 1996 Incentive Stock Option Plan. The Board of Directors of IAC has fixed the close of business on . , 1996 as the IAC Record Date. Only holders of record of IAC Common Stock as of the IAC Record Date are entitled to notice of and to vote at the IAC Special Meeting. As of the close of business on the IAC Record Date, there were 833,250 shares of IAC Common Stock issued and outstanding and held by 38 holders of record. IAC Stockholders are entitled to one vote on each matter considered and voted on at the IAC Special Meeting for each share of IAC Common Stock held of record at the close of business on the IAC Record Date. The presence, in person or by properly executed proxy, of the holders of a majority of the outstanding shares of IAC Common Stock entitled to vote at the IAC Special Meeting is necessary to constitute a quorum of the holders of IAC Common Stock at the IAC Special Meeting. Abstentions will be counted as shares present for purposes of determining the presence of a quorum. Abstentions will not be counted as votes cast for purposes of determining whether a proposal has received sufficient votes for adoption. Consequently, abstentions will have the effect of a vote against the adoption of the Merger Agreement and the transactions contemplated thereby. Proxies in the form enclosed are solicited by the IAC Board of Directors. Shares of IAC Common Stock represented by properly executed proxies, if such proxies are received in time and are not revoked, will be voted in accordance with the instructions indicated on the proxies. IF NO INSTRUCTIONS ARE INDICATED, SUCH PROXIES WILL BE VOTED FOR ADOPTION OF THE MERGER AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY, FOR THE ELECTION OF EACH OF THE SIX NOMINATED DIRECTORS, FOR ADOPTION OF THE IAC 1996 INCENTIVE STOCK OPTION PLAN, AND AS DETERMINED BY A MAJORITY OF THE MEMBERS OF THE IAC BOARD OF DIRECTORS AS TO ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE IAC SPECIAL MEETING. ANY HOLDER OF IAC COMMON STOCK WHO RETURNS A SIGNED PROXY BUT FAILS TO PROVIDE INSTRUCTIONS AS TO THE MANNER IN WHICH SUCH HOLDER'S SHARES ARE TO BE VOTED WILL BE DEEMED TO HAVE VOTE FOR THE ADOPTION OF THE MERGER AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY, FOR THE ELECTION OF EACH OF THE EIGHT NOMINATED DIRECTORS AND FOR ADOPTION OF THE IAC 1996 INCENTIVE STOCK OPTION PLAN. An IAC Stockholder who has given a proxy may revoke it at any time prior to its exercise at the IAC Special Meeting or prior to the receipt by IAC of proxies of stockholders, by (i) giving written notice of revocation to the Secretary of IAC, (ii) properly submitting to IAC a duly executed proxy bearing a later date, or (iii) voting in person at the IAC Special Meeting. All written notices of revocation and other communications with respect to revocation of proxies should be addressed to IAC as follows: Initial Acquisition Corp., 810 Seventh Avenue, New York, New York 10019, Attention: President. A proxy appointment will not be revoked by death or supervening incapacity of the stockholder executing the proxy unless, before the shares are voted, notice of such death or incapacity is filed with IAC's Secretary or other person responsible for tabulating votes on behalf of IAC. The expense of soliciting proxies for the IAC Special Meeting will be borne by IAC, although Hollis-Eden has paid one-half of the cost of the filing, printing and mailing fees and expenses of this Joint Proxy Statement/Prospectus. In addition to the solicitation of stockholders of record by mail, telephone or personal contact, IAC will be contacting brokers, dealers, banks or voting trustees or their nominees who can be identified as record holders of IAC Common Stock. Such holders, after inquiry by IAC, will provide information concerning quantity of proxy and other materials needed to supply such materials to beneficial owners, and IAC will reimburse them for the expense of mailing the proxy materials to such persons. -24- The affirmative vote of two-thirds of the outstanding shares of IAC Common Stock voting at the IAC Special Meeting, either in person or by proxy, is necessary to approve and adopt the Merger Agreement and the transactions contemplated thereby. The affirmative vote of the holders of a plurality of the outstanding shares of IAC Common Stock voting is required for the election of each director. The affirmative vote of a majority of the outstanding shares of IAC Common Stock voting is required for the approval and adoption of the IAC 1996 Incentive Stock Option Plan. Mr. Salvatore J. Zizza, Chairman of the Board of IAC and the owner of approximately 8.4% of the outstanding shares of IAC Common Stock (without giving effect to the exercise of any IAC Warrants and Options), has agreed with Hollis-Eden to vote all shares of IAC Common Stock owned by him in favor of the Merger Agreement. As an Initial IAC Stockholder, however, Mr. Zizza is required (as set forth in the IAC Prospectus) to vote his shares with respect to the Merger Agreement in accordance with the vote of the majority in interest of all IAC Non-Affiliate Stockholders. The Initial IAC Stockholders, which include IAC's directors and executive officer, collectively holding an aggregate of approximately 28% of the outstanding shares of IAC Common Stock before giving effect to the Merger (and without giving effect to the exercise of any Merger Warrants and Options or IAC Warrants and Options), by reason of their prior agreement with IAC, will vote their respective shares of IAC Common Stock in accordance with the vote of the majority in interest of all IAC Non- Affiliate Stockholders. Consequently, if a majority of the outstanding shares of IAC Common Stock held and voted by IAC Non-Affiliate Stockholders is voted in favor of the Merger Agreement and the transactions contemplated thereby, the Initial IAC Stockholders will vote their shares of IAC Common Stock in favor of the Merger Agreement and the transactions contemplated thereby. If the Merger Agreement and the transactions contemplated thereby are not approved by the requisite vote, the Merger Agreement will be terminated and the proposed Merger will be abandoned. In such event, the proposal to approve and adopt the IAC 1996 Incentive Stock Option Plan will not be implemented, even if such proposal is approved by the requisite vote. As of the IAC Record Date, Hollis-Eden, its directors and executive officers, and their affiliates (except as set forth below), held no shares of IAC Common Stock. Mr. James D. Bowyer, an employee of Laidlaw Equities and one of the persons who introduced Hollis-Eden to the Company, however, to IAC's knowledge, beneficially owns 58,800 shares of IAC Common Stock. Laidlaw Equities, which currently owns warrants to purchase up to 134,100 shares of Hollis-Eden Common Stock and is entitled to receive warrants to purchase up to an additional 452,830 shares of Surviving Corporation Common Stock upon the consummation of the Merger, serves as Hollis-Eden's investment banker. Mr. J. Paul Bagley, one of Hollis-Eden's directors and a proposed director of the Surviving Corporation following the Merger, was the Chief Executive Officer of Laidlaw Equities' parent company until November 1996. Redemption Rights. Each of the IAC Non-Affiliate Stockholders (and each Initial IAC Stockholder who holds After Acquired Stock, but only to the extent of the After Acquired Stock) has the right, pursuant to IAC's Prospectus, to elect to have any or all of his or her shares of IAC Common Stock redeemed for $[10.78] per share (the Redemption Value) by exercise of such right in accordance with the procedure set forth below within 20 calendar days of the mailing of this Joint Proxy Statement/Prospectus (the Redemption Period). The Redemption Value has been calculated by dividing (i) the amount of the Escrowed Funds as of the Record Date by (ii) the number of shares of IAC Common Stock held by IAC Non-Affiliate Stockholders as of the IAC Record Date. If IAC Non-Affiliate Stockholders elect to redeem 15% or more of such shares of IAC Common Stock within the Redemption Period, IAC will not proceed with the Merger and will not redeem such shares. If IAC Non-Affiliate Stockholders elect to redeem less than 15% of such IAC Common Stock within the Redemption Period, assuming that IAC otherwise satisfies the required conditions of the Merger, IAC may proceed with the Merger but will be required to redeem such shares at their Redemption Value upon consummation of the Merger. Each IAC Non-Affiliate Stockholder that desires to exercise his or her Redemption Right should, prior to expiration of the Redemption Period, (i) complete and sign the proxy card (or request that his or her broker, dealer or other nominee do so on his or her behalf) in accordance with the instructions set forth therein, (ii) expressly vote "AGAINST" the Merger, (iii) expressly indicate on the proxy card that such Stockholder is exercising his or her Redemption Right and specify the number of shares to be redeemed and (iv) deposit such proxy card in the United States mail -25- postmarked on or prior to the last day of the Redemption Period. The proxy card containing the exercise of Redemption Rights must be received by IAC prior to the IAC Special Meeting. A proxy card which indicates that an IAC Non-Affiliate Stockholder expressly abstains from voting on the proposal to approve the Merger shall not be deemed an exercise of such IAC Non- Affiliate Stockholder's Redemption Rights. An IAC Non-Affiliate Stockholder may exercise Redemption Rights only if he or she votes "AGAINST" the Merger within the Redemption Period. Any IAC Non-Affiliate Stockholder who returns a signed proxy card which either expressly votes "FOR" the Merger or fails to indicate how his or her shares should be voted, shall be deemed to have waived his or her Redemption Right. If a proxy, which constitutes exercise of the Redemption Rights, is revoked before it is voted, such revocation shall also constitute an election by such IAC Non-Affiliate Stockholder to forfeit all Redemption Rights. An IAC Non-Affiliate Stockholder having shares registered in the name of a broker, dealer, commercial bank, trust company or other nominee must notify such person if he or she desires to exercise his or her Redemption Rights. Redemption Rights shall be forfeited by an IAC Non-Affiliate Stockholder if not exercised in accordance with the foregoing procedures on or prior to the last day of the Redemption Period. An IAC Non-Affiliate Stockholder who sells any of his or her shares of IAC Common Stock after electing to have such shares redeemed shall forfeit the right to receive the Redemption Value with respect to such shares. In addition, an IAC Non-Affiliate Stockholder who exercises his or her Redemption Right shall forfeit the right to receive Additional Merger Shares, if any are issued. Upon consummation of the Merger, IAC Non-Affiliate Stockholders who have exercised their right to redemption within the Redemption Period will be required to tender to American Stock Transfer & Trust Company, as transfer agent, certificates for such number of shares of IAC Common Stock to be redeemed, together with properly executed stock powers and any required signature guarantees. Upon receipt of such certificates, IAC shall promptly make payment of the aggregate Redemption Value for such number of shares of IAC Common Stock as have been properly tendered for redemption. All questions as to the form of all documents and the validity and eligibility for redemption under the rules set forth herein of any exercise of Redemption Rights and tender of IAC Common Stock shall be determined by IAC, in its sole discretion. IAC will not accept any IAC Common Stock tendered for redemption until after the IAC Special Meeting. IAC will use a portion of the Escrowed Funds to pay for the redemption of all shares of IAC Common Stock which IAC is required to redeem pursuant to the above-described procedure. Any shares of IAC Common Stock which are redeemed shall be canceled. IAC NON-AFFILIATE STOCKHOLDERS MAY NOT EXERCISE THEIR REDEMPTION RIGHTS IF THEY ARE SEEKING THEIR APPRAISAL RIGHTS AND, CONVERSELY, IAC NON- AFFILIATE STOCKHOLDERS WHO SEEK REDEMPTION RIGHTS MAY NOT EXERCISE THEIR APPRAISAL RIGHTS. SEE "-APPRAISAL RIGHTS." IAC STOCKHOLDERS SHOULD OBTAIN CURRENT PRICE QUOTES FOR IAC COMMON STOCK TO DETERMINE WHETHER SUCH STOCKHOLDER WOULD OBTAIN A HIGHER PRICE FOR HIS OR HER SHARES BY SELLING THEM INTO THE PUBLIC MARKET RATHER THAN ELECTING TO HAVE HIS OR HER SHARES REDEEMED. SEE "MARKET PRICE OF IAC'S SECURITIES AND DIVIDEND INFORMATION." THE REDEMPTION VALUE IS $[10.78] PER SHARE. Recommendation of the IAC Board of Directors. The Board of Directors of IAC believes that the Merger is in the best interests of IAC and its stockholders and has unanimously approved the Merger Agreement and the consummation of the transactions contemplated thereby. The IAC Board of Directors unanimously recommends that IAC Stockholders vote FOR adoption of the Merger Agreement and the consummation of the transactions contemplated thereby, FOR the election of the new slate of six directors and FOR the proposal to approve and adopt the IAC 1996 Incentive Stock Option Plan. In deciding to approve the Merger Agreement and the consummation of the transactions contemplated thereby, IAC's Board of Directors considered a number of factors, including the terms of the Merger, the future prospects of Hollis-Eden and relevant business, legal and market factors. -26- HOLLIS-EDEN SPECIAL MEETING The Hollis-Eden Special Meeting will be held at 10:00 a.m., local time on . , 1997, at . , Portland, Oregon . . At the Hollis-Eden Special Meeting, Hollis-Eden Stockholders will consider and vote upon the proposal to approve and adopt the Merger Agreement and the transactions contemplated thereby. The Board of Directors of Hollis-Eden has fixed the close of business on . , 1996, as the Hollis-Eden Record Date. Only holders of record of Hollis-Eden Common Stock as of the Hollis-Eden Record Date are entitled to notice of and to vote at the Hollis-Eden Special Meeting. As of the close of business on the Hollis-Eden Record Date, there were 4,911,004 shares of Hollis-Eden Common Stock issued and outstanding and held by 53 holders of record. Holders of Hollis-Eden Common Stock are entitled to one vote on each matter considered and voted on at the Hollis-Eden Special Meeting for each share of Hollis-Eden Common Stock held of record at the close of business on the Hollis-Eden Record Date. The presence, in person or by properly executed proxy, of the holders of a majority of the outstanding shares of Hollis-Eden Common Stock entitled to vote at the Hollis-Eden Special Meeting is necessary to constitute a quorum of the holders of Hollis-Eden Common Stock at the Hollis-Eden Special Meeting. Abstentions will be counted as shares present for purposes of determining the presence of a quorum but will not be counted as votes cast for purposes of determining whether a proposal has received sufficient votes for adoption. Consequently, abstentions will have the effect of a vote against the adoption of the Merger Agreement and the transactions contemplated thereby. Proxies in the form enclosed are solicited by the Hollis-Eden Board of Directors. Shares of Hollis-Eden Common Stock represented by properly executed proxies, if such proxies are received in time and are not revoked, will be voted in accordance with the instructions indicated on the proxies. IF NO INSTRUCTIONS ARE INDICATED, SUCH PROXIES WILL BE VOTED FOR ADOPTION OF THE MERGER AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY, AND AS DETERMINED BY A MAJORITY OF THE MEMBERS OF THE HOLLIS-EDEN BOARD OF DIRECTORS AS TO ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE HOLLIS-EDEN SPECIAL MEETING. ANY HOLDER OF HOLLIS-EDEN COMMON STOCK WHO RETURNS A SIGNED PROXY BUT FAILS TO PROVIDE INSTRUCTIONS AS TO THE MANNER IN WHICH SUCH HOLDER'S SHARES ARE TO BE VOTED WILL BE DEEMED TO HAVE VOTED FOR ADOPTION OF THE MERGER AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY. A Hollis-Eden Stockholder who has given a proxy may revoke it at any time prior to its exercise at the Hollis-Eden Special Meeting or prior to the receipt by Hollis-Eden of proxies voting in favor of the Merger Agreement by all Hollis-Eden Stockholders, by (i) giving written notice of revocation to the Corporate Secretary of Hollis-Eden, (ii) properly submitting to Hollis-Eden a duly executed proxy bearing a later date, or (iii) voting in person at the Hollis-Eden Special Meeting. All written notices of revocation and other communications with respect to revocation of proxies should be addressed to Hollis-Eden as follows: Hollis-Eden, Inc., 808 S.W. Third Avenue, Suite 540, Portland, Oregon 97204, Attention: Corporate Secretary. A proxy appointment will not be revoked by death or supervening incapacity of the stockholder executing the proxy unless, before the shares are voted, notice of death or incapacity is filed with Hollis-Eden's Corporate Secretary or other person responsible for tabulating votes on behalf of Hollis-Eden. The expense of soliciting proxies for the Hollis-Eden Special Meeting will be paid by Hollis-Eden, although IAC has paid the cost of the filing and a portion of the cost of the printing and mailing fees and expenses of this Joint Proxy Statement/Prospectus. In addition to the solicitation of stockholders of record by mail, telephone or personal contact, Hollis-Eden will be contacting brokers, dealers, banks or voting trustees or their nominees who can be identified as record holders of Hollis-Eden Common Stock. Such holders, after inquiry by Hollis-Eden, will provide information concerning quantity of proxy and other materials needed to supply such materials to beneficial owners, and Hollis-Eden will reimburse them for the expense of mailing the proxy materials to such persons. The affirmative vote of a majority of the outstanding shares of Hollis-Eden Common Stock voting at the Hollis-Eden Special Meeting, either in person or by proxy, is necessary to approve and adopt the Merger -27- Agreement and the transactions contemplated thereby. As of the Hollis-Eden Record Date, Hollis-Eden's directors and executive officers and their affiliates held approximately 71% of the outstanding shares of Hollis-Eden Common Stock entitled to vote at the Hollis-Eden Special Meeting. In addition, Mr. Richard B. Hollis, Chairman of the Board of Hollis-Eden and the owner of approximately 58% of the outstanding shares of Hollis-Eden Common Stock, has agreed with IAC to vote all shares of Hollis-Eden Common Stock which he is entitled to vote at the Hollis-Eden Special Meeting in favor of the Merger Agreement and the transactions contemplated thereby. As of the Hollis-Eden Record Date, IAC, its directors and executive officer, and their affiliates, held no shares of Hollis-Eden Common Stock. Recommendation of the Hollis-Eden Board of Directors. The Board of Directors of Hollis-Eden believes that the Merger is in the best interests of Hollis-Eden and its stockholders and has unanimously approved the Merger Agreement and the consummation of the transactions contemplated thereby. The Hollis-Eden Board of Directors unanimously recommends that Hollis-Eden Stockholders vote FOR adoption of the Merger Agreement and the consummation of the transactions contemplated thereby. In deciding to approve the Merger Agreement and the consummation of the transactions contemplated thereby, Hollis-Eden's Board of Directors considered a number of factors, including the terms of the Merger, the financial condition of IAC and Hollis-Eden, the future prospects and capital requirements of Hollis-Eden and relevant business, legal and market factors. HOLDERS OF HOLLIS-EDEN COMMON STOCK OR HOLLIS-EDEN WARRANTS OR OPTIONS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL. APPRAISAL RIGHTS Pursuant to the provisions of Section 262 of the DGCL, any holder of record of IAC or Hollis-Eden Common Stock is entitled to dissent from the Merger and obtain payment of the "fair value" of his or her shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be, in cash if the Merger is effected by complying with the provisions of Section 262 of the DGCL. Generally, a stockholder must dissent with respect to all the shares he or she owns or over which he or she has the power to direct the vote. The failure of a stockholder to follow the statutory provisions set forth in Section 262 of the DGCL may result in the termination or waiver of such stockholder's appraisal rights. Holders of record of shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be, who desire to exercise their appraisal rights must fully satisfy all of the following conditions. A written demand for appraisal of the shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be, owned by such IAC or Hollis-Eden Stockholder, as the case may be, must be delivered to the Secretary of IAC or Hollis-Eden, as the case may be, before the taking of the vote on the approval and adoption of the Merger Agreement. This written demand for appraisal must be in addition to and separate from any proxy or vote abstaining from or voting against the approval and adoption of the Merger Agreement. Neither voting against, abstaining from voting, nor failing to vote on the proposal to approve and adopt the Merger Agreement will constitute a demand for appraisal within the meaning of Section 262 of the DGCL. Any IAC Stockholder or Hollis-Eden Stockholder, as the case may be, seeking appraisal rights must hold the shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be, for which appraisal is sought on the date of the making of the demand, continuously through the Effective Time and otherwise comply with the provisions of Section 262 of the DGCL. Holders of shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be, electing to exercise their appraisal rights under Section 262 of the DGCL must not vote for the approval and adoption of the Merger Agreement or consent thereto in writing. Voting in favor of the approval and adoption of the Merger Agreement, or delivering a proxy in connection with the IAC or Hollis-Eden, as the case may be, Special Meeting or delivering an executed unmarked proxy (unless the proxy votes against, or expressly abstains from voting on the approval and adoption of the Merger Agreement) will constitute a waiver of such stockholder's right of appraisal and will nullify any written demand for appraisal submitted by -28- the stockholder. Consequently, an IAC Stockholder or Hollis-Eden Stockholder, as the case may be, who desires to exercise his or rights of appraisal should not vote in favor of approval and adoption of the Merger Agreement. Any such IAC Stockholder or Hollis-Eden Stockholder, as the case may be, who desires to preserve his or her rights of appraisal should either refrain from returning a proxy card or, if such IAC Stockholder or Hollis-Eden Stockholder, as the case may be, returns a proxy card, such proxy card should expressly indicate that such IAC Stockholder or Hollis- Eden Stockholder, as the case may be, votes against or expressly abstains from voting on such approval and adoption. A demand for appraisal must be executed by or for the stockholder of record, fully and correctly, as such stockholder's name appears on the stock certificates. If shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be, are owned of record in a fiduciary capacity, such as by a trustee or guardian, such demand must be executed by the fiduciary. If shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be, are owned of record by more than one person, as in a joint tenancy or tenancy in common, such demand must be executed by all joint owners. An authorized agent, including an agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record; however, the agent must identify the record owner and expressly disclose the fact that, in exercising the demand, he is acting as agent for the record owner. A record owner, such as a broker who holds shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be, as a nominee for others, may exercise appraisal rights with respect to such shares held for all or less than all beneficial owners of shares of IAC Common Stock or Hollis- Eden Common Stock, as the case may be, as to which the holder is the record owner. In such case, the written demand must set forth the number of shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be, covered by the demand. Where the number is not expressly stated, the demand will be presumed to cover all shares of IAC Common Stock or Hollis- Eden Common Stock, as the case may be, outstanding in the name of such record owner. Beneficial owners who are not record owners and who intend to exercise appraisal rights should instruct the record owner to comply strictly with the statutory requirements with respect to exercise of appraisal rights before the date of the IAC or Hollis-Eden, as the case may be, Special Meeting. IAC Stockholders who elect to exercise appraisal rights must mail or deliver their written demand to: Secretary, Initial Acquisition Corp., 810 Seventh Avenue, New York, New York 10019. Hollis-Eden Stockholders who elect to exercise appraisal rights must mail or deliver their written demand to: Secretary, Hollis-Eden, Inc., 808 S.W. Third Avenue, Suite 540, Portland, Oregon 97204. The written demand for appraisal should specify the stockholder's name and mailing address, the number of shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be, covered by the demand and that such stockholder is thereby demanding appraisal of such shares. Within ten days after the Effective Time, the Surviving Corporation must provide notice of the Effective Time to all stockholders who have complied with Section 262 of the DGCL and have not voted for approval and adoption of the Merger Agreement. Within ten days after the Effective Time, the Surviving Corporation will notify each stockholder who has satisfied the foregoing conditions that the Merger was effective as of a given date. Within 120 days after the Effective Time, the Surviving Corporation, or any stockholder who has complied with the required conditions of Section 262 of the DGCL and who is otherwise entitled to appraisal rights, may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be, held by the IAC Stockholders or Hollis-Eden Stockholders, as the case may be, who have demanded appraisal. If a petition for an appraisal is timely filed, after a hearing on such petition, the Delaware Court of Chancery will determine which stockholders are entitled to appraisal rights and thereafter will appraise the shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be, owned by such stockholders, determining the fair value of such shares, exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with a fair rate of interest to be paid, if any, upon the amount determined to be the fair value. In determining the fair value, the Delaware Court of Chancery is to take into account all relevant factors. -29- The cost of the appraisal proceeding may be determined by the Delaware Court of Chancery and taxed upon the parties as the Delaware Court of Chancery deems equitable in the circumstances. Upon application of a stockholder who has demanded appraisal in accordance with Section 262 of the DGCL, the Delaware Court of Chancery may order that all or a portion of the expenses incurred by such stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorneys' fees and the fees and expenses of experts, be charged pro rata against the value of all shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be, entitled to appraisal. In the absence of such a determination or assessment, each party bears its own expenses. Any IAC or Hollis-Eden Stockholder who has duly demanded appraisal in compliance with Section 262 of the DGCL will not, after the Effective Time, be entitled to vote for any purpose the shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be, subject to such demand or to receive payment of dividends or other distributions on such shares, except for dividends or other distributions payable to stockholders of record at a date prior to the Effective Time. At any time after 60 days after the Effective Time, any former holder of shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be, shall have the right to withdraw his or her demand for appraisal and to accept the terms offered in the Merger. After this period, such holder may withdraw his or her demand for appraisal only with the consent of the Surviving Corporation. If no petition for appraisal is filed with the Delaware Court of Chancery within 120 days after the Effective Time, stockholders' rights to appraisal shall cease and all stockholders shall continue to hold their shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be, as if they had not made any demand for appraisal. Inasmuch as the Surviving Corporation has no obligation to file a petition, and has no present intention to do so, any stockholder who desires such a petition to be filed is advised to file it on a timely basis. However, no petition timely filed in the Delaware Court of Chancery demanding appraisal shall be dismissed as to any stockholder without the approval of the Delaware Court of Chancery and such approval may be conditioned upon such terms as the Delaware Court of Chancery deems just. FAILURE TO TAKE ANY REQUIRED ACTION IN CONNECTION WITH THE EXERCISE OF APPRAISAL RIGHTS MAY RESULT IN THE TERMINATION OR WAIVER OF SUCH RIGHTS. IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF THE DGCL, IAC AND HOLLIS- EDEN STOCKHOLDERS WHO ARE CONSIDERING EXERCISING THEIR APPRAISAL RIGHTS UNDER SECTION 262 OF THE DGCL SHOULD CONSULT THEIR LEGAL ADVISORS. The foregoing does not purport to be a complete statement of the DGCL relating to appraisal rights and is qualified in its entirety by reference to the relevant provision of the statute itself, which is included as Annex E to this Joint Proxy Statement/Prospectus. Annex E should be reviewed carefully by any IAC or Hollis-Eden Stockholder who wishes to exercise statutory appraisal rights or who wishes to preserve the right to do so. MARKET PRICE OF IAC'S SECURITIES AND DIVIDEND INFORMATION Since May and June 1995, IAC's Common Stock, Class A Warrants, Class B Warrants and Units have been quoted and traded on the OTC Electronic Bulletin Board under the symbols "IACQ", "IACQW", "IACQZ" and "IACQU", respectively. The following table sets forth the quarterly high and low bid quotations on the OTC Electronic Bulletin Board for the securities of IAC set forth above for the periods indicated below. These quotations represent prices between dealers and do not include retail mark-up, mark- down or commissions or necessarily represent actual transactions. -30- COMMON STOCK HIGH LOW ------------ ---- --- 1995 ---- June 28 through June 30 $8.875 $8.750 July 1 through September 30 9.000 8.500 October 1 through December 31 8.875 8.625 1996 ---- January 1 through March 31 $10.125 $8.875 April 1 through June 30 10.625 9.250 July 1 through September 30 9.875 9.250 October 1 through December 10 11.250 8.875 CLASS A WARRANTS HIGH LOW ---------------- ---- --- 1995 ---- June 29 through June 30 $0.625 $0.500 July 1 through September 30 0.750 0.500 October 1 through December 31 0.750 0.375 1996 ---- January 1 through March 31 $0.750 $0.500 April 1 through June 30 1.125 0.625 July 1 through September 30 1.000 0.625 October 1 through December 10 1.000 0.625 CLASS B WARRANTS HIGH LOW ---------------- ---- --- 1995 ---- May 16 through June 30 $5.500 $4.500 July 1 through September 30 5.250 4.500 October 1 through December 31 5.000 1.000 1996 ---- January 1 through March 31 $5.250 $3.750 April 1 through June 30 6.000 4.500 July 1 through September 30 6.000 4.250 October 1 through December 10 6.000 3.250 UNITS HIGH LOW ----- ---- --- 1995 ---- May 16 through June 30 $10.000 $8.875 July 1 through September 30 10.000 9.500 October 1 through December 31 10.000 9.375 1996 ---- January 1 through March 31 $10.000 $9.000 April 1 through June 30 10.000 9.625 July 1 through September 30 10.125 9.625 October 1 through December 10 11.250 9.500 -31- As of the IAC Record Date, there were . holders of record of IAC Common Stock, . holders of record of Class A Warrants, . holders of record of Class B Warrants and . holders of record of Units. Since certain of the shares of IAC Common Stock and Class A and B Warrants and Units are held in street name, it is believed that there are substantial additional beneficial holders of IAC Common Stock, Class A and B Warrants and Units. IAC believes that after the consummation of the Merger, the Surviving Corporation will have in excess of beneficial owners of shares of Surviving Corporation Common Stock. On . , 1996 (the last day before the printing of this Joint Proxy Statement/Prospectus), the closing bid quotations for shares of IAC Common Stock, Class A and B Warrants and Units were $ . , $ . , $ . and $ . , respectively. On November 5, 1996 (the day preceding public announcement of the Merger), the closing bid quotations for shares of IAC Common Stock, Class A and B Warrants and Units were $9.250, $0.625, $2.250 and $9.500, respectively. IAC has never declared any cash dividends with respect to its shares of Common Stock and does not anticipate that dividends will be declared in the foreseeable future as all available cash will be utilized to further the growth of Hollis-Eden's (and consequently, the Surviving Corporation's) business subsequent to the Effective Time. It is anticipated that the shares of Surviving Corporation Common Stock will be accepted for quotation or listing, as the case may be, on the NASDAQ NMS or AMEX following the consummation of the Merger. -32- THE MERGER The following information describes certain information pertaining to the Merger. This description does not purport to be complete and is qualified in its entirety by reference to the Annexes hereto, including the Merger Agreement, a copy of which is set forth in ANNEX A to this Joint Proxy Statement/Prospectus and incorporated herein by reference. All IAC and Hollis-Eden Stockholders are urged to read the Annexes in their entirety. GENERAL Subject to the terms and conditions of the Merger Agreement, Hollis- Eden shall merge with and into IAC, with IAC being the Surviving Corporation to the Merger. Upon the consummation of the Merger, Hollis- Eden will cease to exist as a separate corporation. At the time the Merger becomes effective, each outstanding share of Hollis-Eden Common Stock shall cease to be outstanding and shall be converted into the right to receive one share of Surviving Corporation Common Stock. In addition, all outstanding Hollis-Eden Warrants and Options shall cease to be outstanding and shall be converted into the right to receive the same number of Merger Warrants and Options upon the same terms as the corresponding Hollis-Eden Warrants and Options, as the case may be. As of the Hollis-Eden Record Date, there were 4,911,004 shares of Hollis-Eden Common Stock outstanding and an aggregate of 2,279,650 shares of Hollis-Eden Common Stock were underlying the Hollis-Eden Warrants and Options. Consequently, upon the consummation of the Merger, the Surviving Corporation will issue an aggregate of 4,911,004 shares of Surviving Corporation Common Stock to the Hollis-Eden Stockholders and Merger Warrants and Options entitling the holders thereof to acquire an aggregate of 2,279,650 shares of Surviving Corporation Common Stock. The foregoing exchange ratios were established through arms-length negotiations between IAC and Hollis-Eden. None of the outstanding shares of IAC Common Stock will be converted or otherwise modified in the Merger and all of such shares will continue to be outstanding capital stock of the Surviving Corporation after the Effective Time. Upon the consummation of the Merger, the Surviving Corporation will change its name to Hollis-Eden Pharmaceuticals, Inc. and the business of the Surviving Corporation will be that of Hollis-Eden immediately prior to the Merger. Upon consummation of the Merger, the Surviving Corporation will assume all of Hollis-Eden's liabilities and obligations. Upon the consummation of the Merger, the Hollis-Eden Stockholders will collectively acquire approximately 85% of the outstanding Surviving Corporation Common Stock, without giving effect to the exercise of any Merger Warrants and Options, IAC Warrants and Options or Plan Options, and their designees will comprise five of the six members of the Surviving Corporation's newly-elected Board of Directors. Assuming the exercise of all of the outstanding Merger Warrants and Options and IAC Warrants and Options (but not any Plan Options), the Hollis-Eden Stockholders would collectively own approximately 74% of the then outstanding shares of Surviving Corporation Common Stock upon the consummation of the Merger. ADDITIONAL MERGER SHARES In connection with the Merger, IAC will offer each IAC Non-Affiliate Stockholder the opportunity to exchange his or her Redemption Right for the right to receive Additional Merger Shares, should any be issued. In order to perfect the right to receive Additional Merger Shares, if any, an IAC Non-Affiliate Stockholder must (i) not exercise his or her Redemption Right in connection with the Merger and (ii) within 60 days following the Effective Time, take whatever action that may be necessary to cause such IAC Non-Affiliate Stockholder to become the registered owner of his shares of Surviving Corporation Common Stock (each, a "Rights Share" and, collectively, the "Rights Shares"). By not exercising his or her Redemption Right in connection with the Merger, an IAC Non-Affiliate Stockholder shall be deemed to have waived his or her Redemption Right and accepted IAC's offer to receive the right to receive Additional Merger Shares, if any are issued (provided such IAC Non-Affiliate Stockholder is not a dissenting stockholder and becomes the registered owner of his or her shares of Surviving Corporation Common Stock as provided above). As soon as practicable following the 60th day following the Effective Time, the -33- 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 -34- consummation, the Merger is expected to become effective during the first quarter of 1997. See "-Conditions to Consummation" and "-Termination." BACKGROUND OF THE MERGER As discussed under "IAC's Business" elsewhere herein, IAC was formed to serve as a vehicle to effect a Business Combination with a Target Business. IAC's business objective has been to seek to effect a Business Combination with a Target Business which IAC believes has significant growth potential. Following the consummation of IAC's IPO of equity securities in May 1995, from which IAC derived net proceeds of approximately $6,300,000, IAC's executive officer, together with Gruntal & Co., Incorporated, IAC's investment banker ("Gruntal"), commenced an active search for a prospective Target Business. Of the net proceeds from the IPO, $6,000,000 (representing the gross proceeds received from the sale in the IPO of Units), together with interest earned thereon, is currently held in an interest-bearing escrow account and will be released upon the earlier of the consummation of a Business Combination in which at least 50% of the Escrowed Funds are committed to a specific line of business as a result of such consummation of a Business Combination (including any redemption payments) or the liquidation of IAC. At the Effective Time of the Merger, the Escrowed Funds will be released to IAC and all voting agreements previously in effect with respect to the IAC Common Stock (including those relating to the approval of a Business Combination by the Initial IAC Stockholders) will terminate. During the period from May 1995 through November 1996, IAC's executive officer and Gruntal reviewed approximately six prospective Target Businesses and carefully evaluated one other prospective Target Business (in addition to Hollis-Eden) in the field of kidney dialysis treatment. In evaluating each prospective Target Business, IAC's executive officer and Gruntal considered, among other factors, all or a majority of the following: . Valuation of business and cost of acquisition . Management and control of the Target Business . Market share of the Target Business and barriers to entry into the industry . Capital structure and capital needs for the Target Business . Industry growth and growth characteristics for the Target Business . Probability of, and costs associated with, a Business Combination . Technological factors in the Target Business's market segment The factors which were considered most important in IAC's decision to focus on certain of the prospective Target Businesses included: (1) consideration of whether the prospective business demonstrated historical or the potential for future revenue and profitability; (2) consideration of growth characteristics of the prospective business, considering the infusion of IAC's cash; and (3) consideration of whether the amount of consideration which the owners of a prospective business requested would result in an attractive capital structure for IAC after the merger. -35- 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. -36- 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. -37- 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 -38- Options currently issued and outstanding are unaffected by the Merger and will continue to represent shares of Surviving Corporation Common Stock and warrants and options to acquire shares of Surviving Corporation Common Stock after the Merger. INTERESTS OF CERTAIN PERSONS IN THE MERGER Directors and Management. As contemplated by the Merger Agreement, a new Board of Directors consisting of six persons has been nominated and, subject to election by the IAC Stockholders at the IAC Special Meeting, the nominees will begin their term of office as directors of the Surviving Corporation immediately following the Effective Time. Five of the nominees are considered to be designees of Hollis-Eden, while one nominee is the designee of IAC. Consequently, the Hollis-Eden nominees, if they act together, will have effective control of the business and affairs of the Surviving Corporation. Mr. J. Paul Bagley, a current director of Hollis-Eden and one of the nominees for director of the Surviving Corporation, was the Chief Executive Officer of Laidlaw Equities' parent company until November 1996. Laidlaw Equities, which serves as Hollis-Eden's investment banker, currently owns warrants to purchase up to 134,100 shares of Hollis-Eden Common Stock and is entitled to receive warrants to purchase additional shares of Surviving Corporation Common Stock upon the consummation of the Merger, as set forth below. In addition, Mr. James D. Bowyer, an employee of Laidlaw Equities and one of the persons who introduced Hollis-Eden to IAC, currently owns, to IAC's knowledge, 58,800 shares of IAC Common Stock. See "PROPOSAL TO ELECT DIRECTORS OF THE SURVIVING CORPORATION" and "PROPOSED MANAGEMENT OF THE SURVIVING CORPORATION." Stock Options and Warrants. Hollis-Eden's executive officers and directors hold options and warrants to acquire shares of Hollis-Eden Common Stock. At the Effective Time, all such options and warrants, whether or not exercisable, shall be converted into and become rights with respect to Surviving Corporation Common Stock, and the Surviving Corporation shall assume each such option and warrant in accordance with its terms and the stock option or warrant agreement by which it is evidenced. At September 30, 1996, the directors and executive officers and affiliates of Hollis- Eden collectively held options and warrants, whether or not then exercisable, to acquire a total of 1,143,774 shares of Hollis-Eden Common Stock at a weighted average exercise price of $7.04 per share, plus options to acquire an additional 169,811 shares of Surviving Corporation Common Stock at the then fair market value when certain products reach $200 million in revenues. As a fee for financial advisory services rendered to Hollis-Eden in connection with the Merger, Laidlaw Equities, upon the consummation of the Merger, will be issued warrants to purchase an aggregate of up to 452,830 additional shares of Surviving Corporation Common Stock at an exercise price of $2.48 per share. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following discussion summarizes the material federal income tax consequences of the Merger that are generally applicable to holders of Hollis-Eden Common Stock. This discussion is based on currently existing provisions of the Code, existing and proposed Treasury Regulations thereunder and current administrative rulings and court decisions, all of which are subject to change. Any such change, which may or may not be retroactive, could alter the tax consequences to IAC, the IAC Stockholders, Hollis-Eden or the Hollis-Eden Stockholders, as described herein. Stockholders should be aware that this discussion does not deal with all federal income tax considerations that may be relevant to particular stockholders in light of their particular circumstances, such as stockholders who are dealers in securities, are subject to the alternative minimum tax provisions of the Code, are foreign persons, are tax-exempt entities, taxpayers holding stock as part of a conversion or straddle transaction, or who acquired their shares in connection with stock option or stock purchase plans or in other compensatory transactions. In addition, the following discussion does not address the tax consequences of -39- the Merger under foreign, state or local tax laws or the tax consequences of transactions effectuated prior to, concurrently with or after the Merger (whether or not such transactions are in connection with the Merger), including the exchange of Hollis-Eden Warrants and Options and the issuance to the IAC Stockholders of the Additional Merger Shares. ACCORDINGLY, ALL STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC CONSEQUENCES OF THE MERGER TO THEM, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER IN THEIR PARTICULAR CIRCUMSTANCES. Neither IAC nor Hollis-Eden has requested, or will request, a ruling from the IRS with regard to any of the federal income tax consequences of the Merger. Cooley Godward LLP, counsel to Hollis-Eden ("Cooley Godward"), will render an opinion (the "Tax Opinion") to the Hollis-Eden Stockholders, that the Merger will constitute a tax-free reorganization under Section 368(a)(1)(A) of the Code (a "Reorganization"). The Tax Opinion will be based on certain assumptions, as well as representations received and to be received from IAC, Hollis-Eden and certain Hollis-Eden Stockholders and will be subject to the limitations discussed below. Moreover, the Tax Opinion will not be binding on the IRS nor preclude the IRS from adopting a contrary position. The discussion below assumes that the Merger will qualify as a Reorganization, based upon the Tax Opinion. Subject to the limitations and qualifications referred to herein and in the Tax Opinion, and as a result of the Merger's qualifying as a Reorganization, the following federal income tax consequences should, under currently applicable law, result: . No gain or loss will be recognized for federal income tax purposes by the holders of Hollis-Eden Common Stock upon the receipt of Surviving Corporation Common Stock solely in exchange for such Hollis-Eden Common Stock in the Merger (except to the extent that cash is received in lieu of fractional shares). . The aggregate tax basis of the Surviving Corporation Common Stock so received by Hollis-Eden Stockholders in the Merger (including any fractional shares of Surviving Corporation Common Stock not actually received) will be the same as the aggregate tax basis of the Hollis-Eden Common Stock surrendered in exchange therefor. . The holding period of the Surviving Corporation Common Stock so received by each Hollis-Eden Stockholder in the Merger will include the period for which the Hollis-Eden Common Stock surrendered in exchange therefor was considered to be held, provided that the Hollis-Eden Common Stock so surrendered is held as a capital asset at the Effective Date of the Merger. . Cash payments received by holders of Hollis-Eden Common Stock in lieu of fractional shares will be treated as if such fractional shares of Surviving Corporation Common Stock had been issued in the Merger and then redeemed by IAC. Hollis-Eden Stockholders receiving such cash will recognize gain or loss upon such payment, measured by the difference (if any) between the amount of cash received and the basis in such fractional shares. The gain or loss should be capital gain or loss, provided that each such fractional share of Surviving Corporation Common Stock was held as a capital asset at the Effective Date of the Merger. . A holder of Hollis-Eden Common Stock or a holder of IAC Common Stock who exercises appraisal rights with respect to a share of Hollis-Eden Common Stock or IAC Common Stock and receives a cash payment for such share generally should recognize capital gain or loss (if such share was held as a capital asset at the Effective Date of the Merger) measured by the difference between the stockholder's basis in such share and the amount of cash received, provided that such payment is not a dividend equivalent transaction. A sale of shares pursuant to an exercise of appraisal rights generally will not be a dividend equivalent transaction if, as a result of such exercise, the stockholder exercising appraisal rights owns no shares of capital stock of -40- 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. -41- CONDITIONS TO CONSUMMATION The obligations of IAC and Hollis-Eden to consummate the Merger are subject to the satisfaction or waiver of the following conditions: (i) the Merger Agreement and the transactions contemplated thereby shall have been approved and adopted by the IAC Stockholders and the Hollis-Eden Stockholders as described in this Joint Proxy Statement/Prospectus and the IAC Non-Affiliate Stockholders shall not have elected to have 15% or more of their shares of IAC Common Stock redeemed at the Redemption Value; (ii) as of the Effective Time, IAC shall have cash on hand (net of liabilities) of not less than $6.5 million; (iii) the Registration Statement shall have been declared effective; (iv) no action or proceeding shall have been instituted or threatened which is likely to have a material adverse effect on IAC or Hollis-Eden or could enjoin, restrain or prohibit, or could result in substantial damages in respect of, any provision of the Merger Agreement or the consummation of the transactions contemplated thereby; (v) all consents and approvals required for the consummation of the Merger and the transactions contemplated thereby shall have been obtained, and all required filings shall have been made; (vi) IAC and Hollis-Eden each shall have performed and complied with all covenants, obligations and agreements applicable to it contained in the Merger Agreement and all representations and warranties of each of IAC and Hollis-Eden shall be true and correct in all material respects on and as of the date made and the Effective Time; (vii) the patent infringement and, if necessary, the patent validity, analyses by IAC's counsel, and, if given in accordance with the terms of the Merger Agreement, the final opinion of independent patent counsel, shall not have resulted in an opinion of a patent infringement which will have an "unavoidable" material adverse effect upon certain of Hollis-Eden's Products; (viii) the receipt of written opinions of counsel to IAC and Hollis-Eden as to certain matters; and (ix) Mr. Salvatore J. Zizza shall have been elected a director of the Surviving Corporation. In addition to the conditions set forth above, the obligations of IAC and Hollis-Eden to consummate the Merger are subject to the absence, since the date of the Merger Agreement, of any material adverse change in the business, operations, assets, liabilities, results of operations, cash flows, condition (financial or otherwise) or prospects of IAC and Hollis-Eden, which is materially adverse to IAC or Hollis-Eden, as the case may be. TERMINATION The Merger Agreement may be terminated, and the Merger abandoned, at any time prior to the Effective Time, by mutual consent of all parties to the Merger Agreement. In addition, the Merger Agreement may be terminated, and the Merger abandoned, generally, (i) prior to, but not after, the approval of the Merger Agreement by the stockholders of each of Hollis-Eden and IAC, by Hollis-Eden or IAC, as the case may be, if the Merger shall not have become effective by February 15, 1997 (or such later date as permitted by the Merger Agreement to allow the parties to complete their patent analyses within the permitted time parameters), provided, however, that such termination right shall not be available to any party whose failure to fulfill any obligation under the Merger Agreement has been the cause of or resulted in the failure of the Merger to become effective by such date; (ii) by any party to the Merger Agreement if any court of competent jurisdiction in the United States or other United States governmental body shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the Merger or any of the other transactions contemplated by the Merger Agreement and such order, decree, ruling or other action shall have become final and non appealable; (iii) By IAC, if IAC Non-Affiliate Stockholders holding 15% or more of the shares of IAC Common Stock shall have exercised their Redemption Rights or (iv) by IAC, if its Patent Infringement and, if necessary, patent validity analyses, and, if given in accordance with the terms of the Merger Agreement, the final opinion of independent patent counsel, shall have resulted in an opinion of a Patent Infringement which will have an "unavoidable" material adverse effect upon certain of Hollis-Eden's Products. EXPENSES AND FEES The Merger Agreement provides that each party shall bear its own expenses with respect to the transactions contemplated by the Merger Agreement. -42- 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 -43- debt; (x) entering into, amending or terminating any bonus, compensation, stock option, employment, severance or other employee benefit agreement or increasing in any manner the compensation or benefits thereunder; (xi) leasing or encumbering, generally, any assets which are material to its operations; (xii) authorizing or making any capital expenditures which individually or in the aggregate are in excess of $10,000, other than planned expenditures; (xiii) making any tax election or settling or compromising any federal, state, local or foreign income tax liability, or waiving or extending the statute of limitations in respect of any such taxes; and (xiv) paying or agreeing to pay any amount in settlement or compromise of any suits or claims of liability against it or its directors, officers, employees or agents in an amount more than $10,000. In addition, Mr. Salvatore J. Zizza, Chairman of the Board of IAC and the owner of approximately 8.4% of the outstanding shares of IAC Common Stock (without giving effect to the exercise of any IAC Warrants and Options), has agreed with Hollis-Eden to vote all shares of IAC Common Stock owned by him in favor of the Merger Agreement and to use his best efforts to cause the other IAC Stockholders to vote in favor of the Merger Agreement. As an Initial IAC Stockholder, however, Mr. Zizza is required to vote his shares with respect to the Merger Agreement in accordance with the vote of the majority in interest of all IAC Non-Affiliate Stockholders. Mr. Richard B. Hollis, Chairman of the Board of Hollis-Eden and the beneficial owner of approximately 58% of the outstanding Hollis-Eden Common Stock (without giving effect to the exercise of any Hollis-Eden Warrants and Options), has agreed to vote all shares of Hollis-Eden Common Stock owned by him in favor of the Merger Agreement and to use his best efforts to cause the other Hollis-Eden Stockholders to vote in favor of the Merger Agreement. Hollis-Eden has also agreed to use its reasonable commercial efforts to obtain signed letters from as many Hollis-Eden Stockholders as possible, which letters shall acknowledge such Hollis-Eden Stockholders' agreement not to sell any shares of Surviving Corporation Common Stock to be issued, directly or indirectly, to them in, and as a result of, the Merger, for the nine-month period immediately following the Effective Time. In addition, Messrs. Hollis and Prendergast, the owners of approximately 71% of the outstanding Hollis-Eden Common Stock, have agreed with Hollis-Eden not to sell more than an aggregate of 1,000,000 shares of Surviving Corporation Common Stock to be received by them as a result of the Merger for the two- year period commencing upon the Effective Time of the Merger. The Merger Agreement further provides that until either the Effective Time or a permitted termination of the Merger Agreement, neither Hollis- Eden nor any of its affiliates shall solicit, initiate, encourage, continue or enter into negotiations or discussions of any type, directly or indirectly, with any other person, with respect to an offer for the sale of Hollis-Eden, or any substantial portion of Hollis-Eden's assets, or Hollis- Eden's capital stock, directly by merger, consolidation or any other form of purchase, provided, however, that Hollis-Eden and its affiliates may solicit, initiate, encourage, continue or enter into negotiations or discussions for the limited purpose of raising capital for Hollis-Eden. RESALES OF SURVIVING CORPORATION COMMON STOCK Future sales of Surviving Corporation Common Stock by current IAC and Hollis-Eden Stockholders, option holders and warrant holders could adversely affect the market price of the Surviving Corporation's Common Stock. All of the shares of Surviving Corporation Common Stock issuable in the Merger, other than to affiliates of Hollis-Eden, will be eligible for sale under Rules 144 and 145 promulgated under the Securities Act immediately upon consummation of the Merger. In addition, the shares of Surviving Corporation Common Stock issuable in the Merger, other than to affiliates of Hollis-Eden, can be resold pursuant to this Proxy Statement/Prospectus. However, pursuant to the Merger Agreement, Hollis- Eden is using its best efforts to secure the agreement of each Hollis-Eden Stockholder to such Stockholder's not selling any shares of Surviving Corporation Common Stock issuable in the Merger for the nine-month period (and in the case of Mr. Hollis and Dr. Prendergast, no more than an aggregate of 1,000,000 shares in the two-year period) immediately following the consummation of the Merger. In addition, all of the Surviving Corporation Common Stock owned by the Initial IAC Stockholders are -44- "restricted securities" as that term is defined in Rule 144 promulgated under the Securities Act. Under such rule, once two years have elapsed from the date of the acquisition, an affiliate of an issuer may, every three months, sell in ordinary brokerage transactions or in transactions directly with a market maker an amount equal to the greater of one percent of the issuer's outstanding common stock or the average weekly trading volume during the four calendar weeks prior to the sale. Once three years have elapsed, a person who has not been an affiliate of an issuer for 90 days immediately prior to the proposed sale may sell his shares without restriction. As of the date of this Joint Proxy Statement/Prospectus, all of the shares of Surviving Corporation Common Stock held by IAC Stockholders are eligible for sale without restriction, except that Mr. Salvatore J. Zizza, Chairman of the Board of IAC and a proposed member of the Surviving Corporation's Board of Directors following the Merger (beneficially owning 220,000 shares), will continue to be restricted pursuant to Rule 144. The shares of Surviving Corporation Common Stock issuable upon exercise of the Merger Warrants and Options are also being registered pursuant to the Registration Statement of which this Joint Proxy Statement/Prospectus forms a part, for permitted resale following their issuance. OPERATIONS AFTER THE MERGER As a result of the Merger, Hollis-Eden will be merged with and into IAC, with IAC being the Surviving Corporation to the Merger. Upon the consummation of the Merger, Hollis-Eden will cease to exist as a separate corporation and the Surviving Corporation will change its name to Hollis- Eden Pharmaceuticals, Inc. The business of the Surviving Corporation will be that of Hollis-Eden immediately prior to the Merger. In accordance with the Merger Agreement, at the Effective Time, and subject to their election by the IAC Stockholders, the Board of Directors of the Surviving Corporation will consist of six directors, five of whom (Messrs. Hollis, Prendergast, Merigan, Bagley and McDonnell) shall be Hollis-Eden's designees, and one of whom (Mr. Zizza) shall be IAC's designee. In addition, all of the current officers of IAC will resign effective at the Effective Time, to be replaced by the current officers of Hollis-Eden designated by the Surviving Corporation's Board of Directors as detailed in the Merger Agreement. IAC does not presently intend to pay any cash dividends, as all available cash will be utilized to further the growth of the Surviving Corporation's business subsequent to the Effective Time for the foreseeable future thereafter, including the funding of Hollis-Eden's (and consequently, the Surviving Corporation's) working capital and capital expenditure requirements. The payment of any cash dividends will be in the discretion of the Surviving Corporation's Board of Directors and will be dependent upon the Surviving Corporation's results of operations, financial conditions and other factors deemed relevant by the Surviving Corporation's Board of Directors. -45- IAC SELECTED HISTORICAL FINANCIAL INFORMATION The following data, insofar as it relates to each of the fiscal years 1995, 1994 and 1993, has been derived from audited financial statements, including the balance sheets at December 31, 1995, 1994 and 1993 and the statements of operations of stockholders' equity and of cash flows for the years ended December 31, 1995, 1994 and 1993 and notes thereto appearing elsewhere herein. The data for the nine months ended September 30, 1996 and 1995 has been derived from unaudited financial statements also appearing herein and which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for unaudited interim periods. No cash dividends have ever been declared or paid on IAC Common Stock. YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 STATEMENT OF OPERATIONS DATA: ---- ---- ---- Interest income . . . . . . . . . . . $ 224,305 $ -0- $ -0- General and administrative expenses . . . . . . . . . . . . . $ 71,782 $ 7,000 $ 7,186 Net income (loss) . . . . . . . . . . $ 100,523 $(7,000) $(7,186) Net income (loss) per common share . . . . . . . . . . . . . . . $ 0.16 $ (.03) $ (.03) Weighted average shares outstanding . . . . . . . . . . . . 608,250 233,250 233,250 BALANCE SHEET DATA: Total assets . . . . . . . . . . . . $6,518,759 $74,139 $81,139 Common stock subject to possible redemption . . . . . . . . $ 932,316 $ -0- $ -0- Stockholders' equity . . . . . . . . $5,496,803 $68,139 $75,139 NINE MONTHS ENDED SEPTEMBER 30, ----------------- 1996 1995 STATEMENT OF OPERATIONS DATA: ---- ---- Interest income . . . . . . . . . . . $ 264,986 $ 123,228 General and administrative expenses . . . . . . . . . . . . . $ 132,152 $ 15,405 Net income (loss) . . . . . . . . . . $ 100,684 $ 107,823 Net income (loss) per common share . . . . . . . . . . . . . . . $ 0.12 $ 0.20 Weighted average shares outstanding . . . . . . . . . . . . 833,250 533,250 BALANCE SHEET DATA: Total assets . . . . . . . . . . . . $6,692,264 $6,438,919 Common stock subject to possible redemption . . . . . . . . $ 969,703 $ -0- Stockholders' equity . . . . . . . . $5,560,100 $6,436,419 -46- HOLLIS-EDEN SELECTED HISTORICAL FINANCIAL INFORMATION The following data, insofar as it relates to each of the periods 1995 and 1994, has been derived from audited financial statements, including the balance sheet at December 31, 1995 and 1994 and the related statements of operations, of stockholders' deficit and of cash flows for the year ended December 31, 1995 and the periods from inception (August 15, 1994) to December 31, 1994 and September 30, 1996 and notes thereto appearing elsewhere herein. The data for the nine months ended September 30, 1996 and 1995 has been derived from unaudited financial statements also appearing herein and which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited interim periods. The interim results of operations are not necessarily indicative of results which may occur for the full fiscal year. No cash dividends have ever been declared or paid on Hollis-Eden Common Stock. PERIOD FROM PERIOD FROM INCEPTION INCEPTION (AUGUST 15, (AUGUST 15, YEAR ENDED 1994) TO 1994) TO DECEMBER 31, DECEMBER 31, SEPTEMBER 1995 1994 30, 1996 ------------ ------------ ------------ STATEMENT OF OPERATIONS DATA: Research and development . . . $ 463,000 $ 1,166,762 $ 1,753,855 General and administrative expenses . . . . . . . . . . . $ 170,929 $ 103,564 $ 620,722 Total operating expenses . . . $ 633,929 $ 1,270,326 $ 2,374,577 Other income (expense), net . . $ (37,762) $ (6,720) $ (44,416) Net loss . . . . . . . . . . . $ (671,691) $(1,277,046) $(2,418,993) Net loss per share . . . . . . $ (0.17) $ (0.38) $ (0.61) Weighted average number of common shares outstanding . . . 3,867,924 3,396,226 3,945,783 BALANCE SHEET DATA: Total assets . . . . . . . . . $ -0- $ -0- $ 344,191 Notes and accounts payable and accrued interest to related party . . . . . . . . . . . . . $ 367,522 $ 216,720 $ -0- License fees payable . . . . . $ 928,000 $ 927,000 $ 600,000 Stockholders' deficit . . . . . $(1,537,633) $(1,143,720) $ (368,264) NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 ---- ---- STATEMENT OF OPERATIONS DATA: Research and development . . . $ 124,093 $ 463,000 General and administrative expenses . . . . . . . . . . . $ 346,229 $ 138,429 Total operating expenses . . . $ 470,322 $ 601,429 Other income (expense), net . . $ 66 $ (28,322) Net loss . . . . . . . . . . . $ (470,256) $ (629,751) Net loss per share . . . . . . $ (0.10) $ (0.17) Weighted average number of common shares outstanding . . . 4,573,199 3,773,585 BALANCE SHEET DATA: Total assets . . . . . . . . . $ 344,191 $ -0- Notes and accounts payable and accrued interest to related party . . . . . . . . . . . . . $ -0- $ 335,582 License fees payable . . . . . $ 600,000 $ 943,000 Stockholders' deficit . . . . . $ (368,264) $(1,495,693) -47- UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF INITIAL ACQUISITION CORP. AND HOLLIS-EDEN The following Unaudited Pro Forma Combined Balance Sheet is based upon the financial statements of Initial Acquisition Corp. and Hollis-Eden, combined and adjusted to give effect to the Merger. The Merger Agreement provides that all of the outstanding shares of Hollis-Eden Common Stock will be converted into shares of IAC (Surviving Corporation) Common Stock. The Unaudited Pro Forma Combined Balance Sheet reflects a recapitalization of Hollis-Eden for the net assets of IAC consisting primarily of cash. The Unaudited Pro Forma Combined Balance Sheet was derived by adjusting the unaudited historical financial statements of IAC and Hollis-Eden for certain transactions pursuant to the Merger described in the accompanying notes to the Unaudited Pro Forma Combined Balance Sheet. The unaudited pro forma combined balance sheet at September 30, 1996 gives effect to the Merger as if it had occurred on such date. The Unaudited Pro Forma Combined Balance Sheet is derived from unaudited historical financial statements of Hollis-Eden and unaudited historical financial statements of IAC and should be read in conjunction with Hollis-Eden's and IAC's unaudited historical financial statements included elsewhere in this Joint Proxy Statement/Prospectus. The Pro Forma Combined Balance Sheet as of September 30, 1996 has been prepared on the same basis as the historical information derived from the audited financial statements included elsehwere in the Joint Proxy Statement/Prospectus. In the opinion of Hollis-Eden's and IAC's management, the Unaudited Combined Pro Forma Balance Sheet of Hollis-Eden and IAC referred to above include all adjustments, consisting only of normal recurring accruals, necessary for fair presentation of the financial position as of September 30, 1996 and results for such periods. As the Merger is recorded as a recapitalization of Hollis-Eden for the net assets of IAC, a Pro Forma Statement of Operations is not deemed to be meaningful and, as such, has not been included in this Joint Proxy Statement/Prospectus. -48- UNAUDITED PRO FORMA COMBINED BALANCE SHEET SEPTEMBER 30, 1996 INITIAL PRO FORMA ACQUISITION ADJUSTMENTS HOLLIS-EDEN CORP. DR. CR. ---------------------------------------------------------- ASSETS ------ CURRENT ASSETS Cash . . . . $ 227,657 $ 202,165 $ 6,469,000(2) $ 1,973,500(3)(4)(8) Investment in U.S. Treasury Bills . . . 0 6,469,000 6,469,000(2) Other receivables 90,300 0 Prepaid 19,572 0 expenses . . ----------- ---------- Total current assets . 337,529 6,671,165 Net property and equipment 6,662 0 Deferred acquisition 0 21,099 21,099(3) costs . . . ----------- ---------- Total assets 344,191 6,692,264 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY -------------- CURRENT LIABILITIES Accrued expenses . . 97,119 78,311 Account payable . . 15,336 0 Income taxes payable . . 0 84,150 License fees 600,000 0 323,500(4) payable . . ----------- ---------- Total 712,455 162,461 liabilities ----------- ---------- Common Stock, subject to possible redemption . 0 969,703 969,703(5) ----------- ---------- STOCKHOLDERS EQUITY (DEFICIT) Preferred stock . . . 0 0 Common stock 491 7,434 491(6) 49,110(6) 900(5) 500(9) Additional paid-in capital . . 2,050,238 5,436,065 171,099(3) 968,803(5) 48,619(6) 116,601(7) 3,970,650(9) 500,000(10) 3,970,150(9) Earnings (deficit) accumulated during development (2,418,993) 116,601 1,500,000(8) stage . . . ----------- ---------- 500,000(10) 116,601(7) Total stock- holders' equity (368,264) 5,560,100 6,307,460 5,606,064 (deficit) ----------- ---------- Total liabilities and stock- holders' $ 344,191 $6,692,264 $14,069,663 $14,069,663 equity . . =========== ========== =========== =========== PRO FORMA PRO FORMA ASSUMING ASSUMING MAXIMUM NO REDEMPTION(1) REDEMPTION(1) ------------------------------ ASSETS ------ CURRENT ASSETS Cash . . . . . . . . . . . . . . . . $4,925,322 $3,955,619 Investment in U.S. Treasury Bills . . 0 0 Other receivables . . . . . . . . . . 90,300 90,300 Prepaid expenses . . . . . . . . . . 19,572 19,572 ---------- ---------- Total current assets . . . . . . . 5,035,194 4,065,491 Net property and equipment . . . . . 6,662 6,662 Deferred acquisition costs . . . . . 0 0 ---------- ---------- Total assets . . . . . . . . . . . 5,041,856 4,072,153 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Accrued expenses . . . . . . . . . . 175,430 175,430 Account payable . . . . . . . . . . . 15,336 15,336 Income taxes payable . . . . . . . . 84,150 84,150 License fees payable . . . . . . . . 276,500 276,500 ---------- ---------- Total liabilities . . . . . . . . 551,416 551,416 ---------- ---------- Common Stock, subject to possible redemption . . . . . . . . . . . . 0 0 ---------- ---------- STOCKHOLDERS EQUITY (DEFICIT) Preferred stock . . . . . . . . . . . 0 0 Common stock . . . . . . . . . . . . 57,944 57,044 Additional paid-in capital . . . . . 8,851,489 7,882,686 Earnings accumulated (deficit) during (4,418,993) (4,418,993) development stage . . . . . . . . . ---------- ---------- Total stockholders' equity (deficit) 4,490,440 3,520,737 ---------- ---------- Total liabilities and stockholders' $5,041,856 $4,072,153 equity . . . . . . . . . . . . . ========== ========== -49- NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET 1. The unaudited pro forma combined balance sheet is presented, in the first instance, assuming that no IAC Stockholder exercises Redemption Rights (see "GENERAL INFORMATION-IAC Special Meeting; Redemption Rights" and "-Appraisal Rights") and, in the second instance, assuming that holders of 89,940 shares of IAC Common Stock exercise redemption rights (representing the maximum number of shares with respect to which redemption can be effected pursuant to the IAC Prospectus). Pursuant to the IAC Prospectus, IAC may not consummate a Business Combination if holders with respect to 15% or more in interest of the IAC Common Stock vote against the Business Combination and request redemption of such shares. There were 4,911,004 shares of Hollis-Eden Common Stock outstanding as of September 30, 1996. On a pro forma basis after the Merger, assuming no redemption of shares of IAC Common Stock, 5,794,254 shares of Surviving Corporation Common Stock will be outstanding, which assumes 833,250 of previously outstanding shares, 4,911,004 shares issued in exchange for outstanding shares of Hollis-Eden, and an aggregate of 50,000 shares to be issued to Gruntal & Co. and Reid & Priest LLP. Where the maximum redemption of 89,940 shares of IAC Common Stock as permitted by the IAC Prospectus is assumed, 5,704,314 shares of IAC Common Stock would be outstanding as of September 30, 1996, on a pro forma basis. 2. Represents relief of restricted cash from the trust as a result of the Merger. 3. Represents payment of $150,000 and the application of deferred acquisition costs for total estimated expenses of $171,099 to be incurred by IAC and Hollis-Eden related to the Merger. 4. Represents the reduction of license fees payable due to cash acquired in connection with the Merger. Pursuant to the license agreement, five percent of all net proceeds, as defined in the agreement, becomes immediately due and payable. 5. Represents the reclassification of IAC Common Stock subject to possible redemption on the basis of the Unaudited Pro Forma Combined Balance Sheet assuming that no IAC Stockholder will exercise their Redemption Rights. 6. Represents the recapitalization of Stockholders' Equity based upon the issuance of IAC Common Stock in exchange for Hollis-Eden Common Stock. 7. Represents the reclassification of IAC Retained Earnings prior to the Merger to Additional Paid-In Capital. 8. Represents payment of research and development fees which are required to be paid upon the successful closure of the Merger pursuant to the research and development agreement which become due and payable upon closure. 9. Represents a charge for (i) warrants to purchase an aggregate of 452,830 shares of the surviving company's common stock at an exercise price of $2.48 to be issued upon the successful closure of the merger pursuant to an agreement and (ii) 50,000 shares of the surviving company's common stock to be issued to Gruntal & Co. and Reid & Priest LLP upon the successful closure of the Merger. An estimate of $10.13 per share was used to calculate the charges which approximates fair market value. These charges constitute transaction fees and accordingly have been recorded as a charge to additional paid in capital. 10. Represents a charge for IAC warrants to be issued to a certain officer to purchase an aggregate of 50,000 shares of the surviving company's common stock at an exercise price of $0.10 per share to be issued upon the successful closure of the Merger. An estimate of $10.10 per share was used to calculate the charges which approximates fair market value. NON-RECURRING CHARGES --------------------- The pro forma adjustments outlined in numbers 8, 9 and 10 (discussed above) represent non-recurring charges and as such would not be presented in a pro forma statement of operations. -50- 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. -51- 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." -52- 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. -53- 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. -54- 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. -55- 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. -56- 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. -57- 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. -58- 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. -59- 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. -60- PROHIVITAC If and when Hollis-Eden obtains substantial additional funding, Hollis-Eden plans to carry out a preliminary vaccine trial in which selective portions of human AFP molecules will be administered intra-muscularly to healthy HIV-negative volunteers. Hollis-Eden believes that this research may demonstrate that PROHIVITAC therapy may be able to generate an HIV immune reaction in HIV negative patients without exposing them to any components of the actual HIV virus and therefore offer a protective vaccine therapy that is safer and effective against all known strains of HIV. MANUFACTURING Hollis-Eden does not have, and does not intend to establish, manufacturing facilities to produce its Products. Hollis-Eden plans to control its initial capital expenditures by using contract manufacturers to make its Products. Hollis-Eden believes that there are a sufficient number of high quality FDA-approved contract manufacturers available, and management has had discussions with several of them, to fulfill its near- term production needs for both clinical and commercial use. The manufacture of Hollis-Eden's Products, whether done by outside contractors (as planned) or Hollis-Eden, will be subject to rigorous regulations, including the need to comply with the FDA's current Good Manufacturing Practice standards. As part of obtaining FDA approved for each product, each of the manufacturing facilities must be inspected, approved by and registered with the FDA. In addition to obtaining FDA approval of the prospective manufacturer's quality control and manufacturing procedures, domestic and foreign manufacturing facilities are subject to periodic inspection by the FDA and/or foreign regulatory authorities. PATENTS Hollis-Eden considers the protection of its Products, whether owned or licensed, to the exclusion of use by others, to be vital to its business. While Hollis-Eden intends to focus primarily on patented or patentable technology, it may also rely on trade secrets, unpatented property know- how, regulatory exclusivity, patent extensions and continuing technological innovation to develop its competitive position. In the United States and certain foreign countries, the exclusivity period provided by patents covering pharmaceutical products may be extended by a portion of the time required to obtain regulatory approval for a product. In certain countries, pharmaceuticals are not patentable or only recently have become patentable, and enforcement of intellectual property rights in many countries has been limited or non-existent. Future enforcement of patents and proprietary rights in many countries can be expected to be problematic or unpredictable. There can be no assurance that any patents issued or licensed to Hollis-Eden will provide it with competitive advantages or will not be challenged by others. Furthermore, there can be no assurance that others will not independently develop similar products or will not design around patents issued or licensed to Hollis-Eden. Patent applications in the United States are maintained in secrecy until patents issue. Publication of discoveries in the scientific or patent literature, if made, tends to lag behind actual discoveries by several months. Consequently, Hollis-Eden cannot be certain that its licensor was the first to invest certain technology or compounds covered by pending patent applications or issued patents or that it was the first to file patent applications for such inventions. In addition, the patent positions of pharmaceutical firms, including those of Hollis-Eden, are generally uncertain, partly because they involve complex legal and factual questions. In addition to the considerations discussed above, companies that obtain patents claiming products, uses or processes that are necessary for or useful to the development of Hollis-Eden's products could bring legal actions against Hollis-Eden claiming infringement. Patent litigation is typically costly and time-consuming, and if such an action were brought against Hollis-Eden it could result in significant cost and diversion of management time. Hollis-Eden may be required to obtain licenses to other patents or proprietary rights and there can be no assurance that licenses -61- 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. -62- 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. -63- 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 -64- of a Business Combination, IAC will have the resources to compete in the industry of the Target Business effectively, especially to the extent that the Target Business is in a high-growth industry. EMPLOYEES IAC, at December 16, 1996, employed only one person, Mr. Salvatore J. Zizza, IAC's Chairman, President and Treasurer, on a part-time basis. PROPERTIES IAC's principal office is located in New York, New York, where it occupies the offices of Zizza & Company ("Zizza Corporation"), a corporation controlled by Mr. Zizza. IAC leases this space pursuant to an oral agreement. IAC intends to occupy this space until it effects a Business Combination. IAC pays Zizza Corporation a monthly payment of $2,500 for rent, office and secretarial services. IAC believes that this facility is well maintained and adequate to meet its needs in the foreseeable future pending the consummation of a Business Combination. LEGAL PROCEEDINGS At this time, IAC is not involved in any pending or threatened legal proceedings involving it or any of its assets. -65- 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. -66- Herbert M. Paul has served as a director of IAC since November 1992. Mr. Paul is an attorney and certified public accountant in private practice specializing in tax and business law. From 1957 until 1982, Mr. Paul was a partner in the accounting firm of Touche Ross & Co. and served as Associate National Director of Taxes at that firm. Richard L. Bready has served as a director of IAC since November 1992. Mr. Bready also has been Chairman of the Board and Chief Executive Officer of Nortek, Inc. since 1991, having served as its President since 1979. Nortek Inc., a New York Stock Exchange listed company, manufactures and markets residential, commercial and industrial building products. Mr. Bready is also a director of CCX Corporation, a manufacturer of metal and fiberglass screening products, and of The Lehigh Group Inc. Alan P. Donenfeld has served as a director of IAC since 1995. Mr. Donenfeld also has been President of Bristol Capital Management, Inc. since 1990, which specializes in locating, structuring, and arranging financing for investments in telecommunications and other industries. From 1987 to 1990, Mr. Donenfeld was a Vice President in the Mergers and Acquisitions Group at Bear, Stearns & Co. Inc. in New York where he worked on numerous leveraged buyouts, corporate mergers, valuations, and fairness opinions. Mr. Donenfeld worked in the Leveraged Buyout and Mergers and Acquisitions Groups at E.F. Hutton & Company, Inc. from 1985 to 1987. Mr. Donenfeld was a founder of Quadrex Securities Corporation, where, from 1982 to 1985, he assisted in raising a leveraged buyout fund which made an equity investment in a number of companies. All directors hold office until the next annual meeting of stockholders and the election and qualification of their successors. Directors receive no compensation for serving on the Board of Directors other than the reimbursement of reasonable expenses incurred in attending meetings. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. The Company has not entered into any employment agreements or other understandings with its directors or executive officer concerning compensation. No cash compensation has been paid to any officer or director of IAC to date. No family relationships exist among any of the named directors or IAC's executive officer. No arrangement or understanding exists between any such director or officer and any other person pursuant to which any director or officer was elected as a director or officer of IAC. In connection with any IAC Stockholder vote relating either to approval of a Business Combination or the liquidation of IAC due to the failure of IAC to effect a Business Combination within the time allowed, each of IAC's directors and its executive officer has agreed to vote his respective shares of IAC Common Stock in accordance with the vote of the majority of the shares voted by all IAC Non-Affiliate Stockholders with respect to such Business Combination or liquidation. EXECUTIVE COMPENSATION Since IAC's inception in November 1992, Mr. Salvatore J. Zizza, IAC's Chairman of the Board, President and sole executive officer, has not received any compensation from IAC, been issued any options or stock appreciation rights in IAC, nor has Mr. Zizza or any other person entered into any employment agreement with IAC. PERFORMANCE GRAPH Set forth below is a line graph comparing the cumulative stockholder return of IAC Common Stock, based on its market price, with the cumulative total return of companies on the NASDAQ National Market Composite Index. Because of the nature of IAC's business, IAC has been unable to identify a peer group of companies in a similar line of business, and instead, has provided a comparison with companies with a similar market capitalization. -67- Such peer group is comprised of 110 companies, each being a company with a market capitalization ranging from $6 million to $8 million. The IAC Common Stock commenced trading on the OTC Electronic Bulletin Board on June 28, 1995 and the closing bid price on such date was $8.875. This price has been used as the initial share price. This graph was prepared by Media General Financial Services. [Performance Graph Inserted Here] ---------------------------------------------------------- CALENDAR QUARTER ENDING ---------------------------------------------------------- COMPANY 6/28/1995 6/30/1995 9/29/1995 12/29/1995 ----------------------------------------------------------- Initial Acquisition 100.00 100.00 90.14 100.00 Corp. ---------------------------------------------------------- Peer Group 100.00 100.20 107.01 84.30 ---------------------------------------------------------- Broad Market 100.00 100.00 111.42 110.52 ---------------------------------------------------------- ---------------------------------------------------------- CALENDAR QUARTER ENDING ---------------------------------------------------------- COMPANY 3/29/1996 6/28/1996 9/30/1996 11/29/1996 ---------------------------------------------------------- Initial Acquisition 107.04 104.23 100.00 112.68 Corp. ---------------------------------------------------------- Peer Group 90.69 88.96 74.31 60.52 ---------------------------------------------------------- Broad Market 115.63 124.20 127.62 133.99 ---------------------------------------------------------- PROPOSAL TO ELECT DIRECTORS OF THE SURVIVING CORPORATION The Board of Directors of IAC has nominated the five persons named below and M. Salvatore J. Zizza for election to the Board of Directors of the Surviving Corporation. One of the nominees (Mr. Zizza) is currently a director of IAC and the other five nominees are currently directors of Hollis-Eden. For biographical information on Mr. Zizza, see "MANAGEMENT OF IAC-Directors and Executive Officer." The Surviving Corporation's Board -68- of Directors will be a "classified board," with only one-third of its directors coming up for election each year. All of the nominees have consented to serve as directors. Messrs. Hollis and Bagley have been nominated to serve as Class I directors, whose term shall expire at the first annual meeting of stockholders held after the Effective Time of the Merger. Dr. Prendergast and Mr. Zizza have been nominated to serve as Class II directors whose term shall expire at the second annual meeting of stockholders held after the Effective Time of the Merger and Dr. Merigan and Mr. McDonnell have been nominated to serve as Class III Directors. The term of the Class III directors shall expire at the third annual meeting of stockholders held after the Effective Time of the Merger. Each proxy received will be voted "FOR" the election of the nominees named below unless otherwise specified in the proxy. At this time, the Board of Directors of IAC knows of no reason why any nominee might be unable to serve. If the Merger is not consummated, the current directors of IAC will continue to serve. Richard B. Hollis, age 44, is the founder of Hollis-Eden and has served as Hollis-Eden's Chairman, President and Chief Executive Officer since August 1994. Mr. Hollis has over 20 years experience in the health care industry in positions ranging from sales to Chief Executive Officer. Mr. Hollis served as Chief Operating Officer of Bioject Medical from 1991 to 1994, and as Vice President Marketing and Sales/General Manager for Instromedix from 1989 to 1991. From 1986 to 1989, Mr. Hollis served as a general manager of the Western business unit of Genentech, Inc., a manufacturer of biopharmaceuticals. From 1977 to 1986, Mr. Hollis served as a division general manager of Imed Corporation, Inc., a manufacturer of intravenous infusion pumps. Mr. Hollis began his career in the health care industry with Baxter Travenol from 1974 to 1977. Mr. Hollis devotes full time to the affairs of Hollis-Eden. Mr. Hollis received his B.A. in Psychology from San Francisco State University in 1974. Patrick T. Prendergast, PhD., age 40, Chief Scientific Officer and a director of Hollis-Eden since August 1994, developed the Products licensed to Hollis-Eden. Dr. Prendergast's specialty is in anti-viral drug screening and assessment. His research interests are virology, molecular immunological, and genetic analysis of animal and human lentiviruses, human herpes virology and immunology, anti-viral agent isolation and retroviral diagnostics. Dr. Prendergast has been primarily engaged in medical research and development activities through two research and development companies controlled by him, Colthurst Limited and Edenland, Inc., since 1985 and 1987, respectively. These companies investigated and screened human hormone DHEA and human protein AFP as anti-HIV drugs. Dr. Prendergast filed foreign patents on the use of these agents for the treatment of HIV/AIDS, and also has several patents pending on unique and novel composition of matter pharmaceutical agents for the treatment of viral caused immune disorders. Dr. Prendergast received his Ph.D. in microbiology from the University College of Galway, Ireland in 1982. Thomas Charles Merigan, Jr., M.D., age 62, became Chairman of the Scientific Advisory Board and a director of Hollis-Eden in March 1996. Dr. Merigan has been George E. and Lucy Becker Professor of Medicine at Stanford University School of Medicine from 1980 to the present. Dr. Merigan has also been the Principal Investigator, NIAID Sponsored AIDS Clinical Trials Unit, from 1986 to the present and has been Director of Stanford University's Center For AIDS Research from 1988 to the present. Dr. Merigan is a member of various medical and honorary societies, has lectured extensively within and outside the United States, and authored numerous books and articles and has chaired and edited symposia relating to viruses, infectious diseases, anti-viral agents, HIV and other retroviruses and AIDS. From 1990 to the present, Dr. Merigan has been Chairman, Editorial Board of "HIV: Advances in Research and Therapy" and is also a member of the editorial boards of "Aids Research and Human Retroviruses" (since 1983), "International Journal of Anti-microbial Agents" (since 1990), and "The Aids Reader" (since 1991), among others. He is a co-recipient of six patents which, among other things, relate to synthetic polynucleotides, modification of hepatitus B virus infection, purified cytomegalovirus protein and composition and treatment for herpes simplex. Dr. Merigan has been Chair, Immunology Advisory Board, Bristol Myers Squibb Corporation (1989-1995) and Chair, Scientific Advisory Board, Sequel Corp -69- (1993 - present). In 1994, Stanford University School of Medicine honored him with the establishment of the Annual Thomas C. Merigan Jr. Endowed Lectureship in Infectious Diseases and, in 1996, Dr. Merigan was elected Fellow, American Association for the Advancement of Science. From 1966 to 1992, Dr. Merigan was Head, Division of Infectious Diseases, at Stanford University School of Medicine. Dr. Merigan received his B.A. (with honors) from the University of California at Berkeley in 1955 and his M.D. from the University of California at San Francisco in 1958. J. Paul Bagley III, age 52, became a director of Hollis-Eden in March 1996. Mr. Bagley was Chief Executive Officer of Laidlaw Holdings, Inc., an investment services company, from January 1995 until November 1996. Mr. Bagley is a founding principal of Stone Pine Capital Ltd., a group that provides mezzanine capital to fund acquisitions, buyouts, growth and recapitalizations and is also associated with Stone Pine China L.L.C., Stone Pine Mezzanine L.L.C. and Stone Pine Financial Services L.L.C. For more than twenty years prior to October 1988, Mr. Bagley was engaged in investment banking activities with Shearson Lehman Hutton Inc. and its predecessor, E.F. Hutton & Company, Inc. Mr. Bagley served in various capacities with Shearson and E.F. Hutton, including Executive Vice President and Director, Managing Director, Head of Direct Investment Origination and Manager of Corporate Finance. Mr. Bagley controls a United States registered investment advisor which provides advisory services to two United States business development companies. Mr. Bagley serves as Chairman of the Board of Directors of Silver Screen Management, Inc. and International Film Investors, Inc., which manage film portfolios with aggregate assets under management of approximately $1 billion. Mr. Bagley is also a director of Logan Machinery Corporation, a manufacturer of all-terrain vehicles, EurekaBank, a federal savings bank and America First Financial Corporation, a Nasdaq Stock Market listed company. Mr. Bagley graduated from the University of California at Berkeley in 1965 with a B.S.c in Business and Economics and from Harvard Business School in 1968 with an M.B.A. in Finance. Brendan R. McDonnell, age 34, is a partner at Lane Powell Spears Lubersky, a large Northwest-based law firm, and is Chairman of the Corporate Securities and Finance Group in the firm's Portland, Oregon office. Mr. McDonnell specializes in representing both private and public emerging growth companies, with focus on the high technology industry. Mr. McDonnell joined Lane Powell Spears Lubersky in 1990 after working for approximately three years for Brobeck, Phleger & Harrison, another law firm, in California. Mr. McDonnell holds a B.S. in accounting from Loyola Marymount University and a J.D. from the University of California at Davis. All directors will be reimbursed for their expenses of attending Board meetings and will be eligible to receive options under the 1996 IAC Incentive Stock Option Plan, if adopted and approved at the IAC Special Meeting. All members of the Surviving Corporation's Board of Directors will hold office until their respective terms expire and the election and qualification of their successors. No family relationships exist among Hollis-Eden's directors. Pursuant to the Anti-Serum License Agreement, Dr. Prendergast or, at the option of Edenland, Leo Prendergast, the brother of Dr. Prendergast, has the right to serve as a director of Hollis-Eden until August 25, 1997. -70- SECURITY OWNERSHIP OF IAC PRIOR TO THE MERGER The following table sets forth information as of December . , 1996, based on information obtained from the persons named below, with respect to the beneficial ownership (as defined under the applicable rules of the Commission) of shares of IAC Common Stock by (i) each person known by IAC to be the owner of more than 5% of the outstanding shares of IAC Common Stock, (ii) each director and (iii) all directors and the executive officer of IAC as a group: AMOUNT AND PERCENTAGE OF NATURE OF OUTSTANDING BENEFICIAL SHARES OF NAME OR GROUP(1) OWNERSHIP(2)(3) COMMON STOCK ---------------- --------------- ------------- Salvatore J. Zizza(4) . 220,000 22.37% Richard Bready . . . . 35,000 4.10 Herbert Paul . . . . . 35,000 4.10 Sidney Dworkin . . . . 35,000 4.10 Alan P. Donenfeld . . . 35,000 4.10 Gruntal & Co., Incorporated . . . . . 75,000 8.40 James D. Bowyer(5) 1117 Chantilly Road Los Angeles, California 90077 . . . . . . . . . 58,800 7.06 All executive officers and directors as a group (five persons)(4) . . . 360,000 33.86% ------------------------------- (1) Each of the persons listed, unless otherwise noted, has an address in care of IAC. (2) Unless otherwise noted, IAC believes that all persons named in the table have sole voting and investment power with respect to all shares of IAC Common Stock beneficially owned by them. (3) Includes warrants to purchase units, each unit comprised of one share of IAC Common Stock and one Class A Warrant to purchase, upon consummation of a Business Combination, one share of IAC Common Stock at a price of $9.00, as follows: (i) Salvatore J. Zizza, 50,000 units; (ii) each of Messrs. Bready, Paul, Dworkin and Donenfeld, 10,000 units; (iii) Gruntal, 30,000 units and (iv) all executive officers and directors, as a group, 90,000 units. (4) Includes 50,000 shares of IAC Common Stock underlying certain other warrants owned by Mr. Zizza which shall become exercisable upon the consummation of the Merger. (5) Based solely on information set forth in Amendment No. 1 to Schedule 13D, dated January 8, 1996, filed by Mr. Bowyer with the Commission. SECURITY OWNERSHIP OF THE SURVIVING CORPORATION AFTER THE MERGER The following table sets forth, on a pro forma basis as if the Merger had been consummated, based on ownership of shares of Common Stock in IAC and Hollis-Eden as of November 30, 1996, the beneficial ownership (as defined under the applicable rules of the Commission) of (i) each person known by IAC and Hollis-Eden who will become, as a result of the Merger, the owner of more than 5% of the outstanding shares of Surviving Corporation Common Stock , (ii) each proposed director of the Surviving Corporation, and (iii) all proposed directors and executive officers of the Surviving Corporation as a group: -71- Amount and Nature of Percentage of Beneficial Outstanding Shares Name or Group(1) Ownership(2) of Common Stock ---------------- ------------ ------------------ Richard B. Hollis (3) 3,328,302 53.51% Edenland, Inc. (4) . 713,208 12.14 Baybush, Straffan County Kildare, Ireland Dr. Patrick T. Prendergast (5) . . . 747,170 12.65 Gary McAdam (6) . . . 566,038 9.48 4 West Dry Creek Circle Suite 140 Littleton, CO 80120 Thomas C. Merigan (7) 47,222 * J. Paul Bagley (7) . 25,000 * Brendan R. McDonnell -0- -0- Salvatore J. Zizza (8) . . . . . . . . . 220,000 3.73 Laidlaw Equities, Inc. (9) . . . . . . 586,930 9.27 100 Park Avenue New York, NY 10017 All Officers and Directors as a group (8 persons) (3)(4)(5) (7)(8) . . . . . . 4,387,694 66.78% * Less than one percent ------------------------- (1) Unless otherwise noted, each of the persons listed has an address in care of the Surviving Corporation. (2) Unless otherwise noted, IAC and Hollis-Eden believe that all persons named in the table will have sole voting and investment power with respect to all shares of Surviving Corporation Common Stock to be beneficially owned by them after the Merger. (3) Includes warrants to purchase up to 475,472 shares of Surviving Corporation Common Stock at $11.02 per share for a period of three years following the Effective Time of the Merger. (4) Of these shares, 584,906 shares represent shares to be owned of record by Edenland, 37,736 shares represent shares underlying certain warrants exercisable at $15.90 per share until February 5, 2000 and 90,566 shares represent shares underlying certain warrants exercisable at $11.02 per share for a period of three years following the Effective Time of the Merger. Excludes Edenland's option to purchase up to 169,811 shares of Surviving Corporation Common Stock if and when revenues from the AFP anti- serum and/or a vaccine developed therefrom generate revenues of $200 million, valued at market price, in payment of royalties. (5) Dr. Prendergast is the president, a director and the controlling stockholder of Edenland. As such, Dr. Prendergast may be deemed to beneficially own all securities owned by Edenland. (6) Includes 226,416 shares underlying certain warrants exercisable at $11.02 per share, which warrants are owned by Creative Investment Services, Inc. Pension Plan and Trust, of which Mr. McAdams is the Trustee. (7) Represents shares of Surviving Corporation Common Stock underlying certain outstanding options. (8) Includes warrants to purchase up to 150,000 shares of Surviving Corporation Common Stock exercisable upon the Effective Time of the Merger. (9) Represents shares of Surviving Corporation Common Stock underlying certain outstanding warrants. Warrants to purchase up to 452,830 of these shares are issuable upon consummation of the Merger. -72- PROPOSED MANAGEMENT OF THE SURVIVING CORPORATION Following the Merger, it is contemplated that the following individuals will serve the Surviving Corporation in the capacities set forth below: NAME AGE POSITION(S) ---- --- ----------- Richard B. Hollis . . 44 Chairman of the Board, President, Chief Executive Officer and Director Patrick T. Prendergast, Ph.D. . 40 Chief Scientific Officer and Director Thomas Charles Merigan, Jr., M.D. . 62 Chairman of the Scientific Advisory Board and Director Robert W. Weber . . . 45 Vice President-Controller Lois Rezler, Ph.D. . 45 Vice President-Regulatory Affairs J. Paul Bagley III . 52 Director Salvatore J. Zizza . 50 Director Brendan R. McDonnell 34 Director For biographical information on each of the above persons (with the exception of Mr. Weber and Dr. Rezler, whose biographies appear below), see "MANAGEMENT OF IAC" and "PROPOSAL TO ELECT DIRECTORS OF THE SURVIVING CORPORATION." At the Effective Time of the Merger, the Board of Directors will designate an Audit Committee. Upon the Effective Time, the members of the Audit Committee will be . , each an independent director. The Audit Committee will review and evaluate the results and scope of the audit and other services provided by the Surviving Corporation's independent accountants, as well as the Surviving Corporation's accounting principles and system of internal accounting controls. Robert W. Weber, age 45, has served as Vice President-Controller of Hollis-Eden since March 1996. From October 1994 to March 1996, Mr. Weber was Chief Financial Officer and Vice President Finance of Prometheus Products, a subsidiary of Sierra Semiconductor, a company that designs and markets computer modems and software. From August 1993 to October 1994, Mr. Weber was Chief Financial Officer and Vice President Finance of Amercom, a company that designs, publishes and markets personal computer telecommunications software for the small office, home office and personal communications marketplace. Mr. Weber was also Vice President Finance and Chief Financial Officer of Instromedix from February 1988 to August 1993. Instromedix is engaged in designing, manufacturing and marketing medical electronics devices and software. Prior thereto, Mr. Weber held various financial management positions with Metheus Corporation, a company engaged in designing, manufacturing and marketing computer graphics hardware and software, International Paper Company and General Motors Corporation. Mr. Weber received his B.S. from GMI Institute of Technology in 1975 and his MBA from Stanford Graduate School of Business in 1977. Lois Rezler, Ph.D., age 45, became Vice President of Regulatory Affairs of Hollis-Eden in March 1996. For more than ten years, Dr. Rezler has been engaged in consulting for various pharmaceutical and biotechnology corporations including Smith Kline, Smith & Nephew, Cheesborough Ponds, CIBA, Merck Sharpe Dome, Baxter Travenol and others. Dr. Rezler currently acts as a regulatory consultant for Westem Center for Clinical Studies (since January 1996), Inglewood Medical and Mental Health Services (since November 1995), Santa Clarita Medical Center (since January 1995), Interactive Medical Technologies (since August 1993), Puretek Corporation (since November 1993) and Bioremediation Incorporated (since February 1993). From July 1986 to February 1993, Dr. Rezler was sequential quality assurance (SQA) consultant to Xerox Incorporated. On behalf of her various clients, Dr. Rezler's duties and responsibilities have included working at bench level to assist in drug design and development, preparing and submitting grant applications to various government agencies, consulting in all aspects of preparing IND and NDA submissions to the FDA, including biologics devices, new drugs, priority drugs and orphan drugs. Dr. Rezler's duties also include responsibility for developing time lines and budgets for each project. Dr. Rezler received her B.A., B.S.c and M.A. from London University and her Ph.D. in Public Health from Edinburgh University. -73- MEDICAL ADVISORY BOARD Hollis-Eden, through Dr. Merigan, Hollis-Eden's Chairman of the Scientific Advisory Board, has established relationships with a group of scientific advisors with expertise in their respective fields that align with Hollis-Eden sponsored programs. Dr. Merigan plans to assemble the Surviving Corporation's Scientific Advisory Board from among these advisors. The Surviving Corporation intends to hold formal semi-annual scientific advisory board meetings to review ongoing studies and exchange ideas. The Surviving Corporation expects that its scientific advisors will consult with management of the Surviving Corporation regarding the status of the Surviving Corporation's work in progress and the evaluation of prospective opportunities for the Surviving Corporation. The Surviving Corporation intends to pay certain of its scientific advisors' consulting fees or salaries and expects to provide reimbursement for expenses incurred in connection with service to the Surviving Corporation. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Surviving Corporation's Bylaws will provide that the Surviving Corporation shall indemnify its directors and executive officers and may indemnify its other officers, employees and other agents to the fullest extent permitted by Delaware law. The Surviving Corporation will also be empowered under its Bylaws to enter into indemnification contracts with its directors and officers and to purchase insurance on behalf of any person whom it is required or permitted to indemnify. Pursuant to this provision, the Surviving Corporation intends to enter into indemnity agreements with each of its directors and officers. In addition, the Surviving Corporation will be required, subject to certain exceptions, to advance all expenses incurred by any director or executive officer in connection with a completed, pending or threatened action, suit or proceeding upon receipt of an undertaking by such director or executive officer to repay all amounts advanced by the Surviving Corporation on such persons behalf if it is ultimately determined that such person is not entitled to be indemnified under the Bylaws or otherwise. The Surviving Corporation's Certificate of Incorporation will also provide that to the fullest extent permitted by Delaware law, the Surviving Corporation's directors will not be personally liable to the Surviving Corporation and its stockholders for monetary damages for any breach of a director's fiduciary duty. The Certificate of Incorporation will not, however, eliminate the duty of care, and in appropriate circumstances, equitable remedies such as an injunction or other forms of non-monetary relief would remain available under Delaware law. Each director will be subject to liability for breach of the director's duty of loyalty to the Surviving Corporation, for acts or omissions not in good faith or involving intentional misconduct or knowing violations of law, for acts or omissions that the director believes to be contrary to the best interests of the Surviving Corporation or its stockholders, for any transaction from which the director derived an improper personal benefit, for acts or omissions involving a reckless disregard for the director's duty to the Surviving Corporation or its stockholders when the director was aware or should have been aware of a risk of serious injury to the Surviving Corporation or its stockholders, for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Surviving Corporation or its stockholders, for improper transactions between the director and the Surviving Corporation and for improper distributions to stockholders and loans to directors and officers. This provision also will not affect a director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. Upon or promptly after the consummation of the Merger, the Surviving Corporation will seek to acquire and maintain directors' and officers' liability insurance. EXECUTIVE COMPENSATION From Hollis-Eden's inception in August 1994 through December 31, 1995, no officer of Hollis-Eden (including its Chief Executive Officer) received any salaried compensation for services rendered. EMPLOYMENT AGREEMENTS Pursuant to an employment agreement between Hollis-Eden and Mr. Richard B. Hollis entered into in November 1996 (the "Hollis Employment Agreement"), Mr. Hollis currently receives from Hollis-Eden an annual base salary of not less than $195,000 and bonuses and equity compensation as determined by the Hollis-Eden Board of Directors. Mr. Hollis' annual base -74- salary will be increased to not less than $225,000 upon the consummation of the Merger. If Mr. Hollis' employment is terminated "without cause," "for insufficient reason" or pursuant to a "change in control" (as such terms are defined in the Hollis Employment Agreement), Mr. Hollis will receive as severance (i) an amount equal to five times his then current annual base salary plus five times the amount of the bonus awarded to him in the prior calendar year, (ii) immediate vesting of all unvested stock options of Hollis-Eden (or the Surviving Corporation, if applicable) held by him and (iii) continued benefits under all employee benefit plans and programs for a period of three years. All of such payments are to be made in one lump sum within 30 days of termination. If Mr. Hollis' employment is terminated with cause or if Mr. Hollis resigns other than for "sufficient reason," Mr. Hollis' compensation and benefits will cease immediately and Mr. Hollis will not be entitled to severance benefits. The Hollis Employment Agreement will continue in effect after the consummation of the Merger, with the Surviving Corporation being the obligor thereunder. No other Hollis-Eden employment agreements currently exist and it is anticipated that, for the forseeable future, the Surviving Corporation will not enter into any new employment agreements. EMPLOYEE BENEFIT PLANS 1996 Stock Option Plan. In August 1996, Hollis-Eden adopted a Stock Option Plan (the "Plan") which provides for the granting to employees of incentive stock options within the meaning of Section 422 of the Code and non-statutory stock options which are not intended to qualify as incentive stock options. The Plan will terminate automatically in August 2006 unless terminated sooner. The Plan allows the Board of Directors of Hollis-Eden to amend, suspend or terminate the Plan, provided that no such action may affect any share of Hollis-Eden Common Stock previously issued and sold or any option previously granted under the Plan. A total of 500,000 shares of Hollis-Eden Common Stock have been reserved for issuance pursuant to the Plan. The Plan is administered by the Board of Directors of Hollis-Eden (the "Administrator"), which Administrator is constituted to comply with Section 16(b) of the Exchange Act and applicable laws. The Administrator has the power to determine the terms of the options, including the exercise price, the number of shares subject to each option and the exercisability thereof, and the form of consideration payable upon exercise. Options granted under the Plan are not generally transferable by the optionee, and each option is exercisable during the lifetime of the optionee only by such optionee. Options granted under the Plan must be exercised within three months following the end of the optionee's status as an employee, director or consultant of Hollis-Eden, or within 12 months after the optionee's termination as a result of disability or within 18 months of such optionee's death, but in no event later than the expiration of the option's 10-year term. The exercise price of any incentive stock option granted under the Plan must be at least equal to the fair market value of the Hollis-Eden Common Stock on the date of grant. The exercise price of any nonstatutory stock option granted under the Plan is determined by the Administrator. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of Hollis-Eden's outstanding capital stock, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date and the term of such incentive stock option must not exceed five years. The term of all other options which may be granted under the Plan may not exceed 10 years. The Plan provides that in the event of a merger of Hollis-Eden into another corporation or a sale of all or substantially all of the assets or like transaction involving Hollis-Eden, each option will be assumed or an equivalent option substituted by the successor corporation. If the outstanding options are not assumed or substituted as described in the preceding sentence, the vesting period for options held by persons then performing services as employees, directors or consultants shall be accelerated prior to such event; such options will terminate if not exercised after such acceleration and at or prior to such event. In connection with the Merger, all outstanding options granted under the Plan will be substituted for equivalent options of the Surviving Corporation. See "PROPOSAL TO APPROVE AND ADOPT THE IAC 1996 INCENTIVE STOCK OPTION PLAN." The following tables set forth information concerning individual grants of stock options, exercises of stock options, and aggregate stock options held for each of the proposed executive officers and directors of the Surviving Corporation. Mr. Salvatore J. Zizza does not hold any such stock options. All of these stock options were granted on March 29, 1996, at which time the Board of Directors of Hollis-Eden determined that the per share fair market value for Hollis-Eden Common Stock was $2.25 per share. None of these stock options has been exercised. Hollis-Eden has not granted any other stock options, except for an incentive stock option to purchase 500 shares of Hollis-Eden Common Stock granted in November 1996 under the Plan to an employee of Hollis-Eden. -75- OPTION GRANTS IN 1996 INDIVIDUAL GRANTS ---------------------------------------------- NUMBERED PERCENTAGE OF SECURITIES TOTAL OPTIONS UNDERLYING GRANTED TO EXERCISE OPTIONS EMPLOYEES IN PRICE PER EXPIRATION NAME GRANTED 1996(4) SHARE DATE -------------- ---------- ------------ --------- ---------- Richard Hollis 200,000(1) 37.0% $2.25 3/15/06 Patrick Prendergast 50,000(1) 9.3% $2.25 3/15/06 Thomas C. Merigan 125,000(2) 23.1% $2.25 3/15/03 Robert Weber 40,000(1) 7.4% $2.25 3/15/03 25,000(1) 4.6% $2.25 3/15/06 Lois Rezler 50,000(1) 9.3% $2.25 3/15/03 J. Paul Bagley 25,000(3) 4.6% $2.25 3/15/03 Brendan McDonnell 25,000(1) 4.6% $2.25 3/15/06 POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION TERM (5) --------------------- NAME 5% 10% ------------------- --------------------- Richard Hollis $283,000 $717,400 Patrick Prendergast $ 70,750 $179,350 Thomas C. Merigan $114,500 $266,875 Robert Weber $ 36,640 $ 85,400 $ 35,375 $ 89,675 Lois Rezler $ 45,800 $106,750 J. Paul Bagley $ 22,900 $ 53,375 Brendan McDonnell $ 35,375 $ 89,675 --------------------------- (1) One-third of the shares subject to such option shall vest and become exercisable on the first anniversary of the date of grant, and the remaining shares shall vest in 24 equal monthly installments thereafter based on continued employment and/or service with Hollis-Eden (or its successor). (2) Options to purchase 25,000 shares are vested and are currently exercisable, and the remaining shares subject to this option will vest and be exercisable in equal monthly installments over a three-year period based on continued service as a director of Hollis-Eden (or its successor) and Chairman of the Scientific Advisory Board. (3) All options are vested and may be exercised immediately. (4) Based on options to purchase an aggregate of 540,500 shares granted to employees and directors. (5) The potential realizable value is calculated based on the term of the option at its date of grant (7 years and 10 years). It is calculated assuming that the stock price on the date of grant appreciates at the indicated annual rate, compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. These amounts represent certain assumed rates of appreciation only, in accordance with the rules of the Commission, and do not reflect Hollis-Eden's estimate or projection of future stock price performance. Actual gains, if any, are dependent on the actual future performance of Hollis-Eden's (and consequently, the Surviving Corporation's) Common Stock and no gain to the optionee is possible unless the stock price increases over the option term, which will benefit all Hollis-Eden (and consequently, Surviving Corporation) Stockholders. PROPOSAL TO APPROVE AND ADOPT THE 1996 IAC INCENTIVE STOCK OPTION PLAN GENERAL The following description of the 1996 IAC Incentive Stock Option Plan (the "IAC Plan") is a summary and is qualified in its entirety by reference to the IAC Plan, as proposed to be adopted, which is attached hereto as Annex D. The IAC Plan will continue as the Incentive Stock Option Plan of the Surviving Corporation following the consummation of the Merger and, at the Effective Time, all outstanding options granted under Hollis-Eden's Plan will be substituted for equivalent options under the IAC Plan. On November 1, 1996, the IAC Board of Directors adopted the IAC Plan, subject to approval of the IAC Stockholders at the IAC Special Meeting. -76- PURPOSE OF THE GRANT OF OPTIONS The purpose of the IAC Plan is to encourage selected management, key employees, directors and certain other persons associated with IAC (including any successor) to acquire an investment in IAC's business, thereby strengthening their commitment to remain with, or join, IAC. The IAC Plan contemplates the grant to such persons of "incentive stock options" under Section 422 of the Code ("ISOs") and nonqualified stock options ("NSOs"). The IAC Plan is not subject to any of the requirements of the Employee Retirement Income Security Act of 1974, as amended, nor is it qualified or intended to be qualified under Section 401(a) of the Code. SECURITIES TO BE OFFERED An aggregate of 1,000,000 shares of IAC Common Stock have been reserved for issuance upon the exercise of options granted pursuant to the IAC Plan (subject to adjustment as provided in the IAC Plan upon the occurrence of certain changes in the capitalization of IAC and certain other corporate transactions). To date, no options under the IAC Plan have been granted. ADMINISTRATION The Incentive Plan is to be administered by the Incentive Stock Option Committee (the "Option Committee"), consisting of Messrs. . , each a "disinterested person" within the meaning of Rule 16(b)-3(c)(2)(i) of the Exchange Act, with respect to the IAC Plan. Following the consummation of the Merger, it is anticipated that Messrs. . , each a disinterested person, will comprise the Surviving Corporation's Option Committee. Subject to the terms of the IAC Plan and such limitations as the IAC Board of Directors may impose, the Option Committee shall be responsible for the overall management and administration of the IAC Plan and shall have such authority as may be necessary or appropriate to carry out its responsibilities, including, without limitation, the authority to (i) determine the persons (other than a member of the Option Committee) to whom, and the time or times at which, grants shall be made as well as the terms of ISOs and NSOs, (ii) interpret and construe the terms of the IAC Plan and any instrument thereunder, and (iii) adopt rules and regulations, prescribe forms and take any other actions not inconsistent with the IAC Plan as it may deem necessary or appropriate. PERSONS WHO MAY PARTICIPATE Officers, key employees and directors of IAC, as well as certain consultants, advisors and other persons who provide services to IAC (other than a member of the Option Committee), are eligible to participate in the IAC Plan without regard to length of employment or service. Any such person who is not an "employee" of IAC, within the meaning of Section 422 of the Code, is not eligible to receive ISOs. No options will be granted after November 1, 2006, the date upon which the IAC Plan will terminate if it is not terminated earlier by the IAC Board. DESCRIPTION OF OPTIONS The exercise price of an option granted under the IAC Plan and the period during which it may be exercised will be determined by the Option Committee at the time of grant, subject to the terms and conditions of the IAC Plan. The exercise price of an ISO, however, shall not be less than the fair market value of the shares subject to such ISO on the date of grant (or 110% of such fair market value in the case of ISOs granted to an individual who is a 10% or greater stockholder). No options may be exercised until at least six months after the date upon which the option was granted. In no event will options expire later than the expiration of ten years from the date of grant (or five years from the date of grant in the case of ISOs granted to an individual who is a 10% or greater stockholder). Options that are otherwise exercisable may be exercised in whole or in part. -77- In the event of (i) a "change of control," (ii) retirement of a holder from IAC on or after the holder's 65th birthday, (iii) disability or death of a holder, or (iv) upon the occurrence of such special circumstances or events as in the opinion of the Option Committee merits special consideration, options granted pursuant to the IAC Plan will vest and become immediately exercisable (but in no event prior to six months after the date of grant). A change of control will be deemed to occur for these purposes if either (i) after the Effective Time, any person (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes, without the approval of the IAC Board, the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of securities representing 30% or more of the combined voting power of IAC; (ii) the stockholders of IAC approve either (a) an agreement to merge or consolidate in a transaction in which IAC is not the surviving entity, (b) an agreement to sell or dispose of all or substantially all of IAC's assets, or (c) a plan to liquidate IAC, unless the IAC Board determines that options will not vest upon an event described in (a), (b) or (c); or (iii) during any period of two consecutive years, individuals constituting at least of a majority of the IAC Board at the beginning of such period cease to constitute a majority thereof, unless the election or nomination for election by IAC's Stockholders of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period. If the optionee's employment with IAC terminates or if the optionee's association with IAC terminates (in the case of a consultant, advisor or other service provider), options that are exercisable on his termination date shall remain exercisable until the expiration of three months from such termination date (extended to 12 months if such termination occurs due to the optionee's death or disability). To the extent that the aggregate fair market value (determined at the time an ISO is granted) of shares of IAC Common Stock subject to ISOs are exercisable for the first time by an optionee during a calendar year (under all stock option plans of IAC) exceeds $100,000, such ISOs shall be treated as NSOs. PAYMENT FOR SHARES Payment for shares of IAC Common Stock purchased upon exercise of an option must be made in full upon exercise, either in cash or check or in shares of outstanding IAC Common Stock, as determined by the Stock Option Committee. The proceeds received by IAC from the sale of shares of IAC Common Stock pursuant to the IAC Plan shall be used for general corporate purposes. TRANSFER RESTRICTIONS Options are not transferable other than by will or the laws of descent and distribution and, upon the occurrence of any event permitting such a transfer, the entire option must be transferred to the same person or entity. An optionee is required to notify IAC if he disposes of shares of IAC Common Stock acquired pursuant to the exercise of an ISO within two years of the date the ISO was granted or within one year of the date the ISO was exercised. AMENDMENT AND TERMINATION The IAC Board may amend or terminate the IAC Plan at any time or from time to time; provided, however, that unless all required approvals have been received, no amendment will be made that would (i) increase the maximum number of shares as to which options may be granted, or (ii) materially modify the requirements as to eligibility for participation. No amendment is permitted which would adversely affect the rights of any optionee under an option granted prior to such amendment, unless the optionee consents thereto. In addition, no amendment will be made that would result in the disqualification of any ISO as an "incentive stock option" within the meaning of Section 422 of the Code. FEDERAL INCOME TAX CONSEQUENCES The following is a general discussion of the federal income tax consequences to an optionee and IAC of the grant and exercise of an option pursuant to the IAC Plan and the disposition of stock acquired upon exercise of any option. Because the consequences will vary for any one of a number of reasons, IAC -78- urges each optionee to consult his own tax advisor with respect to the tax consequences of such transactions. The following summary does not purport to be complete and does not take into account state or local tax implications. General The grant of an option under the IAC Plan, whether or not an ISO, does not result in any tax consequences to IAC or the optionee. The tax consequences of exercising an option or disposing of IAC Common Stock purchased by an optionee upon exercise of an option ("option stock") depend upon whether the option is an ISO or an NSO. Nonqualified Stock Options An optionee, if he is not a director, officer or beneficial owner of more than ten percent of the outstanding shares of IAC Common Stock (hereinafter, a "director, officer or principal stockholder"), will realize income as compensation, at the time he exercises an NSO, in an amount equal to the amount by which the then fair market value of the IAC Common Stock acquired pursuant to the exercise of the NSO exceeds the price paid for such IAC Common Stock. Section 83 of the Code provides generally that, if a director, officer or principal stockholder receives shares pursuant to the exercise of such an option, he will realize ordinary income only when he can sell such shares at a profit without being subject to liability under section 16(b) of the Exchange Act, at which time he will be subject to tax on the difference between the then fair market value of the shares and the price paid for them. Alternatively, a director, officer or stockholder who would not otherwise be subject to tax on the value of his shares as of the date they were acquired can file a written election with the Internal Revenue Service, no more than 30 days after the shares are transferred to him, to be taxed as of the date of the transfer. The optionee then will realize income, as compensation, in a total amount equal to the amount by which the fair market value of the shares, as of the date he acquired them, exceeds the price paid for such shares. Shares of IAC Common Stock issued pursuant to the exercise of an NSO generally will constitute a capital asset in the hands of an optionee (including a director, officer or principal stockholder) and will be eligible for capital gain or loss treatment upon any subsequent disposition. The holding period of an optionee (including a director, officer or principal stockholder) will commence upon the date he recognizes income with respect to the issuance of such shares, as described above. The optionee's basis in the shares will be equal to the greater of their fair market value as of that date or the amount paid for such shares. Incentive Stock Options If an optionee exercises an ISO, the optionee does not recognize income upon exercise, provided that the optionee was an employee of IAC at all times from the date when the option was granted until not less than three months before exercise. (This three-month period is extended to one year if the optionee's employment terminates as a result of permanent and total disability, and is waived in the case of the optionee's death while employed by IAC). However, the excess of the fair market value of Common Stock acquired upon exercise of an ISO (determined at the time of such exercise) over the exercise price generally constitutes an item of adjustment for purposes of determining the optionee's alternative minimum tax liability for the taxable year of the exercise. If an optionee exercises an ISO and fails to satisfy the three-month (one-year in the case of permanent and total disability) employment period requirement, the optionee must include in gross income, as compensation for the taxable year of exercise, an amount equal to the excess of the fair market value of the option stock at the time of exercise over the exercise price. If an optionee subsequently disposes of option stock which, when exercised, did not satisfy the employment period requirement, the optionee must include in gross income as capital gain (or loss) for the taxable year, the difference between amount realized by the optionee upon such disposition and the fair market value of the option stock at the time of exercise. -79- If (i) an optionee satisfied the employment period requirement set forth above at the time the ISO was exercised, (ii) disposes of option stock that was acquired by the optionee pursuant to an ISO more than one year prior to the disposition, (iii) such ISO was granted to the optionee more than two years prior to the disposition, and (iv) the amount realized in the disposition exceeds the exercise price, then the optionee must include in gross income, as capital gain for the taxable year of the disposition an amount equal to the excess of the amount realized in the disposition over the exercise price. (If, instead, the exercise price exceeds the amount realized in the disposition, the optionee is allowed to deduct an amount equal to such excess as a capital loss for such year.) If (i) an optionee satisfied the employment period requirement set forth above, at the time the ISO was exercised, (ii) disposes of option stock within two years after the related ISO is granted or within one year after the option stock was acquired by the optionee, and (iii) the amount realized in the disposition exceeds both the exercise price and the fair market value of the option stock on the date of exercise, then the optionee must include in gross income, as compensation for the taxable year of the disposition, an amount equal to the excess of such fair market value over the exercise price, and must include in gross income as gain an amount equal to the excess of the amount realized in the disposition over such fair market value. Such gain is generally treated as capital gain, long-term or short-term, depending upon the length of time elapsed between the time when the option stock was acquired and the time of the disposition. If, instead, the amount realized in the disposition exceeds the exercise price, but is less than the fair market value of the option stock on the date of exercise, the optionee must include in gross income, as compensation for the taxable year of the disposition, an amount equal to the excess of the amount realized over the exercise price. If the exercise price exceeds the amount realized in the disposition, the optionee is allowed to deduct an amount equal to such excess as a loss for the taxable year of the disposition. Such loss is generally treated as capital loss, long-term or short term, depending upon the length of time elapsed between the time the option stock was acquired and the time of the disposition. Tax Consequences to IAC If an optionee includes an amount in gross income as compensation for a taxable year under the foregoing rules, IAC is generally entitled to a corresponding deduction for its taxable year that includes the last day of the affected taxable year of the optionee. Section 280G of the Code In addition to the Federal income tax consequences discussed above, Section 280G of the Code provides that if an officer, stockholder or highly compensated individual receives a payment which is in the nature of compensation and which is contingent upon a change in control of the employer, and such payment equals or exceeds three times his "base salary" (as hereinafter defined), then any amount received in excess of base salary shall be considered an "excess parachute payment." An individual's "base salary" is equal to his average annual compensation over the five-year period (or period of employment, if shorter) ending with the close of the individual's taxable year immediately preceding the taxable year in which the change in control occurs. If the taxpayer establishes, by clear and convincing evidence, that such payment is reasonable compensation for past or future services, then all or a portion of such payment may be deemed not to be a parachute payment. Under certain circumstances, options may give rise to excess parachute payments. If so, then in addition to any income tax which would otherwise be owed in connection with such payment, the optionee will be subject to an excise tax equal to 20% of such excess payment, and IAC will not be entitled to any tax deduction to which it would have been entitled with respect to such excess parachute payment. -80- REQUIRED VOTE Under the DGCL and IAC's Charter, the IAC Board of Directors has the authority to grant stock options to officers, key employees, consultants and advisors providing goods or services to IAC without stockholder approval. Under the rules of the Exchange Act, however, stockholder approval is required with respect to the IAC Plan to be exempt from the provisions of Section 16(b) of the Exchange Act. Accordingly, the IAC Board of Directors approved the IAC Plan upon the condition that the IAC Plan would not be effective unless ratified and approved by the IAC Stockholders at the IAC Special Meeting. The affirmative vote of a majority of the outstanding shares of IAC Common Stock voting in person or by proxy at the IAC Special Meeting is required for ratification and approval of the IAC Plan. RECOMMENDATION AND VOTE THE IAC BOARD OF DIRECTORS RECOMMENDS THAT IAC STOCKHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE AND ADOPT THE IAC PLAN. Each properly executed proxy received will be voted "FOR" the approval and adoption of the IAC Plan unless otherwise specified in the proxy. DESCRIPTION OF IAC'S SECURITIES COMMON STOCK IAC is authorized to issue 10,000,000 shares of IAC Common Stock. As of the date of this Joint Proxy Statement/Prospectus, 833,250 shares of IAC Common Stock were outstanding, held of record by [38] persons. The holders of Common Stock are entitled to one vote for each share held of record on all matters to be voted on by stockholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voting for the election of directors can elect all of the directors. The holders of IAC Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors of IAC out of funds legally available therefor. In the event of the liquidation, dissolution or winding up of IAC, the holders of IAC Common Stock will be entitled to share ratably in all assets remaining available for distribution after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the IAC Common Stock. The Initial IAC Stockholders have agreed to waive their respective rights to participate in a liquidation distribution prior to the consummation of the first Business Combination. Holders of shares of IAC Common Stock, as such, have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to the IAC Common Stock. All of the outstanding shares of IAC Common Stock are, and the shares of Surviving Corporation Common Stock to be issued in connection with the Merger, when issued, will be validly authorized and issued, fully paid and nonassessable. PREFERRED STOCK IAC's Charter authorizes the issuance of 5,000 shares of "blank check" preferred stock, par value $.01 per share (the "Preferred Stock"), with such designations, powers, preferences, rights, qualifications, limitations and restrictions of such series as the Board of Directors, subject to the laws of the State of Delaware, may determine from time to time. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue Preferred Stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of IAC Common Stock. Such Preferred Stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of IAC. No shares of Preferred Stock are currently outstanding. WARRANTS Each Class A Warrant entitles the holder thereof to purchase one share of Surviving Corporation Common Stock at a price of $9.00 per share, subject to adjustment in certain circumstances. The Class A Warrants will be initially exercisable upon the consummation of the Merger and expire at 5:00 p.m., New York City time, on May 15, 2000. Each Class B Warrant entitles the holder thereof to purchase one Unit (i.e., one share of Surviving Corporation Common Stock and one Class A Warrant) at a price of $.25 per Unit, subject to adjustment in certain -81- circumstances. The Class B Warrants will be initially exercisable upon the consummation of the Merger and expire at 5:00 p.m., New York City time, on the first anniversary of the date of the Merger. The Surviving Corporation may call the Warrants for redemption, each as a class, in whole and not in part, at the option of the Surviving Corporation, at a price of $.05 per Warrant at any time after the consummation of the Merger, upon not less than 30 days' prior written notice, provided that the last sale price of Surviving Corporation Common Stock, if Surviving Corporation Common Stock is listed for trading on an exchange or interdealer quotation system which provides last sale prices, or, the average of the closing bid and asked quotes, if Surviving Corporation Common Stock is listed for trading on an interdealer quotation system which does not provide last sale prices, on all 10 of the trading days ending on the day immediately prior to the day on which the Surviving Corporation gives notice of redemption, has been $11.00 or higher. The warrantholders shall have exercise rights until the close of business on the date fixed for redemption. The exercise price and number of shares of Surviving Corporation Common Stock issuable on exercise of the Class A Warrants are subject to adjustments under certain circumstances, including in the event of a stock dividend, recapitalization, reorganization, merger or consolidation of IAC (or the Surviving Corporation). The Warrants, however, are not subject to adjustment for issuance of shares of IAC (or Surviving Corporation) Common Stock at prices below their respective exercise prices. IAC (and the Surviving Corporation) each has the right, in its sole discretion, to decrease the exercise price of the Warrants for a period of not less than 30 days on not less than 30 days' prior written notice to the warrantholders, subject to compliance with applicable laws. In addition, IAC (and the Surviving Corporation) has the right, in its sole discretion, to extend the expiration date of the Warrants on five business days' prior written notice to the warrantholders. COMPARISON OF STOCKHOLDERS' RIGHTS The following is a summary of material differences between the rights of holders of Hollis-Eden Common Stock and the rights of holders of IAC Common Stock. As each of Hollis-Eden and IAC is organized under and subject to the laws of the State of Delaware, these differences arise from various provisions of Hollis-Eden's and IAC's respective charter and bylaws. Additionally, after the Effective Time, the Hollis-Eden Charter and Bylaws will operate as the charter and bylaws of the Surviving Corporation. NUMBER, ELECTION AND REMOVAL OF DIRECTORS Subject to the rights of the holders of any series of preferred stock, the Board of Directors of Hollis-Eden is divided into three classes designated as Class I, Class II and Class III, with directors assigned to each class in accordance with resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the Effective Time, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the Effective Time, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the Effective Time, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Also subject to the rights of the holders of any series of preferred stock, no director shall be removed without cause. The Board of Directors of IAC is comprised of one class of directors made of up not more than eight directors, each of whom is elected annually at the annual meeting of IAC Stockholders. Directors of IAC may be removed with or without cause. AMENDMENTS TO THE BYLAWS The Hollis-Eden Bylaws may be amended by either the majority vote of the Board of Directors or the affirmative vote of at least 66 2/3% of the voting power of all of the then outstanding shares of voting stock of Hollis-Eden. The IAC Bylaws may be amended by either the majority vote of the Board Directors or the affirmative vote of the holders of a majority of the outstanding stock of IAC entitled to vote. -82- WRITTEN ACTION BY STOCKHOLDERS No action shall be taken by Hollis-Eden Stockholders except at an annual or special meeting of such stockholders. IAC Stockholders may take any action required or permitted to be taken at any annual or special meeting of stockholders without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, is signed by the holders of all of the outstanding shares entitled to vote thereon. SPECIAL MEETINGS OF STOCKHOLDERS Special meetings of Hollis-Eden Stockholders may be called for any purpose or purposes by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer or (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors . Special meetings of IAC Stockholders may be called for any purpose or purposes at any time by (i) the President or by the Board of Directors or (ii) the President or a Vice President or the Secretary whenever IAC Stockholders holding not less than a majority of all of the outstanding stock entitled to vote at such meeting shall make a written application therefor stating the purpose or purposes for such a meeting. ADVANCE NOTICE REQUIREMENTS IN CONNECTION WITH STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS AT ANNUAL MEETINGS For business to be properly brought before an annual meeting by a Hollis- Eden Stockholder, such stockholder must have given timely notice thereof in writing to the Secretary of Hollis-Eden. To be timely, such stockholder's notice must be delivered to or mailed and received at the principal executive offices of Hollis-Eden not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the first anniversary of Hollis-Eden's preceding year's annual meeting. Such notice shall set forth as to each general matter such stockholder proposes to bring a brief description of the business desired to be brought, the reasons for conducting such business at the annual meeting and all other information relating to such matter as is required to be disclosed to stockholders under the Exchange Act. IAC does not have similar advance notice provisions. TRANSFER AGENTS AND REGISTRARS The transfer agent and registrar for shares of IAC Common Stock is American Stock Transfer & Trust Company, 40 Wall Street, 46th Floor, New York, New York 10005. LEGAL MATTERS The validity of the shares of IAC Common Stock being offered by this Joint Proxy Statement/Prospectus is being passed upon for IAC by Reid & Priest LLP, 40 West 57th Street, New York, New York 10019. EXPERTS The financial statements of IAC as of December 31, 1995 and 1994 and for each of the years ended December 31, 1995, 1994 and 1993 have been included herein and in the Registration Statement in reliance upon the report of BDO Seidman, LLP, independent certified public accountants, appearing elsewhere herein and upon the authority of said firm as experts in accounting and auditing. -83- The financial statements of Hollis-Eden as of December 31, 1995 and 1994 and for the year ended December 31, 1995 and the period from inception (August 15, 1994) to December 31, 1994 included in this Prospectus have been so included in reliance upon the report (which contains an explanatory paragraph relating to the Company's ability to continue as a going concern as described in Note 1 to the financial statements) of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. It is expected that representatives of BDO Seidman, LLP, and Price Waterhouse LLP will be present at the Special Meetings of IAC and Hollis- Eden, respectively, to respond to questions. They will be given an opportunity to make a statement should they so desire. -84- INDEX TO FINANCIAL STATEMENTS IAC Page --- ---- Report of Independent Certified Public Accountants . . . . . . . . . F-2 Statements of Operations for the years ended December 31, 1995, 1994 and 1993, the nine months ended September 30, 1996 and 1995 and for the period January 1, 1993 to September 30, 1996 . . . . . . F-3 Balance Sheets - December 31, 1995 and 1994 and September 30, 1996. . F-4 Statements of Common Stock, Common Stock Subject to Possible Redemption, Preferred Stock, Additional Paid-In Capital and Earnings Accumulated During the Development Stage for the years ended December 31, 1995, 1994 and 1993 and the nine months ended September 30, 1996 . . . . . F-5 Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993, the nine months ended September 30, 1996 and 1995 and for the period January 1, 1993 to September 30, 1996 . . . . . . . . . . F-6 Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . F-7 HOLLIS-EDEN ----------- Report of Independent Accountants . . . . . . . . . . . . . . . . . . F-12 Balance Sheet - December 31, 1995, 1994 and September 30, 1996 . . . F-13 Statement of Operations for the year ended December 31, 1995, for the period from inception (August 15, 1994) to December 31, 1994, for the period from inception (August 15, 1994) to December 31, 1995, for the nine months ended September 30, 1996 and 1995 and for the period from inception (August 15, 1994) to September 30, 1996 F-14 Statement of Stockholders' Deficit . . . . . . . . . . . . . . . . . F-15 Statement of Cash Flows for the year ended December 31, 1995, for the period from inception (August 15, 1994) to December 31, 1994, for the period from inception (August 15, 1994) to December 31, 1995, for the nine months ended September 30, 1996 and 1995 and for the period from inception (August 15, 1994) to September 30, 1996 F-16 Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . F-18 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders of Initial Acquisition Corp. (a corporation in the development stage) New York, New York We have audited the accompanying balance sheets of Initial Acquisition Corp. (a corporation in the development stage), as of December 31, 1995 and 1994, and the related statements of operations, common stock, common stock subject to possible redemption, preferred stock, additional paid-in capital and earnings accumulated during the development stage, and cash flows for each of the years in the three year period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements present fairly, in all material respects, the financial position of Initial Acquisition Corp. as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 1995 in conformity with generally accepted accounting principles. /s/ BDO Seidman, LLP -------------------------------- BDO Seidman, LLP New York, New York February 15, 1996 F-2 INITIAL ACQUISITION CORP. (a corporation in the development stage) STATEMENTS OF OPERATIONS ------------------------ YEAR ENDED DECEMBER 31, ------------------------- 9 MONTHS ENDED 9/30/96 1995 1994 1993 ----------- ------ ----- ----- (UNAUDITED) INTEREST INCOME . . . . . . $224,305 $ - $ - $264,986 GENERAL AND ADMINISTRATIVE EXPENSES . . . . . . . . (71,782) (7,000) (7,186) (132,152) PROVISION FOR TAXES . . . . (52,000) - - (32,150) ------- ------ -------- -------- NET INCOME (LOSS) . . . . . $100,523 $(7,000) $(7,186) $100,684 ======== ======== ======== ======== EARNINGS (LOSS) PER SHARE . $ .16 $ (.03) $ (.03) $ .12 ======== ======== ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING . . . 608,250 233,250 233,250 833,250 ======= ======= ======= ======= PERIOD JANUARY 1, 9 MONTHS 1993 TO ENDED SEPTEMBER 30, 9/30/95 1996 ---------- ------------ (UNAUDITED) (UNAUDITED) INTEREST INCOME . . . . . . $123,228 $489,291 GENERAL AND ADMINISTRATIVE EXPENSES . . . . . . . . (15,405) (218,120) PROVISION FOR TAXES . . . . - (84,150) -------- -------- NET INCOME (LOSS) . . . . . $107,823 $187,021 ======== ========= EARNINGS (LOSS) PER SHARE . $ .20 ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING . . . 533,250 ======== See accompanying notes to financial statements. F-3 INITIAL ACQUISITION CORP. (a corporation in the development stage) BALANCE SHEETS --------------- DECEMBER 31, SEPTEMBER 30, ASSETS ------ 1995 1994 1996 ----- ----- ----------- (unaudited) CURRENT ASSETS: Cash and cash equivalents . . $ 305,171 $ 11,096 $ 202,165 Investment in U.S. Treasury Bills . . . . . . . . . . . . 6,213,588 - 6,469,000 ---------- -------- ---------- Total current assets . . . . . . 6,518,759 11,096 6,671,165 - 63,043 21,099 Deferred registration costs . ---------- ------- --------- Total . . . . . . $6,518,759 $74,139 $6,692,264 ========== ======= ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY: Accrued expenses . . . . . . . $ 37,640 $ - $ 78,311 Income taxes payable . . . . . 52,000 - 84,150 Due to stockholders . . . . . - 6,000 Common stock, subject to possible redemption, 89,940 shares at conversion value . . . . . . . . . . . 932,316 - 969,703 Preferred stock, $.01 par value - shares authorized 5,000; none issued . . . . - - Common stock, $.01 par value - shares authorized 10,000,000; issued and outstanding 833,250 (which includes 89,940 shares subject to possible conversion) and 233,250, respectively . . . 7,434 2,333 7,434 Additional paid-in capital . . 5,436,065 79,992 5,436,065 Earnings (deficit) accumulated during development stage . 53,304 (14,186) 116,601 --------- -------- --------- COMMITMENTS . . . . . . . . . . . Total . . . . . . $6,518,759 $74,139 $6,692,264 ========== ======= ========== See accompanying notes to financial statements. F-4 INITIAL ACQUISITION CORP. (A CORPORATION IN THE DEVELOPMENT STAGE) STATEMENTS OF COMMON STOCK, COMMON STOCK SUBJECT TO POSSIBLE REDEMPTION, PREFERRED STOCK, ADDITIONAL PAID-IN CAPITAL AND EARNINGS ACCUMULATED DURING THE DEVELOPMENT STAGE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 ------------------------------------------------- COMMON STOCK SUBJECT TO COMMON STOCK POSSIBLE REDEMPTION ----------------- ------------------- SHARES AMOUNT SHARES AMOUNT ------ ------ ------- ------- BALANCE AT JANUARY 1, 1993 . - $ - - $ Issuance of founders shares 188,250 1,883 - - Sale of common stock . . . 45,000 450 - - Net loss . . . . . . . . . - - - - --------- --------- ------- ------- BALANCE AT DECEMBER 31, 1993 233,250 2,333 - - Net loss . . . . . . . . . - - - - --------- --------- -------- ------- BALANCE AT DECEMBER 31, 1994 233,250 2,333 - - Sale of 600,000 shares, net of underwriting discounts and offering costs . . . 510,060 5,101 89,940 899,283 Net income . . . . . . . . - - - - Accretion to redemption value of common stock . . - - - 33,033 --------- --------- ------- ------- BALANCE AT DECEMBER 31, 1995 743,310 7,434 89,940 932,316 --------- --------- ------- ------- Net Income (unaudited) . . - - - - Accretion to redemption value of stock (Unaudited) . . . . . . . - - - 37,387 --------- --------- ------- ------- BALANCE AT SEPTEMBER 30, 1996 (unaudited) . . . . . . . . . 743,310 $7,434 89,940 $969,703 ========= ========= ======= ======== EARNINGS (DEFICIT) ACCUMULATED ADDITIONAL DURING THE PAID-IN DEVELOPMENT CAPITAL STAGE --------- ------------ BALANCE AT JANUARY 1, 1993 . $ $ Issuance of founders shares 16,942 - Sale of common stock . . . 63,050 - Net loss . . . . . . . . . - (7,186) ---------- --------- BALANCE AT DECEMBER 31, 1993 79,992 (7,186) Net loss . . . . . . . . . - (7,000) ---------- --------- BALANCE AT DECEMBER 31, 1994 79,992 (14,186) Sale of 600,000 shares, net of underwriting discounts and offering costs . . . 5,356,073 - Net income . . . . . . . . - 100,523 Accretion to redemption value of common stock . . - (33,033) ---------- --------- BALANCE AT DECEMBER 31, 1995 5,436,065 53,304 ---------- --------- Net Income (unaudited) . . - 100,684 Accretion to redemption value of stock (Unaudited) . . . . . . . - (37,387) ---------- --------- BALANCE AT SEPTEMBER 30, 1996 (unaudited) . . . . . . . . . $5,436,065 $116,601 ========== ========= See accompanying notes to financial statements. F-5 INITIAL ACQUISITION CORP. (A CORPORATION IN THE DEVELOPMENT STAGE) STATEMENTS OF CASH FLOWS ------------------------- YEAR ENDED DECEMBER 31, ------------------------------------ 1995 1994 1993 ------ ------ ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) . . . $ 100,523 $ (7,000) $ (7,186) Adjustments to reconcile net income (loss) to net cash used in operating activities: Accrued interest income . . . . . . . (214,370) - - Change in assets and liabilities: Accrued expenses . 31,640 - 6,000 Income taxes payable . . . . . 52,000 - - ---------- ---------- ----------- Deferred acquisition cost Net cash used in operating activities . . (30,207) (7,000) (1,186) ----------- ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of U.S. Treasury Bills . . . . . Proceeds from U.S. Treasury Bills . . . . . (5,999,218) - - ------------ ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of common stock . . . . . - - 82,325 Net proceeds from public offering . . . 6,260,457 - - Deferred registration costs . . . . . . . . 63,043 (10,821) (52,222) --------- ---------- ----------- Net cash provided by (used in) financing activities . . . . . . 6,323,500 (10,821) 30,103 --------- ---------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . 294,075 (17,821) 28,917 CASH AND CASH EQUIVALENTS, beginning of year . . . 11,096 28,917 - --------- ---------- ----------- CASH AND CASH EQUIVALENTS, end of year . . . . . . $ 305,171 $11,096 $28,917 =========== ========== =========== See accompanying notes to financial statements. PERIOD JANUARY 1, 9 MONTHS 9 MONTHS 1993 TO ENDED ENDED SEPTEMBER 30, 9/30/96 9/30/95 1996 ----------- ----------- ------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) . . . $ 100,684 $ 107,823 $187,021 Adjustments to reconcile net income (loss) to net cash used in operating activities: Accrued interest income . . . . . . . (255,412) (117,666) (469,782) Change in assets and liabilities: Accrued expenses . 40,671 2,500 78,311 Income taxes payable . . . . . 32,150 (6,000) 84,150 Deferred acquisition cost (21,099) -0- (21,099) --------- -------- --------- Net cash used in operating activities . . (103,006) (13,343) (141,399) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of U.S. Treasury Bills (6,412,283) (5,999,218) (12,411,501) Proceeds from U.S. Treasury Bills . . . . . 6,412,283 -0- 6,412,283 ----------- ---------- ----------- -0- 5,999,218 (5,999,218) ----------- ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of common stock . . . . . 6,260,457 6,260,457 Net proceeds from public offering . . . 63,043 82,325 Deferred registration costs . . . . . . . . - -0- -0- --------- ---------- ----------- Net cash provided by (used in) financing activities . . . . . . - 6,323,500 6,342,782 --------- ---------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . (103,006) 310,939 202,165 CASH AND CASH EQUIVALENTS, beginning of year . . . 305,171 11,096 -0- --------- -------- --------- CASH AND CASH EQUIVALENTS, end of year . . . . . . $ 202,165 $ 322,035 $202,165 ========== ========== ========= See accompanying notes to financial statements. F-6 INITIAL ACQUISITION CORP. (A CORPORATION IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS ----------------------------- NOTE 1 - ORGANIZATION AND BUSINESS OPERATIONS --------------------------------------------- Initial Acquisition Corp. (the "Company") is a "blank check" or "blind pool" company which was formed on November 18, 1992 to serve as a vehicle to effect a merger, exchange of capital stock, asset acquisition or other business combination (a "Business Combination") with an operating business (a "Target Business"). Operations and cash transactions did not occur until 1993; accordingly, financial statements have been presented commencing on January 1, 1993. The business objective of the Company is to effect a Business Combination with a Target Business which the Company believes has significant growth potential. To date, the Company has not effected a Business Combination. On May 23, 1995 (the "Closing Date" or "Effective Date"), the Company consummated its initial public offering (the "Offering") of (a) 600,000 units (the "Units"), each Unit consisting of (i) one share of common stock, $.01 par value per share (the "Common Stock"), and (ii) one Class A Common Stock Purchase Warrant (the "Class A Warrants") entitling the holder thereof to purchase one share of Common Stock, and (b) 255,000 Redeemable Class B Unit Purchase Warrants (the "Class B Warrants"), each such Class B Warrant entitling the holder thereof to purchase one Unit. On the Closing Date, the Registrant received net proceeds of approximately $6,300,000 (the "Net Proceeds"), after giving effect to the payment of all underwriting discounts, the underwriters' non-accountable expense allowance and Offering expenses. Pursuant to the terms of the Offering, approximately $6 million of Net Proceeds, representing an amount equal to the gross proceeds from the sale of the Units, was placed in escrow with The Chase Manhattan Bank, N.A., subject to release in accordance with the terms of the Offering. These Net Proceeds have been invested in United States Treasury Bills and Commercial Paper. The Company, prior to the consummation of any Business Combination, will submit such transaction to the Company's stockholders for their approval, even if the nature of the acquisition is such as would not ordinarily require stockholder approval under applicable state law. All of the Company's present stockholders, including all directors and the Company's executive officer, have agreed to vote their respective shares of common stock in accordance with the vote of the majority of the shares voted by all other stockholders of the Company ("non-affiliated public stockholders") with respect to any such Business Combination. A Business Combination will not be consummated unless approved by a vote of two-thirds of the shares of common stock owned by non-affiliated public stockholders. At the time the Company seeks stockholder approval of any potential Business Combination, the Company will offer ("Redemption Offer") each of the non-affiliated public stockholders of the Company the right, for a specified period of time not less than 20 calendar days, to redeem his shares of common stock. In connection with the Redemption Offer, if non-affiliated public stockholders holding less than 15% of the common stock elect to redeem their shares, the Company may, but will not be required to, proceed with such Business Combination and, if the Company elects to so proceed, will redeem such shares by dividing (A) the greater of (i) the Company's net worth as reflected in the Company's financial statements or (ii) the amount of the proceeds of the Company in the escrow account by (B) the number of shares held by non-affiliated public stockholders ("Liquidation Value"). In any case, if non-affiliated public stockholders holding 15% or more of the common stock elect to redeem their shares, the Company will not proceed with such potential Business Combination and will not redeem such shares. F-7 INITIAL ACQUISITION CORP. (A CORPORATION IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) ----------------------------- NOTE 1 - ORGANIZATION AND BUSINESS OPERATIONS (continued) --------------------------------------------------------- Accordingly, Public Stockholders holding 14.99% of the aggregate number of shares owned by all Public Stockholders may have their shares converted to cash in the event of a Business Combination. Such Public Stockholders are entitled to receive their per share interest in the escrow account computed without regard to shares held by Initial Stockholders. Accordingly, a portion of the net proceeds from the Offering (14.99% of the amount held in the escrow account) has been classified as common stock subject to possible redemption in the accompanying balance sheet at the redemption value. All shares of the common stock outstanding immediately prior to the date of the Offering were placed in escrow until the earlier of (i) the occurrence of the first Business Combination, (ii) 18 months from the effective date of the Offering or (iii) 24 months from the effective date of the Offering if prior to the expiration of such 18 month period the Company has become a party to a letter of intent or a definitive agreement to effect a Business Combination, in which case such period shall be extended six months. During the escrow period, the holders of escrowed shares of common stock will not be able to sell or otherwise transfer their respective shares of common stock (with certain exceptions), but will retain all other rights as stockholders of the Company, including, without limitation, the right to vote escrowed shares of common stock, subject to their agreement to vote their shares in accordance with a vote of a majority of the shares voted by non-affiliated public stockholders with respect to a Business Combination or liquidation proposal. If the Company does not effect a Business Combination within 18 months from the effective date or 24 months from the effective date if the extension criteria have been satisfied, the Company will submit for stockholder consideration a proposal to liquidate the Company and, if approved, distribute to the then holders of common stock (issued in the Offering or acquired in the open market thereafter) all assets remaining available for distribution after payment of liabilities and after having made appropriate provision for the payment of liquidating distributions upon each class of stock, if any, having preference over the common stock. F-8 INITIAL ACQUISITION CORP. (A CORPORATION IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) ------------------------------------- NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --------------------------------------------------- Supplemental Cash Flow Information The Company considers all short-term, highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company's cash and cash equivalents are carried at cost, which approximates market value, and consist of commercial paper. Cash equivalents as of December 31, 1995 are $300,000. Net Earnings (Loss) Per Common Share Net earnings (loss) per common share for the years ended December 31, 1995 and 1994 are computed by dividing net earnings (loss) by the weighted average common shares outstanding during the year. The assumed exercise of common stock equivalents was not utilized since the effect was anti-dilutive. Income Taxes The Company follows the Financial Accounting Standards Board ("FASB") Statement No. 109. This statement requires that deferred income taxes be recorded following the liability method of accounting and be adjusted periodically when income tax rates change. Deferred taxes are not material. Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from these estimates. NOTE 3 - INVESTMENTS -------------------- The Company had invested the majority of the proceeds from the Offering in United States Treasury Bills. These Treasury Bills, which were purchased at a discount, are presented at their accreted cost, which approximates market. The Treasury Bills mature in October of 1996. NOTE 4 - INCOME TAXES --------------------- Income taxes are provided based on the liability method of accounting pursuant to Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Deferred income taxes are recorded to reflect the tax consequences on future years' differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. Valuation allowances are established for those income tax benefits where reliability is uncertain. F-9 INITIAL ACQUISITION CORP. (A CORPORATION IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) ----------------------------- Provision for income taxes consist of the following: 1995 1994 1993 -------- -------- -------- Current: Federal $40,000 $ - $ - State $12,000 ------- -------- ------- Current tax expense $52,000 $ - $ - ======= ======== ======= In 1995, the Company utilized net operating loss carryforwards from the prior year in the amount of approximately $7,000. NOTE 5 - COMMITMENT ------------------- (a) The Company presently occupies office space provided by a stockholder. Such stockholder has agreed that, until the acquisition of a target business by the Company, he will make such office space, as well as certain office and secretarial service, available to the Company, as may be required by the Company from time to time at the rate of $500 per month. Upon completion of the Offering, in May 1995, the monthly payment increased to $2,500. Such costs reflected in the financial statements amount to $20,000, $6,000 and $6,000 for the years ended December 31, 1995, 1994 and 1993, respectively. (b) The Company has retained an investment banker, for the 18-month period commencing as of May 15, 1995 (the "Engagement Period"), to aid in structuring and negotiating Business Combinations. The investment banker has been and will continue to be paid an engagement fee of $3,500 per month during the Engagement Period, with maximum compensation payable thereunder limited to $63,000 for such 18-month period, or $84,000 if the extension criteria are satisfied and the agreement with the investment banker is extended for the full six months. In addition, in 1993, the Company issued 15,000 shares of common stock at a price $.10 per share for its agreement to act as the Company's investment banker. NOTE 6 - WARRANTS ----------------- In April 1994, the Company issued warrants to purchase 160,000 units at $10.00 per unit, each unit to be identical to the Units issued in the Offering, exercisable until the fifth anniversary of the date of the Prospectus. In April 1994, the Company issued warrants to purchase up to 50,000 shares of Common Stock, at an exercisable price of $.10 per share, to an executive of the Company. These warrants are exercisable for the one-year period following the consummation of a Business Combination. At the time of a Business Combination, a compensation charge will be incurred for the difference between the exercise price and the fair market value of the shares purchased. F-10 INITIAL ACQUISITION CORP. (A CORPORATION IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) ----------------------------- NOTE 6 - WARRANTS (continued) ----------------------------- In connection with the Offering, the Company issued warrants to the underwriters for 60,000 units at an exercise price of $11.00 per unit and 24,000 Class B warrants at an exercise price of $5.775 per unit. These warrants are exercisable for a period of four years commencing one year from the date of the Prospectus. NOTE 7 - SUBSEQUENT EVENT (UNAUDITED) On November 1, 1996, the Company entered into a definitive merger agreement ("Merger Agreement") with Hollis-Eden, Inc. The merger transaction (the "Merger") is subject to the approval of the stockholders of IAC. The Merger Agreement provides for, among other things, the Merger of the Company with and into Hollis-Eden, Inc., with the Company surviving the Merger. At the effective time of the Merger, the outstanding shares of common stock of the Company will be converted to 4,911,004 shares of IAC common stock. The Merger Agreement also encompasses several other agreements including, but not limited to, employment agreement for a key employee, stock options granted to certain of the Company's shareholders and an employee stock option plan. For accounting and financial reporting purposes, the Merger will be treated as a reverse acquisition with Hollis-Eden being the acquiror. F-11 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Hollis-Eden, Inc. In our opinion, the accompanying balance sheet and the related statements of operations, of stockholders' deficit, and of cash flows present fairly, in all material respects, the financial position of Hollis-Eden, Inc. (a development stage company) at December 31, 1995 and 1994, and the results of its operations and its cash flows for the year ended December 31, 1995, the period from inception (August 15, 1994) to December 31, 1994, and the period from inception (August 15, 1994) to December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Hollis-Eden's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 to the financial statements, the Company is a development stage enterprise which has not yet commenced business operations, has no operating history to date, and is dependent upon additional debt or equity financing. In addition, the Company has a stockholders' deficit of $1,537,633 at December 31, 1995. Such factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. /s/ Price Waterhouse LLP Price Waterhouse LLP Portland, Oregon April 19, 1996 F-12 HOLLIS-EDEN, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET DECEMBER 31, --------------------------- SEPTEMBER 30, 1995 1994 1996 ----------- ------------ -------------- (UNAUDITED) ASSETS Current Assets Cash $ 0 $ 0 $ 227,657 Other receivables 0 0 90,300 Prepaid expenses 0 0 19,572 ---------- ------------ ----------- Total current assets 0 0 337,529 Property and Equipment, net of accumulated depreciation of $339 0 0 6,662 ----------- ------------ ----------- Total Assets $ 0 $ 0 $ 344,191 =========== ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Accrued expenses $ 92,111 $ 0 $ 37,641 Accrued expenses for clinical trials 150,000 0 0 Wages payable 0 0 59,478 Accounts payable 0 0 15,336 Accounts payable to related party (Note 8) 73,040 0 0 Note payable to related party (Notes 3 and 8) 250,000 210,000 0 License fees payable to related party (Note 6) 928,000 927,000 600,000 Accrued interest (Notes 3 and 8) 44,482 6,720 0 --------- --------- -------- Total liabilities 1,537,633 1,143,720 712,455 --------- --------- -------- Commitments and contingencies (Note 6) Stockholders' (deficit) (Note 5) Preferred Stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding 0 0 0 Common Stock, $.0001 par value, 30,000,000 shares authorized; 4,150,943 and 3,396,226 and 4,911,004 shares issued and outstanding 415 340 491 Additional Paid-in capital 410,689 132,986 2,050,238 Deficit accumulated during development stage (1,948,737) (1,277,046) (2,418,993) ---------- ---------- ---------- Total stockholders' (deficit) (1,537,633) (1,143,720) (368,264) ---------- ---------- ---------- Total liabilities and stockholders' equity (deficit) $ 0 $ 0 $ 344,191 =========== =========== =========== The accompanying notes are an integral part of this statement. F-13 HOLLIS-EDEN, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF OPERATIONS PERIOD FROM PERIOD FROM INCEPTION INCEPTION FOR THE (AUGUST 15, (AUGUST 15, YEAR ENDED 1994) TO 1994) TO DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1994 1995 -------------- --------------- -------------- Operating expenses: Research and development $ 463,000 $ 1,166,762 $1,629,762 General and administrative 170,929 103,564 274,493 ----------- ----------- ---------- Total operating expenses 633,929 1,270,326 1,904,255 ----------- ----------- ---------- Other income (expense): Interest income 0 0 0 Interest expense (37,762) (6,720) (44,482) ----------- ----------- ---------- Total other income (expense) (37,762) (6,720) (44,482) ----------- ----------- ---------- Net loss $ (671,691) $ (1,277,046) $(1,948,737) =========== ============ =========== Net loss per share $ (0.17) $ (0.38) $(0.54) Weighted average number of common shares outstanding 3,867,924 3,396,228 3,632,075 FOR THE PERIOD FROM NINE MONTHS ENDED INCEPTION SEPTEMBER 30, (AUGUST 15, 1994) ----------------------- TO SEPTEMBER 30, 1996 1995 1996 -------- -------- ---------------- (UNAUDITED) (UNAUDITED) Operating expenses: Research and development $ 124,093 $ 463,000 $ 1,753,855 General and administrative 346,229 138,429 620,722 --------- --------- ----------- Total operating expenses 470,322 601,429 2,374,577 --------- --------- ----------- Other income (expense): Interest income 3,208 0 3,208 Interest expense (3,142) (28,322) (47,624) --------- --------- ----------- Total other income (expense) 66 (28,322) (44,416) --------- --------- ----------- Net loss $(470,256) $(629,751) $(2,418,993) ========== ========= =========== Net loss per share $ (0.10) $ (0.17) $ (0.61) Weighted average number of common shares outstanding 4,573,199 3,773,585 3,945,783 The accompanying notes are an integral part of this statement. F-14 HOLLIS-EDEN, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' DEFICIT COMMON STOCK $.0001 PAR VALUE ADDITIONAL ----------------- PAID-IN SHARES AMOUNT CAPITAL ------ ------ ---------- Contribution by stockholder . . . . 0 $ 0 $ 103,564 Common stock issued for cash . . . . . . 2,852,830 285 24,715 Common stock issued as consideration for amendments to the license agreements (Note 6) . . . . . . 543,396 55 4,707 Net Loss . . . . . . 0 0 0 --------- ----- ------- Balance at Dec. 31, 1994 . . . . . . . . 3,396,226 340 132,986 Common stock issued for cash . . . . . . 679,245 68 249,932 Common stock issued as consideration for amendments to the license agreements (Note 6) . . . . . . 75,472 7 27,771 Net Loss . . . . . . 0 0 0 -------- ----- ------- Balance at Dec. 31, 1995 . . . . . . . . 4,150,943 415 $ 410,689 Common stock issued in conversion of debt (unaudited) . . . . 164,962 16 371,148 Common stock issued for cash, net of issuance costs of $70,512 (unaudited) 580,005 58 1,234,441 Common stock issued as consideration for termination of a financing agreement (unaudited) . . . . . 15,094 2 33,960 Net Loss (unaudited) 0 0 0 --------- ----- --------- Balance at September 30, 1996 (unaudited) 4,911,004 $ 491 $2,050,238 ========= ====== ========== DEFICIT ACCUMULATED DURING DEVELOPMENT STAGE TOTAL --------------- -------------------- Contribution by stockholder . . . . $ 0 $ 103,564 Common stock issued for cash . . . . . . 0 25,000 Common stock issued as consideration for amendments to the license agreements (Note 6) . . . . . . 0 4,762 Net Loss . . . . . . (1,277,046) (1,277,046) ---------- ---------- Balance at Dec. 31, 1994 . . . . . . . . (1,277,046) (1,143,720) Common stock issued for cash . . . . . . 0 250,000 Common stock issued as consideration for amendments to the license agreements (Note 6) . . . . . . 0 27,778 Net Loss . . . . . . (671,691) (671,691) ---------- ----------- Balance at Dec. 31, 1995 . . . . . . . . $(1,948,737) $(1,537,633) Common stock issued in conversion of debt (unaudited) . . . . 0 371,164 Common stock issued for cash, net of issuance costs of $70,512 (unaudited) 0 1,234,499 Common stock issued as consideration for termination of a financing agreement (unaudited) . . . . . 0 33,962 Net Loss (unaudited) (470,256) (470,256) --------- --------- Balance at September 30, 1996 (unaudited) $(2,418,993) $ (368,264) =========== ========== The accompanying notes are an integral part of this statement. F-15 HOLLIS-EDEN, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CASH FLOWS PERIOD FROM INCEPTION PERIOD FROM (AUGUST 15, INCEPTION FOR THE 1994) (AUGUST 15, YEAR ENDED TO DECEMBER 1994) TO DECEMBER 31, 31, DECEMBER 31, 1995 1994 1995 ------------ ----------- ----------- Cash flows from operating activities: Net Loss . . . . . . . . . $(671,691) $(1,277,046) $(1,948,737) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation . . . . . . 0 0 0 Common stock issued as consideration for amendments to the license agreements. . . 27,778 4,762 32,540 Common Stock issued as consideration for termination of a finance agreement . . 0 0 0 Increase in other receivables . . . . . . 0 0 0 Increase in prepaid expenses . . . . . . . 0 0 0 Increase (decrease) in accrued expenses . . . 92,111 0 92,111 Increase (decrease) in accrued expenses for clinical trials . . . . 150,000 0 150,000 Increase in wages payable 0 0 0 Increase in accounts payable . . . . . . . . 0 0 0 Increase (decrease) in accounts payable to related party . . . . . 73,040 0 73,040 Increase (decrease) in license fees payable to related party. . . . 1,000 927,000 928,000 Increase (decrease) in 37,762 6,720 44,482 accrued interest . . . -------- -------- -------- Net cash used in (290,000) (338,564) (628,564) operating activities -------- -------- -------- Cash flow provided by investing activities: Purchase of property and 0 0 0 equipment . . . . . . . . -------- -------- -------- Net cash used in investing 0 0 0 activities . . . . . -------- -------- -------- Cash flows from financing activities: Borrowings from related party . . . . . . . . 40,000 210,000 250,000 Payments to related party . . . . 0 0 0 PERIOD FROM INCEPTION FOR THE (AUGUST 15, NINE MONTHS ENDED 1994) SEPTEMBER 30, TO SEPTEMBER --------------------- 30, 1996 1995 1996 --------------------- ------------ (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net Loss . . . . . . . . . . $(470,256) $(629,751) $(2,418,993) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation . . . . . . . 339 0 339 Common stock issued as consideration for amendments to the license agreements . . . 0 27,778 32,540 Common Stock issued as consideration for termination of a finance agreement . . 33,962 0 33,962 Increase in other receivables . . . . . . . (90,300) 0 (90,300) Increase in prepaid expenses . . . . . . . . (19,572) 0 (19,572) Increase (decrease) in accrued expenses . . . . (54,470) 67,111 37,641 Increase (decrease) in accrued expenses for clinical trials . . . . . (150,000) 150,000 0 Increase in wages payable . 59,478 0 59,478 Increase in accounts payable to related party . . 15,336 0 15,336 Increase (decrease) in accounts payable to related party . . . . . . (73,040) 50,540 0 Increase (decrease) in license fees payable . . (328,000) 16,000 600,000 Increase (decrease) in (44,482) 28,322 0 accrued interest . . . . --------- ------- --------- Net cash used in (1,121,005) (290,000) (1,749,569) operating activities . --------- ------- --------- Cash flow provided by investing activities: Purchase of property and (7,001) 0 (7,001) equipment . . . . . . . . --------- ------- --------- Net cash used in investing (7,001) 0 (7,001) activities . . . . . . --------- ------- --------- Cash flows from financing activities: Borrowings from related party . . . . . . . . . 0 40,000 250,000 Payments on note payable to related party . . . . . (250,000) 0 (250,000) The accompanying notes are an integral part of this statement. F-16 HOLLIS-EDEN, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CASH FLOWS (CONTINUED) PERIOD FROM PERIOD FROM INCEPTION INCEPTION FOR THE (AUGUST 15, (AUGUST 15, YEAR ENDED 1994) 1994) TO DECEMBER 31, TO DECEMBER 31 DECEMBER 31, 1995 1994 1995 ------------ -------------- ------------ Contributions from stockholder . . . . . $ 0 $103,564 $103,564 Net proceeds from sale of common stock . . . . . 250,000 25,000 275,000 Proceeds from issuance of debt . . . . . . . . . 0 0 0 ------- ------- ------- Net cash provided by financing activities . . 290,000 338,564 628,564 ------- ------- ------- Net increase in cash . . . . 0 0 0 0 0 0 Cash at beginning of period . ------- ------- ------- $ 0 $ 0 $ 0 Cash at end of period . . . . ======== ======= ======= Supplemental disclosure of cash flow information: Interest paid . . . . . $ 0 $ 0 $ 0 Conversion of debt to equity . . . . . . $ 0 $ 0 $ 0 PERIOD FROM INCEPTION FOR THE (AUGUST 15, NINE MONTHS ENDED 1994) SEPTEMBER 30, SEPTEMBER ----------------- 30, 1996 1995 1996 ---- ---- ----------- (UNAUDITED) (UNAUDITED) Contributions from stockholder . . . . . . $ 0 $ 0 $ 103,564 Net proceeds from sale of common stock . . . . . . 1,234,499 250,000 1,509,499 Proceeds from issuance of debt . . . . . . . . . . 371,164 0 371,164 --------- ------- --------- Net cash provided by financing activities. . 1,355,663 290,000 1,984,227 --------- ------- --------- Net increase in cash . . . . . 227,657 0 227,657 0 0 0 Cash at beginning of period . . --------- ------- --------- $ 227,657 $ 0 $ 227,657 Cash at end of period . . . . . ========= ======= ========= Supplemental disclosure of cash flow information: Interest paid . . . . . . . $ 44,482 $ 0 $ 44,482 Conversion of debt to equity . . . . . . . . $ 371,164 $ 0 $ 371,164 The accompanying notes are an integral part of this statement. F-17 HOLLIS-EDEN, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS 1. THE COMPANY Hollis-Eden, Inc. (the Company) was formed on August 15, 1994 to engage in the development and commercialization of therapeutic pharmaceutical agents for the treatment of immune disorders. The Company's development efforts are based upon the pioneering research conducted by Dr. Patrick T. Prendergast through his research and development organization, Edenland, Inc. The Company has extensive business arrangements with Edenland, Inc. (See Note 6) and both Edenland, Inc., and Dr. Prendergast are significant stockholder's of the Company. The Company has adopted a December 31 year end. The Company is a development stage company that was organized under the laws of the State of Delaware. Since its inception (August 15, 1994), the Company's efforts have been directed toward organizing and preparing for private offerings of shares of its common stock. As a result, the Company has not developed commercial products or generated sales for the period August 15, 1994 through December 31, 1995. The Company has a current and open Investigational New Drug (IND) with the Food and Drug Administration (FDA) and has completed Phase I of testing for purposes of obtaining FDA approval. Continued development of these products will require the Company to renew its licenses with related parties and fund a development contract with such related parties that are discussed in Note 6. No liability has been recorded for the renewal and execution of such executory obligations. Management plans include performing additional clinical trials and, depending upon the success of those trials, raising additional funds through private placement offerings and/or an initial public offering. However, there can be no assurance that the Company will successfully raise additional funds to sustain operations. 2. SUMMARY OF ACCOUNTING POLICIES PROPERTY AND EQUIPMENT Property and equipment is stated at cost and depreciated over the estimated useful lives of the assets (five years) using the straight-line method. RESEARCH AND DEVELOPMENT Research and development costs consist of license fee expenses related to license agreements with related parties as well as clinical trial expenses. Such amounts paid to related parties aggregated $313,000, $1,166,762, $1,479,762 and $1,479,762 for the year ended December 31, 1995 and for the periods from inception (August 15, 1994) to December 31, 1994, 1995 and September 30, 1996, respectively. Such expenses are recognized as research and development, as incurred. INCOME TAXES The Company provides for income taxes under the principles of Statement of Financial Accounting Standards No. 109 (SFAS 109) which requires that provision be made for taxes currently due and for the expected future tax effects of temporary differences between book and tax bases of assets and liabilities. FINANCIAL INSTRUMENTS The Company's financial instruments consist primarily of cash, accounts payable, accrued expenses, note payable to related party, and license fees payable. These financial instruments are stated at their respective carrying values in the December 31, 1995 and 1994 financial statements, which approximate their fair values. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NET LOSS PER SHARE Net loss per share is based upon the weighted average number of common shares. Common stock equivalents have been excluded from the computation as their effect is anti-dilutive. F-18 HOLLIS-EDEN, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENT In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 allows companies to choose whether to account for stock-based compensation on a fair value method or to continue to account for stock- based compensation under the current intrinsic value method as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company plans to adopt the disclosure alternative under SFAS 123 during 1996 and will continue to follow the provisions of APB Opinion No. 25. Accordingly, management of the Company believes that the impact of adoption will not have a significant effect on the Company's financial position, results of operations or liquidity. UNAUDITED INTERIM FINANCIAL STATEMENTS The information presented as of September 30, 1996, for the period from inception (August 15, 1994) to September 30, 1996, and nine months ended September 30, 1996 and 1995 has not been audited. In the opinion of management, the unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company's financial position as of September 30, 1996 and the results of its operations and cash flows for the period from inception (August 15, 1994) to September 30, 1996, and nine months ended September 30, 1996 and 1995. The interim results of operations are not necessarily indicative of results which may occur for the full fiscal year. 3. NOTE PAYABLE TO RELATED PARTY At December 31, 1995 and 1994, the Company had an unsecured note payable to a stockholder/officer in the amount of $250,000 and $210,000, respectively. This note payable is due on demand, with interest at 15%. This note was paid in full during April 1996. See further discussion in Note 8. 4. INCOME TAXES The Company has available a net operating loss carryforward of $150,000 at December 31, 1995 which may be carried forward as an offset to taxable income, if any, in future years through its expiration in 2009 to 2010. The Company has a net deferred tax asset comprised of capitalized start-up costs of $1,754,255, deferred interest deduction to a related party of $44,482 and the net operating loss carryforward. The net deferred tax asset has been fully reserved due to the uncertainty of the Company being able to generate net operating income under the more likely than not criteria of SFAS 109. 5. REVERSE STOCK SPLITS In March 1996, a 1 for 2.65 split of the Company's common stock was effected. Also, on February 13, 1995 there was a 3 for 5 split of the Company's common stock. All stock splits have been retroactively restated for all periods presented. 6. RELATED PARTY LICENSES AND OTHER AGREEMENTS AND COMMITMENTS AND CONTINGENCIES The Company entered into two license agreements and one research, development and option agreement as discussed in the following paragraphs. Pursuant to a license agreement dated May 18, 1994 (Original License Agreement) with related parties Patrick T. Prendergast, chief scientific officer and a significant stockholder, and with Colthurst Limited, a company controlled by Patrick T. Prendergast, the Company acquired the exclusive worldwide rights of Patrick T. Prendergast's patent rights, know-how and background technology relating to the treatment of human/animal immunodeficiency as disclosed in U.S. patent No. 4,956,355 entitled "Agents for the Arrest and Therapy of Retroviral Infections." Upon execution of this agreement, the Company paid a license fee of $100,000 and was contractually obligated to pay $250,000 no later than November 18, 1994. The payment of this obligation was delinquent at December 31, 1994 and was included in license fees payable on the balance sheet F-19 HOLLIS-EDEN, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) ----------------------------- at December 31, 1994. The agreement was amended on August 11, 1995 to change the license fee payment terms as discussed below in paragraph four. Also, per the Original License Agreement, if the Company obtained financing of at least $10,000,000 by December 31, 1995, payments of $15,000 per month for services commencing on June 1, 1994 through the completion of FDA Phase II would have been payable to Patrick T. Prendergast ($105,000 was included in license fees payable on the balance sheet at December 31, 1994 based on a pending financing agreement). These monthly service fees were eliminated entirely pursuant to an amendment to the agreement on March 17, 1995 and the previously accrued amount of $105,000 was restructured as discussed in paragraph 4 below. Per the amended license agreement, a renewal annual license fee of $500,000 is payable commencing 18 months after the $350,000 license fee, as discussed below in paragraph four, is paid. (See Note 9). Also, the Company had agreed to pay royalties of 6% on product revenues. In the event of a sale of sublicenses or any other third-party agreements, 25% of any fees are payable to Colthurst Limited. On August 25, 1994, the Company entered into a license agreement (Original License Agreement) with a related party, Edenland Inc., a company controlled by Patrick T. Prendergast for the exclusive worldwide rights of Patrick T. Prendergast's patent rights, know-how and background technology related to the anti-serum and to any other pharmaceutical product that becomes subject to the license agreement under the research, development and option agreement discussed below. Upon execution of this agreement, the Company paid a license fee of $25,000. The agreement was amended in August 1994 and required the Company to pay a license fee of $572,000 as follows: $150,000 payable no later than February 28, 1995, $300,000 on February 28, 1995, and $122,000 payable no later than March 31, 1995. These amounts were included in license fees payable on the balance sheet at December 31, 1994. The agreement was again amended on August 11, 1995 to change the license fee payment terms as discussed below in paragraph four. Per the Original License Agreement, the Company has agreed to pay royalties of 4% of product revenues. In the event of a sale of sublicenses or any other third-party agreements, 25% of any fees are payable to Edenland, Inc. Additionally, the Company granted Edenland, Inc. the option to receive payment of its royalties under the license agreement in the form of shares of the Company's stock. The option is limited to a maximum of 5% of the Company's outstanding shares at August 25, 1994. The option is subject to the anti-serum and/or vaccine developed therefrom receiving product approval and generating product revenues to the Company of at least $200,000,000. The option exercise price per share is the fair market value on the date when and if such revenue milestone is achieved, and the option has a term of five years beginning from such date. Effective August 11, 1995, Edenland, Inc., Colthurst Limited and the Company entered into amendments concerning the license fee payment terms to the two agreements described above. Under the August 11, 1995 amendment, the Company is obligated to pay $350,000 by April 28, 1996 and up to an additional $600,000 within 24 months of the $350,000 payment. The $600,000 fee will be payable by way of a five percent payment of the first $12,000,000 of net proceeds or funds or investments acquired by or expended on behalf of the Company by way of equity sale, partnership agreement, loan or other means. At the end of the 24 month period, any unpaid portion of the $600,000 fee is due immediately. If during the 24 month period the net proceeds exceed $12,000,000, then an additional fee is due by way of two and one-half percent of all such proceeds. As of December 31, 1995, the Company has paid $22,000 of the $350,000 fee, and the remaining $328,000 and the $600,000 fee have been included in license fees payable as of December 31, 1995 on the balance sheet. During April 1996, the $328,000 balance was paid in full. As consideration for entering into certain amendments, the Company issued 75,472 shares of the Company's common stock at fair market value to Edenland, Inc. and Colthurst Limited. Such valuation was determined by the Board of Directors and was changed to G&A for the year ended December 31, 1995. In August 1994, the Company entered into a contingent research development and option agreement, as amended, with Edenland, Inc. and Patrick T. Prendergast. The agreement provides for the development of the anti-serum to a stage of development that demonstrates the toxicity and safety profile and also indicates potential efficacy in Phase II (FDA) patient studies, and grants the Company the right of first option on new products developed by Edenland, Inc. The agreement commits the Company to pay for the development costs related to the anti-serum up to the amount of $3,000,000 contingent uopn the Company's receipt of funds realized by way of equity sale, sublicense, partnership agreements, loans, private placements and public offerings which take place following April 28, 1996 but not later than 24 months from 7 days following a private offering. Additionally, the Company has agreed to pay a maximum of $250,000 per year to fund off-budget projects to commence if and on the date the Company obtains $10,000,000 in financing. Commencing April 28, 1996, the Company has agreed to commit at least thirty percent of its annual research and development budget up to a maximum of $50 million during the term of this agreement, but at least a minimum of $2.0 million F-20 HOLLIS-EDEN, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) ----------------------------- and a maximum of $10 million for any given calendar year to pay development costs for the anti-serum or any new product developed per the agreement. 7. COMMON STOCK PURCHASE WARRANTS AND OPTIONS SERIES A WARRANTS During April 1996, in accordance with anti-dilution privileges triggered by the Offering (See Note 8), the Company issued 1,018,867 Series A Warrants to all stockholders of record as of March, 1995 to purchase the same number of shares of common stock at a price of $11.02 per share exercisable for a period of three years following the registration of the underlying shares. SERIES B WARRANTS During February 1995, the Company issued 37,736 Series B Warrants to Edenland, Inc. in consideration for an amendment to the Anti-Serum License Agreement. The warrants are exercisable until February 5, 2000, to purchase the same number of shares of common stock at a price of $15.90 per share. CONSULTANT'S OPTIONS On July 12, 1995, as payment for investor relations counseling and consulting services provided by Coffin Communications Group for the 12- month period ending July 1, 1996, Hollis-Eden issued to Coffin Communications Group an option, exercisable until July 12, 2000, to purchase 18,868 shares of common stock at a price of $2.65 per share, 9,434 shares at a price of $5.30 per share, and 9,434 shares at a price of $7.95 per share. In addition, the Company agreed to register the shares underlying the options for public sale as soon as is practicable. PLACEMENT AGENT WARRANTS The Company has agreed to issue to the Placement Agent, upon completion of the Offering in April 1996 (See Note 8), a warrant to purchase an aggregate of up to 445,000 shares of common stock, at an exercise price of $2.48 per share. If the Placement Agent is successful in arranging certain financings on behalf of the Company, additional warrants to purchase an aggregate of up to 452,830 shares of common stock, at an exercise price of $2,48 per share will be issued. 8. SUBSEQUENT EVENTS On January 21, 1996, the Company completed a $367,522 round of debt financing with a group of private investors (Bridge Finance Offering). These new notes are due on or before the earlier of (i) January 21, 1997 or (ii) the closing of a private or public offering of securities. These notes bear interest at 8% per annum. The Company may at its option repay these notes with common stock of the Company valued at a price of $2.25 per share or such price at which shares are sold to investors in the Bridge Finance Offering. Proceeds from this debt financing were used to repay the note and accounts payable to related party, and accrued interest totaling $367,522. During April 1996, these notes, plus accrued interest, were converted into 164,962 shares of common stock at a price of $2.25 per share. From March 19, 1996 through April 19, 1996, the Company privately issued 580,005 shares of the Company's common stock (the Offering) at an offering price of $2.25 per share. Total proceeds from this offering aggregated $1,305,011. Upon the completion of the Offering in April 1996, the Company was committed to issue 570,000 nonqualified stock options to certain employees, directors and consultants at an exercise price of $2.25 per share as approved by the Company's Board of Directors. The options vest at various times over a three-year period. An aggregate of 240,000 stock options will expire on March 15, 2003 and the remaining 330,000 stock options expire on March 15, 2006. 9. ADDITIONAL SUBSEQUENT EVENTS (UNAUDITED) During 1996, the board of directors approved a stock option plan for officers, directors, employees, and consultants of the company and authorized 500,000 shares to be reserved for the plan of which 330,500 shares have been granted to date at fair market value. F-21 HOLLIS-EDEN, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) ----------------------------- The Company has entered into an agreement to merge with Initial Acquisition Corp. ("IAC"), a blank check company. IAC will be the surviving company and will provide approximately $6.5 million of cash to the merged entity in addition to registering the common stock of the merged entity. The merger is expected to be effective during the first quarter of 1997. In October 1996, the Company and Colthurst Limited, entered into an amendment to the existing agreement (see note 6). The amendment changes the due date of the renewable annual license of $500,000 from October 1997 to the first date that one of the following events occurs: the Company raises a predetermined amount of capital occurring after May 18, 1994; the Company sublicenses the technology received under the Colthurst License Agreement; the Company generates sales; the Company licenses or funds new technologies not covered under the existing agreements; or, February 10, 1999. The amendment also requires an additional license fee of $10,000 per month beginning November 5, 1996 through the earlier of the effective date of the merger or May 5, 1997. This amendment is contingent upon the successful closure of the merger with Initial Acquisition Corp. In October 1996, the Company and Edenland, Inc. entered into an amendment to the existing Research, Development and Option agreement (see note 6). This amendment accelerates the date that the $3,000,000 payment for anti-serum development costs is to be made. A payment of $1,500,000 is payable upon the closure of the merger and the balance is contingent upon future funding events by allocating 22% of the funds raised to the Research, Development and Option agreement until the $3,000,000 has been paid in full. Under the existing agreement, the Company was obligated to fund $2,000,000 per year for research with the first payment due in April, 1997. This obligation will not commence until the Company raises an aggregate of $10 million in capital occurring after May 18, 1994. Payments made toward the $3,000,000 anti-serum development costs are deductible from the amounts due for the $2,000,000 per year of research. This amendment is contingent upon the successful closure of the merger with Initial Acquisition Corp. F-22 ANNEX A Agreement and Plan of Merger See Exhibit 2 ANNEX B Form of Certificate of Merger (which includes the form of Certificate of Incorporation of the Surviving Corporation) ANNEX B CERTIFICATE OF MERGER OF HOLLIS-EDEN, INC. INTO AND WITH INITIAL ACQUISITION CORP. The undersigned corporation does hereby certify: FIRST: That the name and state of incorporation of each of the constituent corporations of the merger are as follows: NAME STATE OF INCORPORATION ---- ---------------------- Hollis-Eden, Inc. Delaware Initial Acquisition Corp. Delaware SECOND: That an Agreement and Plan of Merger between the parties to the merger has been approved, certified, executed, and acknowledged by each of the constituent corporations in accordance with the requirements of subsections (b) and (c) of Section 251 of the General Corporation Law of the State of Delaware, and that pursuant to such Agreement and Plan of Merger, Initial Acquisition Corp. is the surviving corporation of the merger. THIRD: That the name of the surviving corporation of the merger is hereby amended to be Hollis-Eden Pharmaceuticals, Inc. FOURTH: That the Certificate of Incorporation and By-Laws of Hollis-Eden, Inc., a Delaware corporation, shall be the Certificate of Incorporation and By-Laws, respectively, of the surviving corporation. A copy of the Certificate of Incorporation of Hollis-Eden, Inc., as in effect on the date hereof is annexed hereto and made a part hereof as Exhibit A. --------- FIFTH: That an executed copy of the Agreement and Plan of Merger is on file at the principal place of business of Initial Acquisition Corp. located at 810 Seventh Avenue, New York, New York 10019. SIXTH: That a copy of the Agreement and Plan of Merger will be furnished by Initial Acquisition Corp. on request and without cost, to any stockholder of Initial Acquisition Corp. and Hollis-Eden, Inc. Dated: January ___, 1997 INITIAL ACQUISITION CORP. By:___________________________ Name: Title: HOLLIS-EDEN, INC. By:___________________________ Name: Title: Exhibit A AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF HOLLIS-EDEN, INC. Hollis-Eden, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certified as follows: FIRST: The name of this corporation is Hollis-Eden, Inc. SECOND: The date of the filing of the corporation's original Certificate of Incorporation with the Secretary of State of Delaware was August 15, 1994 under the name Holmedco Pharmaceuticals Corporation. THIRD: The Amended and Restated Certification of Incorporation was duly adopted by the Board of Directors in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware. FOURTH: In lieu of a meeting and vote of the stockholders of the Corporation, the holders of not less than a majority of the outstanding Common Stock have given written consent to the Amended and Restated Certificate of Incorporation in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. FIFTH: Prompt written notice was given pursuant to Section 228 of the General Corporation Law of the State of Delaware to those stockholders who did not approve the Amended and Restated Certificate of Incorporation by written consent. SIXTH: The Certificate of Incorporation of the corporation shall be amended and restated to read in full as follows: I. The name of this corporation is Hollis-Eden, Inc. II. The address of the registered office of the corporation in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, and the name of the registered agent of the corporation in the State of Delaware at such address is The Corporation Trust Company. III. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware. IV. A. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is forty million (40,000,000) shares. Thirty million (30,000,000) shares shall be Common Stock, each having a par value of one cent ($.01). Ten million (10,000,000) shares shall be Preferred Stock, each having a par value of one cent ($.01). B. The Preferred Stock may be issued, from time to time in one or more series. The Board of Directors is hereby authorized, by filing a certificate (a "Preferred Stock Designation") pursuant to the Delaware General Corporation Law, to fix or alter from time to time the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions of any wholly unissued series of Preferred Stock, and to establish from time to time the number of shares constituting any such series or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. V. For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: A. 1. The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of Directors which shall constitute the whole Board of Directors shall be fixed exclusively by one or more resolutions adopted by the Board of Directors. 2. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the adoption and filing of this Amended and Restated Certificate of Incorporation, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the adoption and filing of this Amended and Restated Certificate of Incorporation, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the adoption and filing of this Amended and Restated Certificate of Incorporation, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this Article, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 3. Subject to the rights of the holders of any series of Preferred Stock, no director shall be removed without cause. Subject to any limitations imposed by law, the Board of Directors or any individual director may be removed from office at any time with cause by the affirmative vote of the holders of a majority of the voting power of all the then-outstanding shares of voting stock of the corporation, entitled to vote at an election of directors (the "Voting Stock"). 4. Subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders, except as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. B. 1. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two- thirds percent (66-2/3%) of the voting power of all of the then- outstanding shares of the Voting Stock. The Board of Directors shall also have the power to adopt, amend, or repeal Bylaws. 2. The directors of the corporation need not be elected by written ballot unless the Bylaws so provide. 3. No action shall be taken by the stockholders of the corporation except at an annual or special meeting of stockholders called in accordance with the Bylaws. 4. Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption) and shall be held at such place, on such date, and at such time as the Board of Directors shall fix. 5. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. VI. A. A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended after approval by the stockholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director shall be eliminated or limited to the fullest extent permitted by the Delaware General corporation Law, as so amended. B. Any repeal or modification of this Article VI shall be prospective and shall not affect the rights under this Article VI in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. VII. A. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in paragraph B. of this Article VII, and all rights conferred upon the stockholders herein are granted subject to this reservation. B. Notwithstanding any other provisions of this Amended and Restated Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, this Amended and Restated Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal Articles V, VI and VII. IN WITNESS WHEREOF, the Corporation has caused this Amended and Restaetd Certificate of Incorporation to be signed by Richard B. Hollis, President, Chief Executive Officer and Secretary of the Corporation, this -- day of December, 1996. ------------------------------------ Richard B. Hollis President and Chief Executive Officer Attest: ----------------------------- Richard B. Hollis Secretary ANNEX C Form of By-Laws of the Surviving Corporation See Exhibit 4.2 ANNEX D IAC 1996 Incentive Stock Option Plan See Exhibit 10.3 ANNEX E Appraisal Rights Provisions of the Delaware General Corporation Law ANNEX E 262 APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to subsection (d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with subsection (d) of this section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to Section 228 of this title shall be entitled to an appraisal by the Court of Chancery of the fair value of his shares of stock under the circumstances described in subsections (b) and (c) of this section. As used in this section, the word "stockholder" means a holder of record of stock in a stock corporation and also a member of record of a nonstock corporation; the words "stock" and "share" mean and include what is ordinarily meant by those words and also membership or membership interest of a member of a nonstock corporation; and the words "depository receipt" mean a receipt or other instrument issued by a depository representing an interest in one or more shares, or fractions thereof, solely of stock of a corporation, which stock is deposited with the depository. (b) Appraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation to be effected pursuant to Sections 251, 252, 254, 257, 258, 263 or 264 of this title: (1) Provided, however,that no appraisal rights under this section shall be available for the shares of any class or series of stock, which stock, or depository receipts in respect thereof, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders; and further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the holders of the surviving corporation as provided in subsections (f) or (g) of Section 251 of this title. (2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything except: a. Shares of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respects thereof: b. Shares of stock of any other corporation, or depository receipts in respect thereof, which shares of stock or depository receipts at the effective date of the merger or consolidation will be either listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 holders; c. Cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a. and b. of this paragraph; or d. Any combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a., b. and c. of this paragraph. (3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under Section 253 of this title is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation. (c) Any corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation. If the certificate of incorporation contains such a provision, the procedures of this section,including those set forth in subsections (d) and (e) of this section,shall apply as nearly as is practicable. (d) Appraisal rights shall be perfected as follows: (1) If a proposed merger or consolidation for which appraisal rights are provided under this section is to be submitted for approval at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, shall notify each of its stockholders who was such on the record date for such meeting with respect to shares for which appraisal rights are available pursuant to subsections (b) or (c) hereof that appraisal rights are available for any or all of the shares of the constituent corporations, and shall include in such notice a copy of this section. Each stockholder electing to demand the appraisal of his shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a written demand for appraisal of his shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of his shares. A proxy or vote against the merger or consolidation shall not constitute such a demand. A stockholder electing to take such action must do so by a separate written demand as herein provided. Within 10 days after the effective date of such merger or consolidation, the surviving or resulting corporation shall notify each stockholder of each constituent corporation who has complied with this subsection and has not voted in favor of or consented to the merger or consolidation of the date that the merger or consolidation has become effective; or (2) If the merger or consolidation was approved pursuant to Section 228 or Section 253 of this title, each constituent corporation, either before the effective date of the merger or consolidation or within ten days thereafter, shall notify each of the holders of any class or series of stock of such constituent corporation who are entitled to appraisal rights of the approval of the merger or consolidation and that appraisal rights are available for any or all shares of such class or series of stock of such constituent corporation, and shall include in such notice a copy of this section; provided that, if the notice is given on or after the effective date of the merger or consolidation, such notice shall be given by the surviving or resulting corporation to all such holders of any class or series of stock of a constituent corporation that are entitled to appraisal rights. Such notice may, and, if given on or after the effective date of the merger or consolidation, shall, also notify such stockholders of the effective date of the merger or consolidation. Any stockholder entitled to appraisal rights may, within twenty days after the date of mailing of such notice, demand in writing from the surviving or resulting corporation the appraisal of such holder's shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such holder's shares. If such notice did not notify stockholders of the effective date of the merger or consolidation, either (i) each such constituent corporation shall send a second notice before the effective date of the merger or consolidation notifying each of the holders of any class or series of stock of such constituent corporation that are entitled to appraisal rights of the effective date of the merger or consolidation or (ii) the surviving or resulting corporation shall send such a second notice to all such holders on or within 10 days after such effective date; provided, however, that if such second notice is sent more than 20 days following the sending of the first notice, such second notice need only be sent to each stockholder who is entitled to appraisal rights and who has demanded appraisal of such holder's shares in accordance with this subsection. An affidavit of the secretary or assistant secretary or of the transfer agent of the corporation that is required to give either notice that such a notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. For purposes of determining the stockholders entitled to receive either notice, each constituent corporation may fix, in advance, a record date that shall be not more than 10 days prior to the date the notice is given; provided that, if the notice is given on or after the effective date of the merger or consolidation, the record date shall be such effective date. If no record date is fixed and the notice is given prior to the effective date, the record date shall be the close of business on the day next preceding the day on which the notice is given. (e) Within 120 days after the effective date of the merger or consolidation, the surviving or resulting corporation or any stockholder who has complied with subsections (a) and (d) hereof and who is otherwise entitled to appraisal rights, may file a petition in the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger or consolidation, any stockholder shall have the right to withdraw his demand for appraisal and to accept the terms offered upon the merger or consolidation. Within 120 days after the effective date of the merger or consolidation, any stockholder who has complied with the requirements of subsections (a) and (d) hereof, upon written request, shall be entitled to receive from the corporation surviving the merger or resulting from the consolidation a statement setting forth the aggregate number of shares not voted in favor of the merger or consolidation and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such written statement shall be mailed to the stockholder within 10 days after his written request for such a statement is received by the surviving or resulting corporation or within 10 days after expiration of the period for delivery of demands for appraisal under subsection (d) hereof, whichever is later. (f) Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation, which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the surviving or resulting corporation. If the petition shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the surviving or resulting corporation and to the stockholders shown on the list at the addresses therein stated. Such notice shall also be given by 1 or more publications at least 1 week before the day of the hearing, in a newspaper of general circulation published in the City of Wilmington, Delaware or such publication as the Court deems advisable. The forms of the notices by mail and by publication shall be approved by the Court, and the costs thereof shall be borne by the surviving or resulting corporation. (g) At the hearing on such petition, the Court shall determine the stockholders who have complied with this section and who have become entitled to appraisal rights. The Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction,the Court may dismiss the proceedings as to such stockholder. (h) After determining the stockholders entitled to an appraisal, the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. In determining the fair rate of interest, the Court may consider all relevant factors, including the rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the proceeding. Upon application by the surviving or resulting corporation or by any stockholder entitled to participate in the appraisal proceeding, the Court may, in its discretion, permit discovery or other pretrial proceedings and may proceed to trial upon the appraisal prior to the final determination of the stockholder entitled to an appraisal. Any stockholder whose name appears on the list filed by the surviving or resulting corporation pursuant to subsection (f) of this section and who has submitted his certificates of stock to the Register in Chancery, if such is required, may participate fully in all proceedings until it is finally determined that he is not entitled to appraisal rights under this section. (i) The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the stockholders entitled thereto. Interest may be simple or compound, as the Court may direct. Payment shall be so made to each such stockholder, in the case of holders of uncertificated stock forthwith, and the case of holders of shares represented by certificates upon the surrender to the corporation of the certificates representing such stock. The Court's decree may be enforced as other decrees in the Court of Chancery may be enforced, whether such surviving or resulting corporation be a corporation of this State or of any state. (j) The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares entitled to an appraisal. (k) From and after the effective date of the merger or consolidation, no stockholder who has demanded his appraisal rights as provided in subsection (d) of this section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the effective date of the merger or consolidation); provided, however, that if no petition for an appraisal shall be filed within the time provided in subsection (e) of this section, or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of his demand for an appraisal and an acceptance of the merger or consolidation, either within 60 days after the effective date of the merger or consolidations provided in subsection (e) of this section or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just. (l) The shares of the surviving or resulting corporation to which the shares of such objecting stockholders would have been converted had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS (i) IAC's Charter includes a provision that eliminates the personal liability of IAC's directors to IAC's stockholders for monetary damages for breach of fiduciary duty as a director to the maximum extent permitted by the DGCL. The DGCL does not permit liability to be eliminated (a) for any breach of a director's duty of loyalty to IAC or IAC's stockholders, (b) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (c) for unlawful payments of dividends or unlawful stock repurchases or redemptions, as provided in Section 174 of the DGCL, or (d) for any transaction for which the director derived an improper personal benefit. (ii) Article X of IAC's By-Laws provides generally for indemnification of all officers and directors to the fullest extent permitted under the above-referenced Delaware statute. Section 145 of the DGCL provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at its request in such capacity in another corporation or business association, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Exhibit No. Description ------- ----------- 2 Agreement and Plan of Merger by and among the Registrant, Hollis-Eden, Inc., Mr. Salvatore J. Zizza and Mr. Richard B. Hollis, dated as of November 1, 1996. 3.1 Certificate of Incorporation of the Registrant [incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (Commission File No. 33-60134) filed on April 13, 1995]. 3.2 By-laws of the Registrant [incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (Commission File No. 33-60134) filed on April 13, 1995]. 4.1 Form of Amended and Restated Certificate of Incorporation of Hollis-Eden, Inc.(1) 4.2 Form of Bylaws of Hollis-Eden, Inc.(2) 4.3 Form of Common Stock Certificate of the Registrant [incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (Commission File No. 33-60134) filed on April 13, 1995]. 4.4 Warrant Agency Agreement between American Stock Transfer & Company and the Registrant [incorporated by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-1 (Commission File No. 33-60134) filed on April 13, 1995]. 4.5 Form of Class A Common Stock Purchase Warrant of the Registrant [incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-1 (Commission File No. 33-60134) filed on April 13, 1995]. 4.6 Form of Class B Unit Purchase Warrant of the Registrant [incorporated by reference to Exhibit 4.4 to the Registrant's Registration Statement on Form S-1 (Commission File No. 33-60134) filed on April 13, 1995]. II-1 Exhibit No. Description ------- ----------- 4.7 Representative's Warrant of the Registrant [incorporated by reference to Exhibit 4.5 to the Registrant's Registration Statement on Form S-1 (Commission File No. 33-60134) filed on April 13, 1995]. 4.8 Representative's Warrant Agreement [incorporated by reference to Exhibit 4.6 to the Registrant's Registration Statement on Form S-1 (Commission File No. 33-60134) filed on April 13, 1995]. 5* Opinion of Reid and Priest LLP. 8 Tax Opinion of Cooley Godward LLP. 10.1 Form of Escrow Agreement for outstanding Common Stock of the Registrant [incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (Commission File No. 33-60134) filed on April 13, 1995]. 10.2 Engagement Letter, dated March 23, 1993, between Gruntal & Co. and the Registrant, [incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (Commission File No. 33-60134) filed on April 13, 1995]. 10.3 The Registrant's 1996 Incentive Stock Option Plan. 10.4 Hollis-Eden, Inc.'s 1996 Stock Option Plan (the "Option Plan"). 10.5 Forms of Incentive Stock Options and Nonstatutory Stock Options under the Option Plan. 10.6 Employment Agreement by and between Hollis-Eden, Inc. and Richard B. Hollis dated November 1,1996. 10.7 License Agreement by and among Hollis-Eden, Inc., Colthurst Limited and Patrick T. Prendergast, Ph.D. dated May 18, 1994, including all amendments thereto. 10.8 License Agreement by and among Hollis-Eden, Inc., Edenland, Inc. and Patrick T. Prendergast, Ph.D. dated August 25, 1994, including all amendments thereto. 10.9 Research, Development and Option Agreement by and among Hollis-Eden, Inc., Edenland, Inc. and Patrick T. Prendergast, Ph.D. dated August 25, 1994, including all amendments thereto. 10.10 Warrant Agreement with Laidlow Equities, Inc. covering 452,830 shares of Common Stock (included within Placement Agent Agreement dated January 26, 1996 between Laidlaw Equities, Inc. and Hollis-Eden, Inc.). 23.1 Consent of BDO Seidman, LLP. 23.2 Consent of Price Waterhouse LLP. 24.1 Power of Attorney. Reference is made to page II-5. --------------------------------- * To be filed by amendment. (1) To be filed by Hollis-Eden and to become the Certificate of Incorporation of the Surviving Corporation. (2) To be adopted by the Hollis-Eden and to become the Bylaws of the Surviving Corporation. ITEM 22. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate II-2 jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: (1) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request; (2) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective; (3) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (4) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (5) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering; II-3 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on December 19, 1996. INITIAL ACQUISITION CORP. By: /s/ Salvatore J. Zizza ---------------------------------------- Salvatore J. Zizza President KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below under the heading "Signatures" constitutes and appoints Salvatore J. Zizza his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post- effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney- in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection with the above premises, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney- in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- President, Chairman of the /s/ Salvatore J. Zizza Board of Directors, ------------------------ Treasurer and Director Salvatore J. Zizza (Principal Executive, Financial and Accounting December 19, 1996 Officer) Director December 19, 1996 /s/ Sidney Dworkin ------------------------ Sidney Dworkin Director December 19, 1996 /s/ Herbert M. Paul ------------------------ Herbert M. Paul Director December 19, 1996 /s/ Richard L. Bready ------------------------ Richard L. Bready Director December 19, 1996 /s/ Alan P. Donenfeld ------------------------ Alan P. Donenfeld II-4 INDEX TO EXHIBITS ----------------- Exhibit No. Description ------- ----------- 2 Agreement and Plan of Merger by and among the Registrant, Hollis-Eden, Inc., Mr. Salvatore J. Zizza and Mr. Richard B. Hollis, dated as of November 1, 1996. 4.1 Form of Amended and Restated Certificate of Incorporation of Hollis-Eden, Inc.(1) 4.2 Form of Bylaws of Hollis-Eden, Inc.(2) 5* Opinion of Reid and Priest LLP. 8 Tax Opinion of Cooley Godward LLP. 10.3 The Registrant's 1996 Incentive Stock Option Plan. 10.4 Hollis-Eden, Inc.'s 1996 Stock Option Plan (the "Option Plan"). 10.5 Forms of Incentive Stock Options and Nonstatutory Stock Options under the Option Plan. 10.6 Employment Agreement by and between Hollis-Eden, Inc. and Richard B. Hollis dated November 1,1996. 10.7 License Agreement by and among Hollis-Eden, Inc., Colthurst Limited and Patrick T. Prendergast, Ph.D. dated May 18, 1994, including all amendments thereto. 10.8 License Agreement by and among Hollis-Eden, Inc., Edenland, Inc. and Patrick T. Prendergast, Ph.D. dated August 25, 1994, including all amendments thereto. 10.9 Research, Development and Option Agreement by and among Hollis-Eden, Inc., Edenland, Inc. and Patrick T. Prendergast, Ph.D. dated August 25, 1994, including all amendments thereto. 10.10 Warrant Agreement with Laidlow Equities, Inc. covering 452,830 shares of Common Stock (included within Placement Agent Agreement dated January 26, 1996 between Laidlaw Equities, Inc. and Hollis-Eden, Inc.). 23.1 Consent of BDO Seidman, LLP. 23.2 Consent of Price Waterhouse LLP. 24.1 Power of Attorney. Reference is made to page II-5. --------------------------------- * To be filed by amendment. (1) To be filed by Hollis-Eden and to become the Certificate of Incorporation of the Surviving Corporation. (2) To be adopted by the Hollis-Eden and to become the Bylaws of the Surviving Corporation. EX-2 2 Exhibit 2 AGREEMENT AND PLAN OF MERGER BY AND AMONG INITIAL ACQUISITION CORP., A DELAWARE CORPORATION, HOLLIS-EDEN, INC., A DELAWARE CORPORATION, SALVATORE J. ZIZZA (FOR PURPOSES OF SECTION 5.6 AND ARTICLE XI ONLY) AND RICHARD B. HOLLIS (FOR PURPOSES OF SECTION 5.6 AND ARTICLE XI ONLY) TABLE OF CONTENTS PAGE ARTICLE I ADOPTION OF AGREEMENT AND PLAN OF MERGER . . . . 2 1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . 2 1.2 Effective Date of the Merger . . . . . . . . . . . . . 2 1.3 Surviving Corporation . . . . . . . . . . . . . . . . . 2 1.4 Certificate of Incorporation of the Surviving Corporation . . . . . . . . . . . . . . . . . 2 1.5 By-laws of the Surviving Corporation . . . . . . . . . 2 1.6 Directors and Officers . . . . . . . . . . . . . . . . 3 1.7 Plan of Merger . . . . . . . . . . . . . . . . . . . . 3 1.8 Exchange and Conversion of Shares of Hollis-Eden Common Stock and Outstanding Hollis-Eden Warrants and Hollis-Eden Options . . . . . . . . . . . . . . . . . . 7 ARTICLE II CLOSING . . . . . . . . . . . . 8 2.1 Closing Date . . . . . . . . . . . . . . . . . . . . . 8 2.2 Execution of Formal Merger Documents . . . . . . . . . 8 ARTICLE III REPRESENTATIONS AND WARRANTIES OF HOLLIS-EDEN . . . 9 3.1 Due Incorporation . . . . . . . . . . . . . . . . . . . 9 3.2 Due Authorization . . . . . . . . . . . . . . . . . . . 9 3.3 Consents and Approvals; Non-Contravention . . . . . . . 10 3.4 Capitalization . . . . . . . . . . . . . . . . . . . . 11 3.5 Financial Statements; Undisclosed Liabilities; Other Documents . . . . . . . . . . . . . . . . . . . . . . . 11 3.6 No Adverse Effects or Changes . . . . . . . . . . . . . 11 3.7 Title to Properties . . . . . . . . . . . . . . . . . . 12 3.8 Liabilities . . . . . . . . . . . . . . . . . . . . . . 12 3.9 Intellectual Property . . . . . . . . . . . . . . . . . 12 3.10 Contracts . . . . . . . . . . . . . . . . . . . . . . . 13 3.11 Insurance . . . . . . . . . . . . . . . . . . . . . . . 15 3.12 Employee Benefit Plans . . . . . . . . . . . . . . . . 15 3.13 Employees; Labor Matters . . . . . . . . . . . . . . . 15 3.14 Tax Matters . . . . . . . . . . . . . . . . . . . . . . 16 3.15 Environmental Regulations . . . . . . . . . . . . . . . 17 3.16 Litigation . . . . . . . . . . . . . . . . . . . . . . 17 3.17 No Conflict of Interest . . . . . . . . . . . . . . . . 18 3.18 Bank Accounts . . . . . . . . . . . . . . . . . . . . . 18 3.19 Compliance with Laws. . . . . . . . . . . . . . . . . . 18 3.20 Broker's/Finder's Fees . . . . . . . . . . . . . . . . 18 3.21 Board Recommendation . . . . . . . . . . . . . . . . . 18 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF IAC . . . . . 19 4.1 Due Incorporation . . . . . . . . . . . . . . . . . . . 19 4.2 Due Authorization . . . . . . . . . . . . . . . . . . . 19 4.3 Consents and Approvals; Non-Contravention . . . . . . . 19 4.4 Capitalization . . . . . . . . . . . . . . . . . . . . 20 4.5 Financial Statements; Undisclosed Liabilities; Other Documents . . . . . . . . . . . . . . . . . . . . . . . 20 4.6 No Adverse Effects or Changes . . . . . . . . . . . . . 21 4.7 Title to Properties . . . . . . . . . . . . . . . . . . 21 4.8 Liabilities . . . . . . . . . . . . . . . . . . . . . . 21 4.9 Real Property . . . . . . . . . . . . . . . . . . . . . 21 4.10 Intellectual Property . . . . . . . . . . . . . . . . . 21 4.11 Contracts . . . . . . . . . . . . . . . . . . . . . . . 22 4.12 Employee Benefit Plans . . . . . . . . . . . . . . . . 23 4.13 Tax Matters . . . . . . . . . . . . . . . . . . . . . . 23 4.14 Litigation . . . . . . . . . . . . . . . . . . . . . . 24 4.15 No Conflict of Interest . . . . . . . . . . . . . . . . 24 4.16 Bank Accounts . . . . . . . . . . . . . . . . . . . . . 25 4.17 Compliance with Laws . . . . . . . . . . . . . . . . . 25 4.18 Broker's/Finder's Fees . . . . . . . . . . . . . . . . 25 4.19 Board Recommendation . . . . . . . . . . . . . . . . . 25 4.20 Employee Matters . . . . . . . . . . . . . . . . . . . 25 4.21 SEC Filings . . . . . . . . . . . . . . . . . . . . . . 26 ARTICLE V COVENANTS . . . . . . . . . . . . 26 5.1 Implementing Agreement . . . . . . . . . . . . . . . . 26 5.2 Access to Information and Facilities . . . . . . . . . 26 5.3 Preservation of Business . . . . . . . . . . . . . . . 26 5.4 IAC and Hollis-Eden Stockholders' Meetings . . . . . . 29 5.5 Registration of IAC Common Stock . . . . . . . . . . . 29 5.6 Agreement to Vote . . . . . . . . . . . . . . . . . . . 30 5.7 Blue Sky Compliance . . . . . . . . . . . . . . . . . . 30 5.8 Listing . . . . . . . . . . . . . . . . . . . . . . . . 31 5.9 Consents and Approvals . . . . . . . . . . . . . . . . 31 5.10 Maintenance of Insurance . . . . . . . . . . . . . . . 31 5.11 Supplemental Information . . . . . . . . . . . . . . . 31 5.12 Hollis-Eden Lock-Up Letters . . . . . . . . . . . . . . 31 5.13 Patent Analyses . . . . . . . . . . . . . . . . . . . . 31 ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF IAC . . . . . . . . . . . . 33 6.1 Warranties True as of Both Present Date and Closing Date . . . . . . . . . . . . . . . . . . . . . 33 6.2 Compliance With Agreements and Covenants . . . . . . . 33 6.3 Consents and Approvals . . . . . . . . . . . . . . . . 33 6.4 Documents . . . . . . . . . . . . . . . . . . . . . . . 33 6.5 No Material Adverse Change . . . . . . . . . . . . . . 34 6.6 Actions or Proceedings . . . . . . . . . . . . . . . . 34 6.7 Opinion of Counsel for Hollis-Eden . . . . . . . . . . 34 6.8 Approval of Merger . . . . . . . . . . . . . . . . . . 34 6.9 IAC Redemption Right . . . . . . . . . . . . . . . . . 34 6.10 Patent Infringement and Patent Validity Analyses . . . 34 6.11 Appointment of Zizza as a Director . . . . . . . . . . 34 ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF HOLLIS-EDEN . 34 7.1 Warranties True as of Both Present Date and Closing Date . . . . . . . . . . . . . . . . . . . . . 35 7.2 Compliance with Agreements and Covenants . . . . . . . 35 7.3 Consents and Approvals . . . . . . . . . . . . . . . . 35 7.4 Documents . . . . . . . . . . . . . . . . . . . . . . . 35 7.5 No Material Adverse Change . . . . . . . . . . . . . . 35 7.6 Actions or Proceedings . . . . . . . . . . . . . . . . 35 7.7 Opinion of Counsel for IAC . . . . . . . . . . . . . . 35 7.8 Approval of Merger . . . . . . . . . . . . . . . . . . 35 7.9 Registration Statement Effective . . . . . . . . . . . 35 7.10 IAC Cash Position . . . . . . . . . . . . . . . . . . . 35 ARTICLE VIII DELIVERIES AT CLOSING . . . . . . . . . 36 8.1 Deliveries by Hollis-Eden . . . . . . . . . . . . . . . 36 8.2 Deliveries by IAC . . . . . . . . . . . . . . . . . . . 36 ARTICLE IX TERMINATION; TERMINATION FEE . . . . . . . 37 9.1 Termination . . . . . . . . . . . . . . . . . . . . . . 37 9.2 Effect of Termination . . . . . . . . . . . . . . . . . 38 9.3 Termination Fee . . . . . . . . . . . . . . . . . . . . 38 ARTICLE X EXCLUSIVITY . . . . . . . . . . . 38 ARTICLE XI INDEMNIFICATION . . . . . . . . . . 38 11.1 Survival . . . . . . . . . . . . . . . . . . . . . . . 38 11.2 Indemnification by Hollis . . . . . . . . . . . . . . . 39 11.3 Indemnification by Zizza . . . . . . . . . . . . . . . 39 11.4 Notice and Right to Defend Third Party Claims . . . . . 40 ARTICLE XII MISCELLANEOUS . . . . . . . . . . . 41 12.1 Expenses . . . . . . . . . . . . . . . . . . . . . . . 41 12.2 Amendment . . . . . . . . . . . . . . . . . . . . . . . 41 12.3 Confidentiality and Return of Information . . . . . . . 41 12.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . 41 12.5 Waivers . . . . . . . . . . . . . . . . . . . . . . . . 42 12.6 Interpretation . . . . . . . . . . . . . . . . . . . . 42 12.7 Applicable Law . . . . . . . . . . . . . . . . . . . . 42 12.8 Assignment . . . . . . . . . . . . . . . . . . . . . . 42 12.9 No Third Party Beneficiaries . . . . . . . . . . . . . 42 12.10 Further Assurances . . . . . . . . . . . . . . . . . . 43 12.11 Severability . . . . . . . . . . . . . . . . . . . . . 43 12.12 Remedies Cumulative . . . . . . . . . . . . . . . . . . 43 12.13 Entire Understanding . . . . . . . . . . . . . . . . . 43 12.14 Counterparts . . . . . . . . . . . . . . . . . . . . . 43 EXHIBITS Exhibit A - Form of Certificate of Merger Exhibit B - Form of Opinion of Counsel for Hollis-Eden Exhibit C - Form of Opinion of Counsel for IAC Exhibit D - Form of Escrow Agreement SCHEDULES Schedule 3.1 Hollis-Eden Due Incorporation Schedule 3.2 Hollis-Eden Consents and Approvals Schedule 3.4 Hollis-Eden Capitalization Schedule 3.5 Hollis-Eden Undisclosed Liabilities Schedule 3.6 Hollis-Eden No Adverse Effects or Changes Schedule 3.7 Hollis-Eden Title to Properties Schedule 3.8 Hollis-Eden Liabilities Schedule 3.9 Hollis-Eden Intellectual Property Schedule 3.10 Hollis-Eden Contracts Schedule 3.11 Hollis-Eden Insurance Schedule 3.12 Hollis-Eden Employee Benefit Plans Schedule 3.13 Hollis-Eden Employees; Labor Matters Schedule 3.14 Hollis-Eden Tax Matters Schedule 3.16 Hollis-Eden Litigation Schedule 3.17 Hollis-Eden Conflicts of Interest Schedule 3.18 Hollis-Eden Bank Accounts Schedule 3.19 Hollis-Eden Compliance with Laws Schedule 3.20 Hollis-Eden Broker's/Finder's Fee Schedule 5.13 Hollis-Eden Products Schedule 4.4 IAC Capitalization Schedule 4.6 IAC No Adverse Effects or Changes Schedule 4.10 IAC Intellectual Property Schedule 4.11 IAC Contracts Schedule 4.15 IAC No Conflict of Interest Schedule 4.16 IAC Bank Accounts AGREEMENT AND PLAN OF MERGER ---------------------------- AGREEMENT AND PLAN OF MERGER dated as of November 1, 1996, by and among INITIAL ACQUISITION CORP., a Delaware corporation ("IAC"), SALVATORE J. ZIZZA, an individual ("Zizza") (for purposes of Section 5.6 and Article XI only), HOLLIS-EDEN, INC., a Delaware corporation ("Hollis-Eden"), and RICHARD B. HOLLIS, an individual ("Hollis") (for purposes of Section 5.6 and Article XI only). W I T N E S S E T H : - - - - - - - - - - WHEREAS, IAC desires to acquire Hollis-Eden, and Hollis-Eden desires to be acquired by IAC, through the merger of Hollis-Eden with and into IAC pursuant to the terms hereinafter set forth (the "Merger"); and WHEREAS, IAC and Hollis-Eden each intend, for Federal income tax purposes, that the Merger contemplated hereby constitutes a reorganization pursuant to Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); and WHEREAS, the Board of Directors of IAC deems it advisable and in the best interest of IAC that Hollis-Eden be merged with and into IAC upon the terms and conditions hereinafter specified; and WHEREAS, the Board of Directors of Hollis-Eden deems it advisable and in the best interest of Hollis-Eden that Hollis- Eden be merged with and into IAC upon the terms and conditions hereinafter specified; and WHEREAS, IAC has an authorized capital stock consisting of 10,000,000 shares of Common Stock, $.01 par value per share (the "IAC Common Stock"), of which 833,250 shares are currently issued and outstanding, and 5,000 shares of Preferred Stock, $.01 par value per share (the "Preferred Stock"), of which no shares are currently issued or outstanding; and WHEREAS, Hollis-Eden has an authorized capital stock consisting of 30,000,000 shares of Common Stock, $.0001 par value per share (the "Hollis-Eden Common Stock"), of which 4,911,004 shares are currently issued and outstanding; and WHEREAS, Hollis-Eden currently also has outstanding Common Stock purchase warrants and options entitling the holders thereof to purchase an aggregate of up to 2,279,650 shares of Hollis-Eden Common Stock, all as further described herein (collectively, the "Hollis-Eden Warrants and Options"); and WHEREAS, Zizza and Hollis are the principal stockholders of IAC and Hollis-Eden, respectively. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter contained, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I ADOPTION OF AGREEMENT AND PLAN OF MERGER 1.1 The Merger. At the Effective Time (as defined in ---------- Section 1.2 herein), in accordance with this Agreement and the relevant provisions of the Delaware General Corporation Law (the "DGCL"), Hollis-Eden shall be merged with and into IAC. IAC shall be the Surviving Corporation to the Merger (the "Surviving Corporation") and IAC shall continue, and be deemed to continue, for all purposes after the Merger. The existence of Hollis-Eden shall cease at the Effective Time as a consequence of the Merger. Immediately following the Effective Time, the name of IAC shall be changed to "Hollis-Eden Pharmaceuticals, Inc." 1.2 Effective Date of the Merger. This Agreement shall ----------------------------- be submitted to the stockholders of each of Hollis-Eden and IAC as provided in Section 5.4 hereof, for approval as soon as practicable after the Registration Statement (as defined in Section 5.4 below) has been declared effective by the Securities and Exchange Commission (the "SEC"). Subject to the terms and conditions hereof, including, without limitation, IAC's and Hollis-Eden's right to terminate this Agreement without liability in accordance with Article IX hereof, upon the authorization, approval and adoption of this Agreement by the affirmative vote of the holders of not less than 66-2/3% of the outstanding shares of IAC Common Stock and the affirmative vote of the holders of not less than a majority of the outstanding shares of Hollis-Eden Common Stock, both as provided by the DGCL and the respective Certificates of Incorporation of IAC and Hollis-Eden, a Certificate of Merger, substantially in the form annexed hereto as Exhibit A (the "Certificate of Merger"), shall be executed in accordance with Section 103 of the DGCL and delivered to the Secretary of State of Delaware for filing (the time of such filing being the "Effective Time" and the date of such filing being the "Effective Date"). 1.3 Surviving Corporation. Following the Merger, IAC --------------------- shall continue to exist under, and be governed by, the laws of the State of Delaware. Immediately following the Effective Time, IAC's name shall be changed to "Hollis-Eden Pharmaceuticals, Inc." 1.4 Certificate of Incorporation of the Surviving ---------------------------------------------- Corporation. The Certificate of Incorporation of Hollis-Eden, as ----------- in effect at the Effective Time, shall continue in full force and effect as the Certificate of Incorporation of the Surviving Corporation; provided, however, that at the Effective Time, IAC will include in the Certificate of Merger a statement that IAC is, immediately following the Effective Time, changing its name to "Hollis-Eden Pharmaceuticals, Inc." 1.5 By-laws of the Surviving Corporation. The By-laws ------------------------------------ of Hollis-Eden, as in effect at the Effective Time, shall continue in full force and effect as the By-laws of the Surviving Corporation. 1.6 Directors and Officers. The directors and officers ---------------------- of the Surviving Corporation immediately following the Merger shall be as follows: Name Positions ---- --------- Richard B. Hollis Chairman, President and Chief Executive Officer and Director Patrick T. Prendergast, Ph.D. Chief Scientific Officer, Director Thomas Charles Merigan, Jr., M.D. Director, Chairman of the Scientific Advisory Board Robert W. Weber Vice President-Controller Lois Rezler, Ph.D. Vice President-Regulatory Affairs J. Paul Bagley III Director Salvatore J. Zizza Director Brendan R. McDonnell Director Such directors and officers shall continue to hold office until the next annual meetings of the stockholders and directors of the Surviving Corporation or until their successors shall have been duly elected and shall have qualified. 1.7 Plan of Merger. The method of effecting the Merger -------------- and the basis for exchanging and converting the outstanding Common Stock of Hollis-Eden and the outstanding Hollis-Eden Warrants and Options into shares of Common Stock of the Surviving Corporation (the "Surviving Corporation Common Stock"), warrants to purchase shares of Surviving Corporation Common Stock and options to purchase shares of Surviving Corporation Common Stock shall be as follows: (a)(i) Each issued and outstanding share of Hollis-Eden Common Stock (other than those shares of Hollis-Eden Common Stock held by stockholders who shall have perfected their rights to appraisal pursuant to Section 262 of the DGCL and shall not have withdrawn or otherwise lost such rights (the "Dissenting Stockholders")) shall, at the Effective Time, by virtue of the Merger and without further action, be deemed canceled and cease to exist and, upon presentation for surrender of a certificate representing such share by each stockholder of Hollis-Eden participating in the Merger (collectively, the "Participating Stockholders"), shall be converted into one share of Surviving Corporation Common Stock. (ii) At the Effective Time, each issued and outstanding Hollis-Eden Warrant shall, by virtue of the Merger and without further action, be deemed canceled and cease to exist and, upon presentation for surrender of a certificate representing such Hollis-Eden Warrant in accordance with Section 1.8 hereof, shall be converted into a warrant to purchase shares of Surviving Corporation Common Stock, at an exercise price and for an exercise period which is the same, respectively, as the exercise price and the exercise period of the particular Hollis- Eden Warrant (collectively, the "Surviving Corporation Warrants"). (iii) At the Effective Time, each issued and outstanding Hollis-Eden Option shall, by virtue of the Merger and without further action, be deemed to be assumed by the Surviving Corporation and modified so that, in lieu of having the right to purchase shares of Hollis-Eden Common Stock upon exercise, the holder will have the right to purchase shares of Surviving Corporation Common Stock upon exercise (collectively, the "Surviving Corporation Options") at an exercise price and for an exercise period which is the same, respectively, as the exercise price and exercise period of the particular Hollis-Eden Option. The Surviving Corporation, at the Effective Time, will assume all of Hollis-Eden's obligations under any option agreement evidencing the grant of such Hollis-Eden Options. (iv) IAC will establish, subject to IAC stockholder ratification and approval at the meeting of stockholders of IAC to be held to approve the transactions contemplated by the Merger (the "IAC Stockholders' Meeting") prior to the Effective Time, an Employee Stock Option Plan (the "IAC Employee Stock Option Plan") pursuant to which certain of the Surviving Corporation Options referenced in clause (iii) above will be governed. Such IAC Employee Stock Option Plan will be on similar terms and conditions as the Hollis-Eden Employee Stock Option Plan pursuant to which certain of the Hollis-Eden Employee Stock Options were originally granted. (b)(i) Notwithstanding Section 1.7(a) above, shares of Hollis-Eden Common Stock which are held by a Dissenting Stockholder who has properly preserved and perfected dissenters' rights with respect to such shares pursuant to Section 262 of the DGCL shall not be converted into the right to receive shares of Surviving Corporation Common Stock pursuant to Section 1.7(a)(i) hereof, and instead shall be treated in accordance with those provisions of the DGCL unless and until the right of such Dissenting Stockholder under Section 262 of the DGCL to payment for his shares shall cease. (ii) If any Dissenting Stockholder shall effectively withdraw or lose (through failure to perfect or otherwise) such Dissenting Stockholder's right to payment for any of such Dissenting Stockholder's shares under Section 262 of the DGCL, such Dissenting Stockholder's shares shall automatically be converted into the right to receive shares of Surviving Corporation Common Stock in accordance with Section 1.7(a)(i) hereto. (iii) Each Dissenting Shareholder who becomes entitled, pursuant to the provisions of Section 262 of the DGCL, to payment of the fair value of any such Dissenting Stockholder's shares shall receive payment therefor from the Surviving Corporation pursuant to Section 262 of the DGCL. (c)(i) As a condition to the consummation of the Merger, IAC is required to obtain the consent of its stockholders to the Merger. The beneficial owners of 600,000 shares of IAC Common Stock currently have the right, in lieu of approving the Merger, to require IAC to redeem their shares of IAC Common Stock (the "Redemption Right"). Those IAC stockholders possessing the Redemption Right (the "Solicited Stockholders") shall be solicited by IAC and offered the opportunity to exchange their Redemption Right for the right to receive additional shares of common stock of the Surviving Corporation (the "Additional Merger Shares") in accordance with this Section 1.7(c). (ii) In order to perfect the right to receive the Additional Merger Shares, if any, a Solicited Stockholder must (A) not exercise his Redemption Right in connection with the Merger and (B) within 60 days following the Effective Time, take whatever action that may be necessary to cause such Solicited Stockholder to become the registered owner of his shares of Surviving Corporation Common Stock (each, a "Rights Share" and, collectively, the "Rights Shares"). By not exercising his Redemption Right in connection with the Merger, a Solicited Stockholder shall be deemed to have waived his Redemption Right and accepted IAC's offer to receive the right to receive Additional Merger Shares, if any are issued (provided such Solicited Stockholder is not a Dissenting Stockholder and becomes the registered owner of his shares of Surviving Corporation Common Stock as provided above). As soon as practicable following the 60th day following the Effective Time, the Surviving Corporation will cause to be issued to each Solicited Stockholder who shall have perfected his right to receive Additional Merger Shares, if any, certificates evidencing one right (each, a "Right" and, collectively, the "Rights") for each Rights Share held by such Solicited Stockholder (the "Rights Certificates"). The Rights Certificates shall not be transferable, assignable, subject to pledge or otherwise alienable, and the registered holder of such Rights Certificates shall forfeit the number of Rights (the "Forfeited Rights") equal to the number of Shares of Surviving Corporation Common Stock sold or otherwise transferred by such holder during the period commencing at the Effective Time and ending on the date that a final determination of whether any Additional Merger Shares will be issued is made (i.e., the second anniversary of the Effective Date) (the "Holding Period"). The Forfeited Rights, at the moment of such sale or transfer, shall be null and void and have no further force or effect. (iii) Additional Merger Shares, if any, shall be issued to the holders of Rights Certificates who have not otherwise forfeited their Rights as a result of their selling or otherwise transferring shares of Surviving Corporation Common Stock during the Holding Period if, at no time during the 24- month period immediately following the Effective Date, the average Closing Price per share of Surviving Corporation Common Stock over a period of 20 consecutive trading days equals or exceeds $20.00 per share (subject to adjustment as set forth in subsection (c)(vi) below). The Additional Merger Shares shall be issued, in accordance with the records of the Surviving Corporation, as promptly as practicable following the second anniversary of the Effective Date to those holders of Rights Certificates who have not otherwise forfeited their Rights. The number of Additional Merger Shares, if any, to be issued to the holders of the Rights Certificates shall be calculated as follows: each outstanding Right (i.e., any Right other than the Forfeited Rights) shall entitle the holder thereof to the number of Additional Merger Shares equal to (A) the difference between (i) $20.00 (subject to adjustment as set forth in subsection (c)(vi) below) and (ii) the average of the highest 60 Closing Prices per share of Surviving Corporation Common Stock during the one-year period immediately prior to the second anniversary of the Effective Date (the "Sixty Day Average Price"), divided by ---------- (B) the Sixty Day Average Price. No fractional Additional Merger Shares shall be issued. In lieu thereof, any fractional shares shall be rounded to the nearest whole share of Surviving Corporation Common Stock. The amount of Additional Merger Shares, if any, to be issued shall be computed by Price Waterhouse LLP, independent public accountants, as soon as practicable following the second anniversary of the Effective Date. The determination by Price Waterhouse LLP shall be final and binding on the Surviving Corporation and the holders of the Rights. (iv) For purposes of this Section 1.7 and Section 11.2(c), "Closing Price" per share of Surviving Corporation Common Stock on a Trading Day shall mean the last reported sale price per share of Surviving Corporation Common Stock regular way or, in case no such reported sale takes place on such Trading Day, the average of the closing bid and asked prices regular way for such Surviving Corporation Common Stock for such Trading Day, in either case on the principal national securities exchange on which the Surviving Corporation Common Stock is listed or admitted to trading, or if the Surviving Corporation Common Stock is not listed or admitted to trading on any national securities exchange, but is traded in the over-the- counter market, the closing sale price per share of such Surviving Corporation Common Stock or, in case no sale is publicly reported, the average of the closing bid and asked quotations for the Surviving Corporation Common Stock, as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or any comparable system or, if such Surviving Corporation Common Stock is not listed on NASDAQ or a comparable system, the closing sale price of Surviving Corporation Common Stock or, in case no sale is publicly reported, the average of the closing bid and asked prices per share, as furnished by two members of the National Association of Securities Dealers, Inc. who make a market in such Surviving Corporation Common Stock selected from time to time by the Surviving Corporation for that purpose. In addition, for purposes of this Section 1.7 and Section 11.2(c), a "Trading Day" shall mean, if such Surviving Corporation Common Stock is listed on any national securities exchange, a business day during which such exchange was open for trading and at least one trade of Surviving Corporation Common Stock was effected on such exchange on such business day, or, if such Surviving Corporation Common Stock is not listed on any national securities exchange but is traded in the over-the-counter market, a business day during which the over-the-counter market was open for trading and at least one "eligible dealer" quoted both a bid and asked price for Surviving Corporation Common Stock. An "eligible dealer" for any day shall include any broker-dealer who quoted both a bid and asked price for such day, but shall not include any broker-dealer who quoted only a bid or only an asked price for such day. (v) Notwithstanding the foregoing, the Sixty Day Average Price shall in no event be less than $5.00 per share (subject to adjustment as set forth in subsection (c)(vi) below). (vi) In the event of a stock dividend, stock split, share combination, exchange of shares, recapitalization, merger, consolidation, acquisition or disposition of property or shares, reorganization, liquidation or other similar change or transaction of or by the Surviving Corporation following the Effective Time, the Closing Price and the Sixty Day Average Price shall be adjusted as appropriate to give proper effect to the event. (vii) Notwithstanding anything to the contrary contained herein, the Surviving Corporation shall have the unilateral right to redeem and cancel all, but not less than all, of the Rights evidenced by the Rights Certificates, at a redemption price of $.001 per Right, if the Surviving Corporation, at any time during the Holding Period, closes an equity offering pursuant to which the Surviving Corporation (A) issues shares of Surviving Corporation Common Stock at a per share price of not less than $15.00 per share and (B) raises net proceeds to the Surviving Corporation of not less than $10 million. 1.8 Exchange and Conversion of Shares of Hollis-Eden ------------------------------------------------- Common Stock and Outstanding Hollis-Eden Warrants and Hollis-Eden ----------------------------------------------------------------- Options. The manner of exchanging and converting shares of Hollis -------- Eden Common Stock, Hollis-Eden Warrants and Hollis-Eden Options into shares of Surviving Corporation Common Stock, Surviving Corporation Warrants and Surviving Corporation Options, as the case may be, in accordance with Section 1.7 above, shall be as follows: (a) From and after the Effective Time, American Stock Transfer & Trust Company (the "Exchange Agent") shall act as exchange agent in effecting the exchange of certificates representing shares of Hollis-Eden Common Stock pursuant to Section 1.7(a) hereof. As soon as practicable after the Effective Time, and after surrender to the Exchange Agent by each Participating Stockholder of certificates which prior to the Effective Time represented shares of Hollis-Eden Common Stock, the Surviving Corporation shall cause to be distributed to such Participating Stockholder in whose name such Common Stock certificates shall have been registered, or in accordance with the written instructions transmitted to the Exchange Agent by the Participating Stockholder, certificates representing shares of Surviving Corporation Common Stock, all in accordance with the provisions of Section 1.7(a) hereof. Upon the surrender by Participating Stockholders of each certificate representing shares of Hollis-Eden Common Stock, and the issuance and delivery by the Exchange Agent of certificates representing shares of Surviving Corporation Common Stock, the certificates which prior to the Effective Time represented outstanding shares of Hollis- Eden Common Stock shall forthwith be canceled. Until so surrendered and exchanged, each such certificate representing shares of Hollis-Eden Common Stock shall be deemed for all purposes to evidence only a right to receive shares of Surviving Corporation Common Stock, and the holders of such certificates shall no longer be deemed, for any purpose, to be stockholders in Hollis-Eden. (b) As soon as practicable after the Effective Time, the Surviving Corporation shall cause to be distributed to each holder of Hollis-Eden Warrants or Hollis-Eden Options, certificates or option agreements, as the case may be, representing Surviving Corporation Warrants or Surviving Corporation Options in accordance with Section 1.7(a) hereof. Upon the surrender by such holders of each certificate or agreement representing Hollis-Eden Warrants or Hollis-Eden Options and the delivery by the Surviving Corporation of certificates or agreements representing Surviving Corporation Warrants or Surviving Corporation Options, as the case may be, the certificates and agreements which prior to the Effective Time represented Hollis-Eden Warrants and/or Hollis-Eden Options shall be forthwith be canceled. Until so surrendered and exchanged, each such certificate or agreement representing Hollis-Eden Warrants and/or Hollis-Eden Options shall be deemed for all purposes to evidence only a right to receive Surviving Corporation Warrants or Surviving Corporation Options, as the case may be. (c) Participating Stockholders or holders of Hollis-Eden Warrants or Hollis-Eden Options will, for all purposes (except for the payment of possible dividends or other distributions by the Surviving Corporation which will be withheld until the exchange of certificates discussed above), be deemed to be stockholders, warrantholders and/or optionholders of the Surviving Corporation, as the case may be, as of the Effective Time, irrespective of whether they have received their certificates representing shares of Surviving Corporation Common Stock, Surviving Corporation Warrants or Surviving Corporation Options, as the case may be. (d) Immediately prior to the Effective Time, the Surviving Corporation shall provide the Exchange Agent with certificates representing the maximum number of shares of Surviving Corporation Common Stock as the Surviving Corporation may be required to issue in accordance with Section 1.7(a) hereof. (e) Promptly after the Effective Time, the Exchange Agent, on behalf of Hollis-Eden and the Surviving Corporation, shall mail to each holder of record of certificates which immediately prior to the Effective Time represented shares of Hollis-Eden Common Stock, Hollis-Eden Warrants or Hollis-Eden Options, a form of letter of transmittal and instructions for use in surrendering such certificates and receiving certificates representing shares of Surviving Corporation Common Stock, Surviving Corporation Warrants or Surviving Corporation Options therefor, as the case may be. ARTICLE II CLOSING 2.1 Closing Date. The closing of the Merger (the ------------ "Closing") and the other transactions contemplated by this Agreement (the "Related Transactions") shall take place at the offices of Reid & Priest LLP, 40 West 57th Street, New York, New York 10019 at 10:00 a.m., New York time, on January 15, 1997, or such other date, time and place as the parties hereto may agree upon (the "Closing Date"). 2.2 Execution of Formal Merger Documents. On the ------------------------------------ Closing Date, Hollis-Eden and IAC shall execute the Certificate of Merger as provided by the laws of the State of Delaware. The Certificate of Merger shall be transmitted by the parties to the appropriate office for filing and/or recording on the Closing Date, in order that the Merger contemplated by this Agreement shall become effective at 5:00 p.m., New York time, on the Closing Date. ARTICLE III REPRESENTATIONS AND WARRANTIES OF HOLLIS-EDEN In order to induce IAC to enter into this Agreement and to consummate the transactions, including the Merger, contemplated hereby, Hollis-Eden represents and warrants to IAC as of the date of this Agreement and as of the Closing Date (as if such representations and warranties were remade on the Closing Date), as follows: 3.1 Due Incorporation. Hollis-Eden is a corporation ----------------- duly organized, validly existing and in good standing under the laws of the State of Delaware, with all requisite power and authority to own, lease and operate its properties and to carry on its business as they are now being owned, leased, operated and conducted. Hollis-Eden is qualified or licensed to do business and is in good standing as a foreign corporation in each jurisdiction where the nature of the properties owned, leased or operated by it and the business transacted by it requires such qualification or licensing, except where the failure to be so qualified or licensed could not have a Hollis-Eden Material Adverse Effect (as defined in Section 3.6 hereof). The jurisdictions in which Hollis-Eden is qualified or licensed to do business as a foreign corporation are set forth on Schedule 3.1. ------------- Hollis-Eden has no direct or indirect subsidiaries or affiliates, either wholly or partially owned, and Hollis-Eden does not hold any economic, voting or management interest in any corporation, proprietorship, firm, partnership, limited partnership, trust, association, individual or other entity (a "Person") or own any security issued by any Person. True, correct and complete copies of the Certificate of Incorporation and By-laws, as amended, and minutes of meetings (or written consents in lieu of meetings) of the Boards of Directors (and all committees thereof) and stockholders of Hollis-Eden have been, or prior to the Closing Date will have been, delivered to IAC. 3.2 Due Authorization. Hollis-Eden has full power and ----------------- authority to enter into this Agreement and the Certificate of Merger and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by Hollis-Eden of this Agreement and the Certificate of Merger have been, or, in the case of the Certificate of Merger, prior to the Closing Date will be, duly and validly approved and authorized by the Board of Directors of Hollis-Eden, and, subject to obtaining the necessary approval of the Merger by the stockholders of Hollis-Eden, no other actions or proceedings on the part of Hollis-Eden are necessary to authorize this Agreement, the Certificate of Merger and the transactions contemplated hereby and thereby. Hollis- Eden has duly and validly executed and delivered this Agreement and will duly and validly execute and deliver the Certificate of Merger. Subject to obtaining the necessary approval of the stockholders of Hollis-Eden and the consents set forth on Schedule 3.3, this Agreement constitutes the legal, valid and ------------- binding obligation of Hollis-Eden, enforceable in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization or other laws from time to time in effect which affect creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3.3 Consents and Approvals; Non-Contravention. ----------------------------------------- (a) Except as set forth on Schedule 3.3, and except for ------------ the filing of the Certificate of Merger with the appropriate authorities pursuant to the DGCL and the filing of the Registration Statement (as set forth in Section 5.5), no permit, consent, authorization or approval of, or filing or registration with, any Governmental Authority or any other Person not a party to this Agreement is necessary in connection with the execution, delivery and performance by Hollis-Eden of this Agreement or the Certificate of Merger, or the consummation of the transactions contemplated hereby or thereby, or for the lawful continued operation by the Surviving Corporation following the Effective Time of the business currently conducted by Hollis-Eden. "Governmental Authority" shall mean the government of the United States or any foreign country or any state or political subdivision thereof or any entity, body or authority exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. (b) Except as set forth on Schedule 3.3 and except as ------------ would not result in a Hollis-Eden Material Adverse Effect, the execution, delivery and performance by Hollis-Eden of this Agreement and the Certificate of Merger do not and will not (A) violate any Law ("Law" meaning any law, statute, regulation, ordinance, rule, order, decree, judgment, consent decree, settlement agreement or governmental requirement enacted, promulgated, entered into, agreed or imposed by any Governmental Authority); (B) violate or conflict with, result in a breach or termination of, constitute a default (or a circumstance which, with or without notice or lapse of time or both, would constitute a default) or give any third party any additional right (including a termination right) under, permit cancellation of, or result in the creation of any mortgage, lien (except for any lien for taxes not yet due and payable), charge, restriction, pledge, security interest, option, lease or sublease, claim, right of any third party, easement, encroachment or encumbrance (collectively, a "Lien") upon any of the assets or properties of Hollis-Eden under any contract to which Hollis-Eden is a party or by which Hollis-Eden or any of its assets or properties is bound; (C) permit the acceleration of the maturity of any indebtedness of Hollis-Eden or indebtedness secured by Hollis-Eden's assets or properties; or (D) violate or conflict with any provision of the Certificate of Incorporation or By-laws of Hollis-Eden. (c) Hollis-Eden has obtained and is in compliance with all governmental permits, licenses, registrations, certificates of occupancy, approvals and other authorizations (collectively, the "Permits") that are required for the complete operation of the business of Hollis-Eden as currently operated, except for any Permits the absence of which would not result in a Hollis-Eden Material Adverse Effect. All of the Permits are currently valid and in full force and, to Hollis-Eden's knowledge, no revocation, cancellation or withdrawal thereof has been threatened. Hollis-Eden has filed such timely and complete renewal applications as may be required with respect to the Permits. Except as set forth on Schedule 3.3, to Hollis-Eden's ------------- knowledge, the Permits, in their current state, will allow Hollis-Eden to continue to operate its business following the Effective Time in substantially the same manner as Hollis-Eden's business is currently operated. 3.4 Capitalization. -------------- (a) The authorized capital stock of Hollis-Eden consists of 30,000,000 shares of Hollis-Eden Common Stock. On the date hereof, there are issued and outstanding 4,911,004 shares of Hollis-Eden Common Stock. All of the issued and outstanding shares of Hollis-Eden Common Stock are validly issued, fully paid and nonassessable and the issuance thereof was not subject to preemptive rights. (b) Except as set forth on Schedule 3.4, there are no ------------ shares of Hollis-Eden Common Stock or other equity securities (whether or not such securities have voting rights) of Hollis- Eden issued or outstanding or any subscriptions, options, warrants, call rights, convertible securities or other agreements or commitments of any character obligating Hollis-Eden to issue, transfer or sell any shares of capital stock or other securities (whether or not such securities have voting rights) of Hollis- Eden. Except as set forth on Schedule 3.4, there are no ------------- outstanding contractual obligations of Hollis-Eden which relate to the purchase, sale, issuance, repurchase, redemption, acquisition, transfer, disposition, holding or voting of any shares of capital stock or other securities of Hollis-Eden. 3.5 Financial Statements; Undisclosed Liabilities; ----------------------------------------------- Other Documents. For purposes of this Agreement, "Hollis-Eden --------------- Financial Statements" shall mean the audited financial statements of Hollis-Eden as of December 31, 1995 and December 31, 1994 and the unaudited financial statements of Hollis-Eden as of June 30, 1996 (including all notes thereto) which have been previously delivered to IAC, consisting of the balance sheets at such dates and, with respect to the audited Hollis-Eden Financial Statements, the related statements of income and cash flow for each of the twelve-month periods ended December 31, 1995 and December 31, 1994, and with respect to the unaudited Hollis-Eden Financial Statements, the related statements of income and cash flow for the nine-month period ended September 30, 1996. The Hollis-Eden Financial Statements have been prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied and present fairly the financial position, assets and liabilities of Hollis-Eden as at the dates thereof and the revenues, expenses, results of operations and cash flows of Hollis-Eden for the periods covered then ended (subject, in the case of the unaudited interim Hollis-Eden Financial Statements, to normal year-end audit adjustments consistent with past practice and the absence of notes). The Hollis-Eden Financial Statements are in accordance with the books and records of Hollis-Eden, do not reflect any transactions which are not bona fide transactions and do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading. The Hollis-Eden Financial Statements make full and adequate disclosure of, and provision for, all obligations and liabilities of Hollis-Eden as of the date thereof. 3.6 No Adverse Effects or Changes. Except as listed on ----------------------------- Schedule 3.6, or as disclosed in or reflected in the Hollis-Eden ------------ Financial Statements, or as contemplated by this Agreement or the Certificate of Merger, since September 30, 1996, Hollis-Eden has not (i) taken any of the actions set forth in Section 5.3, (ii) suffered any Hollis-Eden Material Adverse Effect, (iii) suffered any damage, destruction or Loss to any of its assets or properties (whether or not covered by insurance), or (iv) increased the compensation of any executive officer of Hollis- Eden. "Loss" shall mean liabilities, losses, costs, claims, damages (including consequential damages), penalties and expenses (including attorneys' fees and expenses and costs of investigation and litigation). For purposes of this Agreement, "Hollis-Eden Material Adverse Effect" shall mean an effect on the business, operations, assets, liabilities, results of operations, cash flows, condition (financial or otherwise) or prospects of Hollis-Eden which is materially adverse to Hollis-Eden. 3.7 Title to Properties. Except as disclosed on ------------------- Schedule 3.7, Hollis-Eden (i) has good and marketable title to, and ------------ is the lawful owner of, all of the material tangible and intangible assets, properties, including real property, and rights reflected as being owned by Hollis-Eden in the Hollis-Eden Financial Statements (other than assets disposed of in the ordinary course of business since the date of the Hollis-Eden Financial Statements), and (ii) at the Effective Time, will have good and marketable title to, and will be the lawful owner of, all of such tangible and intangible assets, properties, including real property, and rights, in any case free and clear of any Lien, except for (x) any Lien for current taxes not yet due and payable, and (y) minor Liens that have arisen in the ordinary course of business and that do not (in any case or in the aggregate) materially detract from the value of the assets subject thereto or materially impair the operations of Hollis- Eden. 3.8 Liabilities. Except to the extent reflected or ----------- reserved against on the balance sheets of Hollis-Eden constituting a part of the Hollis-Eden Financial Statements, Hollis-Eden has no debts, liabilities or obligations of any nature other than (i) non-material liabilities incurred subsequent to the date of such balance sheets in the ordinary course of Hollis-Eden's business and (ii) as set forth on Schedule 3.8. ------------- 3.9 Intellectual Property. --------------------- (a) Schedule 3.9 is a true and complete list of all of ------------ the material patents, patents pending, patent applications, trademarks, tradenames, service marks and rights (collectively, the "Intellectual Property") used by Hollis-Eden in the conduct of its business. Except as disclosed on Schedule 3.9: ------------ (i) all of the Intellectual Property is licensed by Hollis-Eden; (ii) none of the Intellectual Property is the subject of any pending or, to Hollis-Eden's knowledge, threatened litigation or claim of infringement; (iii) no license or royalty agreement to which Hollis- Eden is a party is in breach or default by Hollis-Eden or, to Hollis-Eden's knowledge, any other party thereto or the subject of any notice of termination given or threatened; (iv) the services provided by Hollis-Eden do not, to Hollis-Eden's knowledge, infringe any trademark, service mark, trade name, copyright, trade secret, patent or confidential or proprietary rights of another, and Hollis-Eden has not received any notice contesting its right to use any Intellectual Property; (v) Hollis-Eden has not granted any license or agreed to pay or receive any royalty in respect of any Intellectual Property; and (vi) Hollis-Eden possesses adequate rights as licensee in and to all Intellectual Property necessary to conduct its business as presently conducted. (b) Hollis-Eden has obtained from each inventor of the Patent Applications and Patents that such inventor(s) have disclosed to counsel who prepared each of the Patent Applications and the applications underlying the Patents all prior art of which said inventor(s) are aware. (c) Hollis-Eden has no knowledge which, directly or indirectly, indicates an infirmity in any claim of the Patents or Patent Applications or any basis for invalidity or unenforceability of any claim of the Patents or Patent Applications. (d) Hollis-Eden has no knowledge which, directly or indirectly, indicates that the licensor in each license agreement under which Hollis-Eden has been granted rights owns the entire unencumbered right, title and interest in and to the inventions and patent applications which are the subject of the license. (e) Hollis-Eden has used its reasonable commercial efforts to receive from each inventor named in each Patent Application and Patent all prior art, written or otherwise available from such inventor, relating to the subject matter claimed in any of them, and the names of each contributor toward the invention(s) claimed in each. (f) Hollis-Eden has delivered to IAC for inspection and copying a true copy of each document in Hollis-Eden's possession relating directly or indirectly to each Patent Application, Patent and license agreement relating to the technology of Hollis-Eden's present and intended business activities and has disclosed to IAC each and all facts, test results and other information known to Hollis-Eden which has, or to its knowledge may have, any negative impact upon the efficacy of the technology of the Patent Applications and Patents. 3.10 Contracts. "Contract" shall mean any material --------- contract, lease, commitment or understanding, sales order, purchase order, agreement, indenture, mortgage, note, bond, instrument or license, whether written or verbal, which is intended or purports to be binding and enforceable and, in the case of a Person which is a corporation, general partnership or limited partnership, such Person's certificate or articles of incorporation and by-laws or partnership agreement, as the case may be. Schedule 3.10 lists all the material Contracts and -------------- arrangements of the following types to which Hollis-Eden is a party or by which it is bound, or to which any of its assets or properties is subject: (a) any collective bargaining agreement; (b) any Contract or arrangement of any kind with any employee, consultant, medical advisor, officer or director of Hollis-Eden; (c) any Contract or arrangement with a sales representative, manufacturer's representative, distributor, dealer, broker, sales agency, advertising agency or other Person engaged in sales, distributing or promotional activities, or any Contract to act as one of the foregoing, on behalf of any Person; (d) any Contract or arrangement of any nature which involves the payment or receipt of cash or other property, an unperformed commitment, or goods or services, having a value in excess of $10,000; (e) any Contract or arrangement pursuant to which Hollis-Eden has made or will make loans or advances, or has or will have incurred debts or become a guarantor or surety or pledged its credit on or otherwise become responsible with respect to any undertaking of another (except for the negotiation or collection of negotiable instruments in transactions in the ordinary course of business); (f) any indenture, credit agreement, loan agreement, note, mortgage, security agreement, lease of real property or personal property or agreement for financing; (g) any Contract or arrangement involving a partnership, joint venture or other cooperative undertaking; (h) any Contract or arrangement involving any restrictions with respect to the geographical area of operations or scope or type of business of Hollis-Eden; (i) any power of attorney or agency agreement or arrangement with any Person pursuant to which such Person is granted the authority to act for or on behalf of Hollis-Eden, or Hollis-Eden is granted the authority to act for or on behalf of any Person; (j) any Contract for which the full performance thereof may extend beyond 60 days from the date of this Agreement; (k) any Contract not made in the ordinary course of business which is to be performed at or after the date of this Agreement; (l) any Contract relating to any acquisition or disposition of Hollis-Eden, or any acquisition or disposition of any subsidiary, division, line of business, or Real Property, during the five years prior to the date of this Agreement; and (m) any Contract not specified above that is material to Hollis-Eden. Hollis-Eden has made available to IAC true and complete copies of each document listed on Schedule 3.10, and a written description of ------------- each oral arrangement so listed. Except as disclosed on Schedule -------- 3.10, the cancellation of any such Contracts at any time by the ---- other party, would not have a Hollis-Eden Material Adverse Effect. 3.11 Insurance. Schedule 3.11 contains an accurate and --------- ------------- complete list of all policies of fire, liability, workers' compensation, product liability, professional malpractice, title and other forms of insurance owned or held by Hollis-Eden, and Hollis-Eden has heretofore delivered to IAC a true and complete copy of all such policies. All such policies are in full force and effect, all premiums with respect thereto covering all periods up to and including the Closing Date have been, or prior to the Closing Date, will be, paid, and no notice of cancellation or termination has been received with respect to any such policy. Except as set forth in Schedule 3.11, Hollis-Eden has not been ------------- refused any insurance with respect to its assets or operations, and its coverage has not been limited by any insurance carrier to which it has applied for any such insurance or with which it has carried insurance, during the last two years. Such insurance policies provide types and amounts of insurance customarily obtained by businesses similar to the business of Hollis-Eden. 3.12 Employee Benefit Plans. Neither Hollis-Eden nor ---------------------- any other member of the Controlled Group (i) has at any time maintained, contributed to or participated in, (ii) has or had at any time any obligation to maintain, contribute to or participate in, or (iii) has any liability or contingent liability, direct or indirect, with respect to: any employee benefit plan (within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), oral or written retirement or deferred compensation plan, incentive compensation plan, stock plan, consulting agreement, unemployment compensation plan, vacation pay plan, severance plan, bonus plan, stock compensation plan or any other type or form of employee-related (or independent contractor-related) arrangement, program, policy, plan or agreement. For purposes of this Agreement, the term "Controlled Group" shall refer to Hollis-Eden and each other corporation or other entity under common control with Hollis-Eden (pursuant to the provisions of Sections 414(b), (c), (m) or (o) of the Code) at any time during the 60-month period ending on the Closing Date. 3.13 Employees; Labor Matters. (a) Hollis-Eden has ------------------------ conducted and currently is conducting its business in material compliance with all Laws relating to employment and employment practices, terms and conditions of employment, wages and hours and nondiscrimination in employment. In the opinion of management, the relationship of Hollis-Eden with its employees is good and there is, and during the past two years there has been, no labor strike, dispute, slow-down, work stoppage or other labor difficulty pending or, to Hollis-Eden's knowledge, threatened against or involving Hollis-Eden. None of the employees of Hollis-Eden is covered by any collective bargaining agreement, no collective bargaining agreement is currently being negotiated and no attempt is currently being made, or during the past two years has been made, to organize any employees of Hollis-Eden to form or enter a labor union or similar organization. (b) Except as disclosed on balance sheets of Hollis- Eden forming a part of the Financial Statements or on Schedule --------- 3.13, Hollis-Eden has no material liability for any vacation time, ---- vacation pay, retirement benefits, disability or other insurance benefits or severance pay attributable to services rendered prior to the date of each such balance sheet. 3.14 Tax Matters. ----------- (a) "Taxes", as used in this Agreement, means any ----- Federal, state, county, local or foreign taxes, charges, fees, levies, or other assessments, including all net income, gross income, sales and use, ad valorem, transfer, gains, profits, excise, franchise, real and personal property, gross receipt, capital stock, production, business and occupation, disability, employment, payroll, license, estimated, stamp, custom duties, severance or withholding taxes or charges imposed by any Governmental Authority, and includes any interest and penalties (civil or criminal) on or additions to any such taxes and any expenses incurred in connection with the determination, settlement or litigation of any tax liability. "Tax Return", as used in this ---------- Agreement, means a report, return or other information required to be supplied to a Governmental Authority with respect to Taxes including, where permitted or required, combined or consolidated returns for any group of entities that includes Hollis-Eden on the one hand, or IAC on the other hand. (b) Hollis-Eden has duly filed all Tax Returns required to be filed by it under applicable law or filed appropriate extensions which have not yet expired and will file all Tax Returns required to be filed by it at or prior to the Effective Time under applicable law. All Tax Returns were in all material respects (and, as to Tax Returns not filed as of the date hereof, will be) true, complete and correct and filed on a timely basis, or extended as permitted by law. (c) Hollis-Eden has, within the time and in the manner prescribed by law, paid (and until the Effective Time will pay within the time and in the manner prescribed by law) all Taxes that are currently due and payable except for those contested in good faith and for which adequate reserves have been taken. (d) There are no material Tax liens upon the assets of Hollis-Eden except liens for Taxes not yet due. (e) Hollis-Eden has complied (and until the Effective Time will comply) in all material respects with the provisions of the Code relating to the payment and withholding of Taxes and has, within the time and in the manner prescribed by Law, withheld from employee wages and paid over to the proper Governmental Authorities all amounts required. (f) Except as disclosed on Schedule 3.14, no audits or ------------- other administrative proceedings or court proceedings are presently pending with regard to any Taxes or Tax Returns of Hollis-Eden. (g) Except as disclosed on Schedule 3.14, Hollis-Eden ------------- has not received any Tax Rulings (as defined below) or entered into any Closing Agreements (as defined below) with any taxing authority that would have a continuing adverse effect after the Effective Time. "Tax Ruling", as used in this Agreement, shall mean ---------- a written ruling of a taxing authority relating to Taxes. "Closing -------- Agreement", as used in this Agreement, shall mean a written and --------- legally binding agreement with a taxing authority relating to Taxes. (h) Schedule 3.14 contains a list of states, ------------- territories and jurisdictions (whether foreign or domestic) to which any Tax is properly payable by Hollis-Eden. 3.15 Environmental Regulations. Hollis-Eden is in ------------------------- compliance in all material respects with all applicable federal, state and local laws and regulations governing the environment, public health and safety and employee health and safety (including all provisions of the Occupational Safety and Health Act ("OSHA")) and no charge, complaint, action, suit, proceeding, hearing, investigation, claim, demand or notice has been filed or commenced against Hollis-Eden and, to the knowledge of Hollis- Eden, no such charge, complaint, action, suit, proceeding, hearing, investigation, claim, demand or notice is pending or threatened. 3.16 Litigation. ---------- (a) Except as disclosed in Schedule 3.16, there are no ------------- actions, suits, arbitrations, regulatory proceedings or other litigation, proceedings or governmental investigations pending or, to Hollis-Eden's knowledge, threatened against Hollis-Eden or any of Hollis-Eden's officers or directors in their capacity as such, or any of their respective properties or businesses, and Hollis-Eden is not aware of any facts or circumstances which may reasonably be likely to give rise to any of the foregoing. Except as set forth on Schedule 3.16, all of the proceedings ------------- pending against Hollis-Eden are covered and being defended by insurers (subject to such deductibles as are set forth in such Schedule). Except as disclosed on Schedule 3.16, Hollis-Eden is not ------------- subject to any order, judgment, decree, injunction, stipulation or consent order of or with any court or other Governmental Authority. Since January 1, 1993, Hollis-Eden has not entered into any agreement to settle or compromise any proceeding pending or threatened against it which has involved any obligation for which Hollis-Eden has any continuing obligation. (b) There are no claims, actions, suits, proceedings, or investigations pending or, to Hollis-Eden's knowledge, threatened by or against Hollis-Eden with respect to this Agreement or the Certificate of Merger, or in connection with the transactions contemplated hereby or thereby, and Hollis-Eden has no reason to believe there is a valid basis for any such claim, action, suit, proceeding or investigation. 3.17 No Conflict of Interest. Except as disclosed on ----------------------- Schedule 3.17, to Hollis-Eden's knowledge, none of the stockholders ------------- of Hollis-Eden has or claims to have any direct or indirect interest in any tangible or intangible property used in the business of Hollis-Eden, except as a holder of shares of Hollis- Eden Common Stock. Except as disclosed on Schedule 3.17, to ------------- Hollis-Eden's knowledge, none of the stockholders of Hollis-Eden has any direct or indirect interest in any other Person which conducts a business similar to, has any Contract or arrangement with, or does business or is involved in any way with, Hollis- Eden except for the ownership of less than 1% of the outstanding stock of any publicly held corporation. 3.18 Bank Accounts. Schedule 3.18 sets forth the names ------------- ------------- and locations of each bank or other financial institution at which Hollis-Eden has either an account (giving the account numbers) or safe deposit box and the names of all Persons authorized to draw thereon or have access thereto, and the names of all Persons, if any, now holding powers of attorney or comparable delegation of authority from Hollis-Eden and a summary statement thereof. 3.19 Compliance with Laws. Except as set forth on -------------------- Schedule 3.19, Hollis-Eden is not in default under any order of any ------------- court, Governmental Authority or other agency or arbitration board or tribunal to which Hollis-Eden is or was subject within the past two years or in violation of any laws, ordinances, governmental rules or regulations (including, but not limited to, those relating to environmental, safety, building, product safety or health standards or labor or employment matters) to which Hollis-Eden is or was subject within the past two years, except to the extent failure to comply would not have a Hollis-Eden Material Adverse Effect. The business of Hollis-Eden is being, and at the Closing will be, conducted in compliance with all applicable laws, ordinances, rules and regulations applicable to it (including, but not limited to, those relating to environmental, safety, building, product safety or health standards or labor or employment matters, except to the extent failure to comply would not have a Hollis-Eden Material Adverse Effect). 3.20 Broker's/Finder's Fees. Hollis-Eden retained ---------------------- Laidlaw Equities ("Laidlaw") in connection with the transactions contemplated by this Agreement and shall issue to Laidlaw warrants to purchase an aggregate of up to 452,830 shares of Surviving Corporation Common Stock at an exercise price of $2.48 per share upon the Closing of the Merger as a fee for their services. IAC does not have, nor shall have, any liability or otherwise suffer or incur any loss as a result of or in connection with such fee payable to Laidlaw. Except for Laidlaw, Hollis-Eden has not used any broker or finder in connection with the transactions contemplated by this Agreement, and IAC has not and shall not have any liability or otherwise suffer or incur any loss as a result of or in connection with any brokerage or finder's fee or other commission payable as a result of any actions taken by Hollis-Eden with respect to any broker or finder in connection with the Merger contemplated by this Agreement. 3.21 Board Recommendation. The Board of Directors of -------------------- Hollis-Eden, at a special meeting of such Board held on November 1, 1996, approved this Agreement, the Merger and the other transactions contemplated hereby on the terms and conditions set forth herein and has determined to recommend that the stockholders of Hollis-Eden approve this Agreement and the Merger. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF IAC In order to induce Hollis-Eden to enter into this Agreement and to consummate the transactions, including the Merger, contemplated hereby, IAC represents and warrants to Hollis-Eden as of the date of this Agreement and as of the Closing Date (as if such representations and warranties were remade on the Closing Date), as follows: 4.1 Due Incorporation. IAC is a corporation duly ----------------- organized, validly existing and in good standing under the laws of the State of Delaware with all requisite power and authority to own, lease and operate its properties and to carry on its business as they are now being owned, leased, operated and conducted. IAC, in light of its current operations and properties, is not required to qualify as a foreign corporation in any jurisdiction and is not qualified to do business in any jurisdiction other than its jurisdiction of incorporation. True, correct and complete copies of the Certificate of Incorporation and By-laws, as amended, and minutes of meetings (or written consents in lieu of meetings) of the Board of Directors (and all committees thereof) and stockholders of IAC have been, or prior to the Closing Date will have been, delivered to Hollis-Eden. 4.2 Due Authorization. IAC has full power and ----------------- authority to enter into this Agreement and the Certificate of Merger and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by IAC of this Agreement and the Certificate of Merger have been, or, in the case of the Certificate of Merger, prior to the Closing Date will be, duly and validly approved and authorized by the Board of Directors of IAC, and, subject to obtaining the necessary approval of the Merger by the stockholders of IAC, no other actions or proceedings on the part of IAC are necessary to authorize this Agreement, the Certificate of Merger and the transactions contemplated hereby and thereby. IAC has duly and validly executed and delivered this Agreement and will duly and validly execute and deliver the Certificate of Merger. Subject to obtaining the necessary approval of the stockholders of IAC, this Agreement constitutes the legal, valid and binding obligation of IAC, enforceable in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization or other laws from time to time in effect which affect creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.3 Consents and Approvals; Non-Contravention. ----------------------------------------- (a) With the exception of filing the Certificate of Merger with the appropriate authorities pursuant to the DGCL and the filing of the Registration Statement (as set forth in Section 5.5), no permit, consent, authorization or approval of, or filing or registration with, any Governmental Authority or any other Person not a party to this Agreement is necessary in connection with the execution, delivery and performance by IAC of this Agreement or the Certificate of Merger, or the consummation of the transactions contemplated hereby or thereby. (b) Except as would not result in an IAC Material Adverse Effect (as defined in Section 4.6 below), the execution, delivery and performance by IAC of this Agreement and the Certificate of Merger do not and will not (A) violate any Law, (B) violate or conflict with, result in a breach or termination of, constitute a default (or a circumstance which, with or without notice or lapse of time or both, would constitute a default) or give any third party any additional right (including a termination right) under, permit cancellation of, or result in the creation of any Lien (except for any Lien for taxes not yet due and payable) upon any of the assets or properties of IAC under any contract to which IAC is a party or by which IAC or any of its assets or properties is bound; (C) permit the acceleration of the maturity of any indebtedness of IAC or indebtedness secured by IAC's assets or properties; or (D) violate or conflict with any provision of the Certificate of Incorporation or By-laws of IAC. (c) IAC has obtained and is in compliance with all Permits that are required for the complete operation of the business of IAC as currently operated, except for any Permits the absence of which would not result in an IAC Material Adverse Effect. All of the Permits are currently valid and in full force and, to the knowledge of IAC, no revocation, cancellation or withdrawal thereof has been threatened. IAC has filed such timely and complete renewal applications as may be required with respect to the Permits. 4.4 Capitalization. -------------- (a) The authorized capital stock of IAC consists of 10,000,000 shares of IAC Common Stock and 5,000 shares of Preferred Stock. On the date hereof, there are issued and outstanding 833,250 shares of IAC Common Stock and no shares of Preferred Stock. All of the issued and outstanding shares of IAC Common Stock are validly issued, fully paid and nonassessable and the issuance thereof was not subject to preemptive rights. (b) Except as set forth on Schedule 4.4, there are no ------------ shares of IAC Common Stock or other equity securities (whether or not such securities have voting rights) of IAC issued or outstanding or any subscriptions, options, warrants, call rights, convertible securities or other agreements or commitments of any character obligating IAC to issue, transfer or sell any shares of capital stock or other securities (whether or not such securities have voting rights) of IAC. Except as set forth on Schedule 4.4, ------------ there are no outstanding contractual obligations of IAC which relate to the purchase, sale, issuance, repurchase, redemption, acquisition, transfer, disposition, holding or voting of any shares of capital stock or other securities of IAC. Except as set forth on Schedule 4.4, all of the warrants listed on Schedule ------------ -------- 4.4 redeemable by IAC, subject only to the prior consummation by IAC --- of a "business combination" (as defined in such warrants) and the occurrence of certain trading prices of the IAC Common Stock at the prices and for the periods described in such warrants. 4.5 Financial Statements; Undisclosed Liabilities; ----------------------------------------------- Other Documents. For purposes of this Agreement, "IAC Financial --------------- Statements" shall mean the audited financial statements of IAC as of December 31, 1995 and December 31, 1994 and the unaudited financial statements of IAC as of June 30, 1996 (including all notes thereto) which have been previously delivered to Hollis- Eden, consisting of the balance sheets at such dates and, with respect to the audited IAC Financial Statements, the related statements of income and cash flow for each of the twelve-month periods ended December 31, 1995 and December 31, 1994, and with respect to the unaudited IAC Financial Statements, the related statements of income and cash flow for the six-month period ended June 30, 1996. The IAC Financial Statements have been prepared in accordance with GAAP consistently applied and present fairly the financial position, assets and liabilities of IAC as at the dates thereof and the revenues, expenses, results of operations and cash flows of IAC for the periods covered then ended (subject, in the case of the unaudited interim IAC Financial Statements to normal year-end audit adjustments consistent with past practice). The IAC Financial Statements are in accordance with the books and records of IAC, do not reflect any transactions which are not bona fide transactions and do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading. The IAC Financial Statements make full and adequate disclosure of, and provision for, all obligations and liabilities of IAC as of the date thereof. 4.6 No Adverse Effects or Changes. Except as disclosed ----------------------------- in or reflected in the IAC Financial Statements, or as contemplated by this Agreement or the Certificate of Merger, since June 30, 1996, IAC has not (i) taken any of the actions set forth in Section 5.3, (ii) suffered any IAC Material Adverse Effect, (iii) suffered any damage, destruction or Loss to any of its assets or properties (whether or not covered by insurance), or (iv) increased the compensation of any executive officer of IAC. For purposes of this Agreement, "IAC Material Adverse Effect" shall mean an effect on the business, operations, assets, liabilities, results of operations, cash flows, condition (financial or otherwise) or prospects of IAC which is materially adverse to IAC. 4.7 Title to Properties. IAC (i) has good and ------------------- marketable title to, and is the lawful owner of, all of the tangible and intangible assets, properties and rights reflected in the IAC Financial Statements and (ii) at the Effective Time will have good and marketable title to, and will be the lawful owner of, all of such tangible and intangible assets, properties and rights, in any case free and clear of any Lien, except for (x) any Lien for current taxes not yet due and payable, and (y) minor Liens that have arisen in the ordinary course of business and that do not (in any case or in the aggregate) materially detract from the value of the assets subject thereto or materially impair the operations of IAC. 4.8 Liabilities. Except to the extent reflected or ----------- reserved against on the balance sheets of IAC constituting a part of the IAC Financial Statements, IAC has no debts, liabilities or obligations of any nature other than liabilities incurred subsequent to the date of such balance sheets in the ordinary course of IAC's business. 4.9 Real Property. IAC does not have, and at the ------------- Closing Date will not have, any Real Property. 4.10 Intellectual Property. Schedule 4.10 is a true and --------------------- ------------- complete list of all Intellectual Property used by IAC in the conduct of its business. Except as disclosed on Schedule 4.10: ------------- (a) all of the Intellectual Property is owned by IAC free and clear of all Liens, and is not subject to any license, royalty or other agreement; (b) none of the Intellectual Property has been or is the subject of any pending or, to the best of knowledge of IAC, threatened litigation or claim of infringement; (c) no license or royalty agreement to which IAC is a party is in breach or default by IAC or, to IAC's knowledge, any other party thereto or the subject of any notice of termination given or threatened; (d) the services provided by IAC and any process, method, part, design or material it employs, do not, to IAC's knowledge, infringe any trademark, service mark, trade name, copyright, trade secret, patent or confidential or proprietary rights of another, and IAC has not received any notice contesting its right to use any Intellectual Property; (e) IAC has not granted any license or agreed to pay or receive any royalty in respect of any Intellectual Property; and (f) IAC owns or possesses adequate rights in perpetuity in and to all Intellectual Property necessary to conduct its business as presently conducted. 4.11 Contracts. Schedule 4.11 lists all the material --------- ------------- Contracts and arrangements of the following types to which IAC is a party or by which it is bound, or to which any of its assets or properties is subject: (a) any collective bargaining agreement; (b) any Contract or arrangement of any kind with any employee, consultant, medical advisor, officer or director of IAC; (c) any Contract or arrangement with a sales representative, manufacturer's representative, distributor, dealer, broker, sales agency, advertising agency or other Person engaged in sales, distributing or promotional activities, or any Contract to act as one of the foregoing, on behalf of any Person; (d) any Contract or arrangement of any nature which involves the payment or receipt of cash or other property, an unperformed commitment, or goods or services, having a value in excess of $10,000; (e) any Contract or arrangement pursuant to which IAC has made or will make loans or advances, or has or will have incurred debts or become a guarantor or surety or pledged its credit on or otherwise become responsible with respect to any undertaking of another (except for the negotiation or collection of negotiable instruments in transactions in the ordinary course of business); (f) any indenture, credit agreement, loan agreement, note, mortgage, security agreement, lease of real property or personal property or agreement for financing; (g) any Contract or arrangement involving a partnership, joint venture or other cooperative undertaking; (h) any Contract or arrangement involving any restrictions with respect to the geographical area of operations or scope or type of business of IAC; (i) any power of attorney or agency agreement or arrangement with any Person pursuant to which such Person is granted the authority to act for or on behalf of IAC, or IAC is granted the authority to act for or on behalf of any Person; (j) any Contract for which the full performance thereof may extend beyond 60 days from the date of this Agreement; (k) any Contract not made in the ordinary course of business which is to be performed at or after the date of this Agreement; (l) any Contract relating to any acquisition or disposition of IAC, or any acquisition or disposition of any subsidiary, division, line of business, or Real Property, during the five years prior to the date of this Agreement; and (m) any Contract not specified above that is material to IAC. IAC has made available to Hollis-Eden true and complete copies of each document listed on Schedule 4.11, and a written description ------------- of each oral arrangement so listed. The cancellation of any such Contracts at any time by the other party would not have an IAC Material Adverse Effect. 4.12 Employee Benefit Plans. ---------------------- IAC has no employee benefit plan other than the contemplated IAC Employee Stock Option Plan referenced in Section 1.7(a)(iii)(1) above. 4.13 Tax Matters. ----------- (a) IAC has duly filed all Tax Returns required to be filed by it under applicable law or filed appropriate extensions which have not yet expired and will file all Tax Returns required to be filed by it at or prior to the Effective Time under applicable law. All Tax Returns were in all material respects (and, as to Tax Returns not filed as of the date hereof, will be) true, complete and correct and filed on a timely basis or extended as permitted by law. (b) IAC has, within the time and in the manner prescribed by law, paid (and until the Effective Time will pay within the time and in the manner prescribed by law) all Taxes that are currently due and payable except for those contested in good faith and for which adequate reserves have been taken. (c) There are no material Tax liens upon the assets of IAC except liens for Taxes not yet due. (d) IAC has complied (and until the Effective Time will comply) in all respects with the provisions of the Code relating to the payment and withholding of Taxes, including, without limitation, the withholding and reporting requirements under Code Sections 1441 through 1464, 3401 through 3606, 6041 and 6049, as well as similar provisions under any other Laws, and has, within the time and in the manner prescribed by Law, withheld from employee wages and paid over to the proper Governmental Authorities all amounts required. (e) No audits or other administrative proceedings or court proceedings are presently pending with regard to any Taxes or Tax Returns of IAC. (f) IAC has not received any Tax Rulings or entered into any Closing Agreements with any taxing authority that would have a continuing adverse effect after the Effective Time. (g) As soon as practicable after the Closing Date, IAC will make available to Hollis-Eden complete and accurate copies of (i) all Tax Returns, and any amendments thereto, filed by IAC, (ii) all audit reports received from any taxing authority relating to any Tax Return filed by IAC and (iii) any Closing Agreements entered into by IAC with any taxing authority. (h) The United States government (with respect to United States Federal income taxes) and Delaware (with respect to Delaware franchise taxes) are the only states, territories and jurisdictions (whether foreign or domestic) to which any Tax is properly payable by IAC. 4.14 Litigation. ---------- (a) There are no actions, suits, arbitrations, regulatory proceedings or other litigation, proceedings or governmental investigations pending or, to IAC's knowledge, threatened against IAC or any of the officers or directors of IAC in their capacity as such, or any of their respective properties or businesses, and IAC is not aware of any facts or circumstances which may give rise to any of the foregoing. IAC is not subject to any order, judgment, decree, injunction, stipulation or consent order of or with any court or other Governmental Authority. Since January 1, 1993, IAC has not entered into any agreement to settle or compromise any proceeding pending or threatened against it which has involved any obligation for which IAC has any continuing obligation. (b) There are no claims, actions, suits, proceedings, or investigations pending or, to IAC's knowledge, threatened by or against IAC with respect to this Agreement or the Certificate of Merger, or in connection with the transactions contemplated hereby or thereby, and IAC has no reason to believe there is a valid basis for any such claim, action, suit, proceeding or investigation. 4.15 No Conflict of Interest. Except as disclosed on ----------------------- Schedule 4.15, to IAC's knowledge, none of the stockholders of IAC ------------- has or claims to have any direct or indirect interest in any tangible or intangible property used in the business of IAC, except as a holder of shares of IAC Common Stock. Except as disclosed on Schedule 4.15, to IAC's knowledge, none of the -------------- stockholders of IAC has any direct or indirect interest in any other Person which conducts a business similar to, has any Contract or arrangement with, or does business or is involved in any way with, IAC except for the ownership of less than 1% of the outstanding stock of any publicly held corporation. 4.16 Bank Accounts. Schedule 4.16 sets forth the names ------------- ------------- and locations of each bank or other financial institution at which IAC has either an account (giving the account numbers) or safe deposit box and the names of all Persons authorized to draw thereon or have access thereto, and the names of all Persons, if any, now holding powers of attorney or comparable delegation of authority from IAC and a summary statement thereof. 4.17 Compliance with Laws. IAC is not in default under -------------------- any order of any court, Governmental Authority or other agency or arbitration board or tribunal to which IAC is or was subject within the past two years or in violation of any laws, ordinances, governmental rules or regulations (including, but not limited to, those relating to environmental, safety, building, product safety or health standards or labor or employment matters) to which IAC is or was subject within the past two years, except to the extent failure to comply would not have an IAC Material Adverse Effect. The business of IAC is being, and at the Closing will be, conducted in compliance with all applicable laws, ordinances, rules and regulations applicable to it (including, but not limited to, those relating to environmental, safety, building, product safety or health standards or labor or employment matters), except to the extent failure to comply would not have an IAC Material Adverse Effect. 4.18 Broker's/Finder's Fees. IAC retained Gruntal & ---------------------- Co., Incorporated ("Gruntal") in connection with the transactions contemplated by this Agreement and shall pay to Gruntal 50,000 shares of Surviving Corporation Common Stock as a fee for their services. Hollis-Eden does not have, nor shall have, any liability or otherwise suffer or incur any loss as a result of or in connection with such fee payable to Gruntal. Except for Gruntal, IAC has not used any broker or finder in connection with the transactions contemplated by this Agreement, and Hollis-Eden has not and shall not have any liability or otherwise suffer or incur any loss as a result of or in connection with any brokerage or finder's or other commission payable as a result of any actions taken by IAC with respect to any broker or finder in connection with the Merger contemplated by this Agreement. 4.19 Board Recommendation. The Board of Directors of -------------------- IAC, at a special meeting of such Board held on November 1, 1996, approved this Agreement, the Merger and the other transactions contemplated hereby on the terms and conditions set forth herein and has determined to recommend that the stockholders of IAC approve this Agreement and the Merger (subject to the fiduciary duty of the Board of Directors under applicable law). 4.20 Employee Matters. With the exception of Salvatore ---------------- J. Zizza, President of IAC, IAC does not presently have any employees and will not have any employees from the date hereof to the Effective Time. IAC is not a party to any employment agreement or consulting or similar agreement for the present or future provision of services to IAC. IAC has conducted and currently is conducting its business in material compliance with all Laws relating to employment and employment practices, terms and conditions of employment, wages and hours and nondiscrimination in employment. IAC has no liability for any vacation pay, vacation time, retirement benefits, health, disability or other insurance benefits or severance pay. 4.21 SEC Filings. IAC has heretofore delivered to ----------- Hollis-Eden all registrations statements filed with the Securities and Exchange Commission ("SEC"), its most recent Form 10-K for the fiscal year ended December 31, 1995 and all intervening Form 8-K's, Form 10-Q's, proxy statements and other documents together with all exhibits thereto, as filed with the SEC (the "SEC Filings"). The SEC Filings were timely filed with the SEC and do not contain a misstatement of a material fact or an omission of a material fact required to be stated therein or necessary to make the statements therein not misleading as of the time such documents were filed. No other document or report has been required to be filed by IAC with the SEC which has not been filed and, with the exception of the consummation of the Merger, no event or transaction has occurred or is contemplated which will hereafter be required to be disclosed by the Company in a Form 10-K, Form 10-Q, Form 8-K or similar filing. IAC shall cause to be filed all periodic and current reports required to be filed with the SEC for all periods after execution of the Agreement through the Closing Date. ARTICLE V COVENANTS 5.1 Implementing Agreement. Subject to the terms and ---------------------- conditions hereof, each party hereto shall use its best effort to take all action required of it to fulfill its obligations under the terms of this Agreement and the Certificate of Merger and to facilitate the consummation of the transactions contemplated hereby and thereby. 5.2 Access to Information and Facilities. (a) From and ------------------------------------ after the date of this Agreement, Hollis-Eden shall allow IAC and its representatives access during normal business hours to all of the facilities, properties, books, Contracts, commitments and records of Hollis-Eden and shall make the officers and employees of Hollis-Eden available to IAC and its representatives as IAC or its representatives shall from time to time reasonably request. IAC and its representatives will be furnished with any and all information concerning Hollis-Eden which IAC or its representatives reasonably request. (b) From and after the date of this Agreement, IAC shall give Hollis-Eden and its representatives access during normal business hours to all of the facilities, properties, books, Contracts, commitments and records of IAC and shall make the officers and employees of IAC available to Hollis-Eden and its representatives as Hollis-Eden or its representatives shall from time to time reasonably request. Hollis-Eden and its representatives will be furnished with any and all information concerning IAC which Hollis-Eden or its representatives reasonably request. 5.3 Preservation of Business. From the date of this ------------------------ Agreement until the Closing Date, each of Hollis-Eden and IAC, as the case may be, shall operate only in the ordinary and usual course of business consistent with past practice, and shall use reasonable commercial efforts to (a) preserve intact the present business organization of Hollis-Eden and IAC, as the case may be, (b) preserve the good will and advantageous relationships of Hollis-Eden and IAC, as the case may be, with employees and other Persons material to the operation of their respective businesses, and (c) not permit any action or omission within its control which would cause any of the representations or warranties of Hollis-Eden and IAC, as the case may be, contained herein to become inaccurate in any material respect or any of the covenants of Hollis-Eden and IAC, as the case may be, to be breached in any material respect. Without limiting the generality of the foregoing, except as set forth on Schedule 3.6 with respect to ------------- Hollis-Eden, and Schedule 4.6 with respect to IAC, prior to the ------------- Closing, neither Hollis-Eden nor IAC will, without having obtained the prior written consent of the other: (i) incur any obligation or enter into any Contract which either (x) requires a payment by any party in excess of, or a series of payments which in the aggregate exceed, $10,000 or provides for the delivery of goods or performance of services, or any combination thereof, having a value in excess of $10,000, or (y) has a term of, or requires the performance of any obligations by Hollis-Eden or IAC, as the case may be, over a period in excess of, six months; (ii) take any action, or enter into or authorize any Contract or transaction other than in the ordinary course of business and consistent with past practice; (iii) as applicable, sell, transfer, convey, assign or otherwise dispose of any of its assets or properties, except in the ordinary course of business; (iv) waive, release or cancel any claims against third parties or debts owing to it, or any rights which have any value in an amount greater than $10,000 other than actions taken consistent with normal past business practices; (v) make any changes in its accounting systems, policies, principles or practices; (vi) authorize for issuance, issue, sell, deliver or agree or commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, convertible or exchangeable securities, commitments, subscriptions, rights to purchase or otherwise) any shares of its capital stock or any other securities, or amend any of the terms of any such securities; (vii) split, combine, or reclassify any shares of its capital stock, declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock, or redeem or otherwise acquire any of its securities; (viii) make any borrowings, incur any debt (other than trade payables in the ordinary course of business or equipment leases entered into in the ordinary course of business), or assume, guarantee, endorse or otherwise become liable (whether directly, contingently or otherwise) for the obligations of any other Person other than a subsidiary, or make any unscheduled payment or repayment of principal in respect of any Long Term Debt. "Long Term Debt" shall mean the aggregate original principal amount (less any cash repayments of principal previously made) of, and any and all accrued interest on, all indebtedness with respect to borrowed money and all other obligations (or series of related obligations) to pay money with respect to extensions of credit, including capitalized lease and deferred compensation obligations, except indebtedness or obligations for which all installments are payable within six months from the date of the advancement of funds or extension of credit. The term "Long Term Debt" shall include any amount listed or to be listed as a current liability on financial statements which reflects the current portion or final installments of obligations originally reflected as noncurrent liabilities; (ix) make any new loans, advances or capital contributions to, or new investments in, any other Person other than to a subsidiary consistent with normal business practices; (x) except as contemplated by this Agreement, enter into, adopt, amend or terminate any bonus, profit sharing, compensation, termination, stock option, stock appreciation right, restricted stock, performance unit, pension, retirement, deferred compensation, employment, severance or other employee benefit agreements, trusts, plans, funds or other arrangements for the benefit or welfare of any director, officer or employee, or increase in any manner the compensation or fringe benefits of any director, officer or employee or pay any benefit not required by any existing plan and arrangement or enter into any contract, agreement, commitment or arrangement to do any of the foregoing other than actions taken in the ordinary course of business consistent with prior business practices; (xi) except for capital expenditures contemplated by (xii) below, acquire, lease or encumber any assets outside the ordinary course of business or any assets which are material to its operations; (xii) authorize or make any capital expenditures which individually or in the aggregate are in excess of $10,000 other than planned expenditures for the development, establishment or expansion of clinics and other operations consistent with past business practices; (xiii) make any Tax election or settle or compromise any federal, state, local or foreign income Tax liability, or waive or extend the statute of limitations in respect of any such Taxes; (xiv) pay or agree to pay any amount in settlement or compromise of any suits or claims of liability against it or its directors, officers, employees or agents in an amount more than $10,000; or (xv) terminate, modify, amend or otherwise alter or change any of the terms or provisions of any Contract other than in accordance with ordinary business practices, or pay any amount not required by Law or by any Contract in an amount more than $10,000. 5.4 IAC and Hollis-Eden Stockholders' Meetings. ------------------------------------------ (a) IAC, promptly following the execution of this Agreement, shall call a meeting of stockholders (the "IAC Stockholders' Meeting") to be held as promptly as practicable following the declaration of effectiveness by the SEC of the Registration Statement (as defined below) at IAC's principal executive offices, for the purpose, among others, of voting on the Merger contemplated herein and to approve the creation of the IAC Employee Stock Option Plan. In connection with the IAC Stockholders' Meeting, IAC shall promptly prepare and file with the SEC, as part of IAC's Registration Statement on Form S-4 with respect to the Merger (the "Registration Statement"), a joint proxy statement/prospectus (the "Joint Proxy Statement") for dissemination to each holder of shares of IAC Common Stock. IAC shall promptly amend or supplement the Registration Statement to the extent necessary in order to make the statements therein not misleading. IAC shall use its reasonable, good faith efforts to have the Registration Statement declared effective by the SEC under the provisions of the Securities Act of 1933, as amended (the "Act"). IAC shall provide Hollis-Eden with copies of all filings made pursuant to this Section 5.4 and shall consult with Hollis-Eden on responses to any comments made by the staff of the SEC with respect thereto. (b) Hollis-Eden, promptly following the execution of this Agreement, shall call a meeting of stockholders (the "Hollis-Eden Stockholders' Meeting" and, together with the IAC Stockholders' Meeting, the "Meetings") to be held as promptly as practicable following the declaration of effectiveness by the SEC of the Registration Statement at Hollis-Eden's principal executive offices, for the purpose, among others, of voting on the Merger contemplated herein. In connection with the Hollis- Eden Stockholders' Meeting, Hollis-Eden shall disseminate to each holder of shares of Hollis-Eden Common Stock for his or its information a copy of the Joint Proxy Statement. Hollis-Eden shall cause its representatives to cooperate with IAC and its representatives in connection with the preparation and filing with the SEC of the Registration Statement. 5.5 Registration of IAC Common Stock. (a) As soon as -------------------------------- practicable after the execution of this Agreement, IAC shall file the Registration Statement with the SEC for the purpose of registering the shares of Surviving Corporation Common Stock and Surviving Corporation Warrants for distribution to Hollis-Eden's stockholders and warrantholders in the Merger. (b) The information specifically designated as being supplied by IAC for inclusion in the Registration Statement shall not, at the time the Registration Statement is declared effective, at the time the Joint Proxy Statement is first mailed to Hollis-Eden and IAC stockholders, at the time of the Meetings and on the Effective Date, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, not misleading. (c) The information specifically designated as being supplied by Hollis-Eden for inclusion in the Registration Statement shall not, at the time the Registration Statement is declared effective, at the time the Joint Proxy Statement is first mailed to Hollis-Eden and IAC stockholders, at the time of the Meetings and on the Effective Date, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, not misleading. (d) If, at any time prior to the Effective Date, any event or circumstance relating to IAC or its officers or directors should be discovered by IAC which should be set forth in an amendment to the Registration Statement or a supplement to the Joint Proxy Statement, IAC shall promptly inform Hollis-Eden and IAC shall promptly file such amendment to the Registration Statement. (e) If, at any time prior to the Effective Date, any event or circumstance relating to Hollis-Eden or its officers or directors should be discovered by Hollis-Eden which should be set forth in a supplement to the Joint Proxy Statement, Hollis-Eden shall promptly inform IAC of the same, and IAC shall promptly file such supplement to the Joint Proxy Statement. (f) All documents that IAC is responsible for filing with the SEC in connection with the transactions contemplated herein will comply as to form and substance in all material respects with the applicable requirements of the Act and the rules and regulations thereunder and the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. (g) Hollis-Eden shall cooperate and use its best efforts to supply IAC with all requisite information necessary to complete the Registration Statement, including, but not limited to, information relative to proxy solicitation of Hollis-Eden's stockholders for approval of the Merger contemplated herein. 5.6 Agreement to Vote. (a) Hollis, Chairman of the ----------------- Board of Hollis-Eden, shall vote all shares of Hollis-Eden Common Stock owned by him in favor of the Merger contemplated herein and use his best efforts to cause the other holders of shares of Hollis-Eden Common Stock to vote their shares in favor of the Merger. (b) Zizza, Chairman of the Board of IAC, shall vote all shares of IAC Common Stock owned by him in favor of the Merger contemplated herein and use his best efforts to cause the other holders of shares of IAC Common Stock to vote their shares in favor of the Merger. 5.7 Blue Sky Compliance. IAC shall use its best efforts ------------------- to qualify the shares of Surviving Corporation Common Stock to be issued pursuant to the Merger under the securities or "blue sky" laws of every jurisdiction of the United States in which a Hollis-Eden stockholder has an address on the records of Hollis- Eden on the record date for determining the Hollis-Eden stockholders entitled to notice of and to vote on the Merger, except any such jurisdiction with respect to which counsel for IAC has determined that such qualification is not required under the securities or "blue sky" laws of such jurisdiction. 5.8 Listing. IAC shall use its best efforts to cause ------- the shares of Surviving Corporation Common Stock to be issued pursuant to the Merger to be listed on the Nasdaq National Market System at the Effective Time, free of restrictions on transfer other than restrictions pursuant to Rule 144 and Rule 145 promulgated under the Act. 5.9 Consents and Approvals. ---------------------- (a) Hollis-Eden shall use reasonable commercial efforts to obtain all consents, approvals, certificates and other documents required in connection with the performance by it of this Agreement and the consummation of the transactions contemplated hereby, including all such consents and approvals by each party to any of the Contracts referred to on Schedule 3.3. ------------ Hollis-Eden shall make all filings, applications, statements and reports to all Governmental Authorities and other Persons which are required to be made prior to the Closing Date by or on behalf of Hollis-Eden pursuant to any applicable Law or Contract in connection with this Agreement and the transactions contemplated hereby. (b) IAC shall use reasonable commercial efforts to obtain all consents, approvals, certificates and other documents required in connection with the performance by it of this Agreement and the consummation of the transactions contemplated hereby. IAC shall make all filings, applications, statements and reports to all Governmental Authorities and other Persons which are required to be made prior to the Closing Date by or on behalf of IAC pursuant to any applicable Law or Contract in connection with this Agreement and the transactions contemplated hereby. 5.10 Maintenance of Insurance. Hollis-Eden shall ------------------------ continue to carry its existing insurance, and shall not allow any breach, default, termination or cancellation of such insurance policies or agreements to occur or exist. 5.11 Supplemental Information. From time to time prior ------------------------ to the Closing, Hollis-Eden, on the one hand, and IAC, on the other hand, will promptly disclose in writing to the other any matter hereafter arising which, if existing, occurring or known at the date of this Agreement would have been required to be disclosed to the other parties hereto or which would render inaccurate any of the representations, warranties or statements set forth in Articles III and IV, respectively, hereof. Disclosure of supplemental information pursuant to this Section 5.11 shall insulate the party disclosing such information from a claim by the other parties hereto of a breach of representation with respect to such disclosed information. 5.12 Hollis-Eden Lock-Up Letters. Hollis-Eden shall use --------------------------- reasonable commercial efforts to obtain signed letters from as many Hollis-Eden stockholders as possible, which letters shall acknowledge such Hollis-Eden stockholders' agreement not to sell any shares of Surviving Corporation Common Stock to be issued to them in, and as a result of, the Merger, for the nine-month period immediately following the Effective Time. 5.13 Patent Analyses. (a) Within 45 days hereof, IAC, at --------------- its option and at its own expense, shall cause to be undertaken and completed by intellectual property counsel selected by IAC (or such counsel's representatives) (collectively, "IAC Counsel"), a patent infringement investigation including a search and an analysis (the "Patent Infringement Analysis") to determine whether, under the U.S. and Canadian Patent Laws then in existence, the manufacture, use, offer for sale or sale of any of Hollis-Eden's products set forth on Schedule 5.13 infringes one -------------- or more claims of any unexpired United States or Canadian patent ("Third-Party Patent"). In the event as a result of the Patent Infringement Analysis it is the opinion of IAC Counsel that one or more claims of Third-Party Patents are infringed, IAC Counsel shall within 45 days thereafter cause to be conducted and completed a patent validity investigation to determine whether in the opinion of IAC Counsel each of such infringed Third-Party Patent claims is valid and enforceable (the "Patent Validity Analysis"). The final opinion of IAC Counsel after completing said Patent Infringement Analysis and, if necessary, said Patent Validity Analysis, shall include an opinion as to whether any finding of patent infringement by IAC Counsel will have an "unavoidable" Hollis- Eden Material Adverse Effect upon the products set forth on Schedule 5.13. In construing the term "unavoidable" as used in -------------- this Section, the parties understand and agree that, by way of example, in the event it is the opinion of IAC Counsel that there is infringement of one or more valid claims of a Third-Party Patent, but that it is demonstrated to the good faith reasonable satisfaction of IAC Counsel that either (i) a license is available to Hollis-Eden under such infringed Third-Party Patent, or (ii) that a non-infringing commercial alternative is available to Hollis-Eden to enable it to avoid liability for patent infringement, the existence of either of such Hollis-Eden options (i) or (ii) shall be construed as satisfying the condition under this Section that liability for such patent infringement can be "avoided" by Hollis-Eden. IAC shall, reasonably promptly after receipt of the aforesaid completed Patent Infringement Analysis and, if completed, the Patent Validity Analysis, provide to Hollis-Eden a copy of same. Moreover, IAC shall provide to Hollis-Eden copies of all documents pertinent to IAC Counsel's said analyses as they are received, including, without limitation, the results of IAC Counsel's prior art search and analysis, its file history analysis, and a detailed claim chart for each claim identified by IAC Counsel as being infringed, together with all related documents, in order to permit H-E Counsel (as defined below) to (a) evaluate same prior to the final opinion of IAC Counsel and (b) to have an opportunity prior to said IAC Counsel final opinion to either obtain a license under each infringed Third- Party Patent and/or provide to IAC Counsel for consideration one or more non-infringing alternatives which will render the patent infringement "avoidable". IAC Counsel shall within 15 business days after receipt of same and all supporting documents, evaluate each such Hollis-Eden proposed non-infringing alternative with a view toward confirming or revising IAC Counsel's final opinion. (b) In the event, in the final opinion of IAC Counsel, there is an "unavoidable" Hollis-Eden Material Adverse Effect upon the products set forth on Schedule 5.13 as a result of infringement of ------------- a Third-Party Patent, then within 45 days after receipt of such IAC Counsel final opinion Hollis-Eden, at its option and at its own expense, shall cause to be undertaken and completed by intellectual property counsel selected by Hollis-Eden (or such counsel's representatives) (collectively "H-E Counsel"), its own like patent infringement and patent validity investigations, to determine whether H-E Counsel is in agreement with the opinion of IAC Counsel. Hollis-Eden shall reasonably promptly after receipt of the aforesaid completed H-E Counsel analyses provide to IAC a copy of same, including, without limitation, the results of H-E Counsel's prior art search and analysis, its file history analysis, and a detailed claim chart for each claim identified by IAC Counsel as being infringed, together with all related documents. Furthermore, Hollis-Eden shall provide to IAC a copy of documents pertinent to H-E Counsel's said analyses as they are received, in order to permit IAC Counsel to evaluate same prior to the final opinion of H-E Counsel. (c) In the event the final opinions IAC Counsel and H-E Counsel reach opposite conclusions, the parties shall in good faith select independent intellectual property counsel with at least ten years of first chair patent trial experience and from an intellectual property boutique with an "av" Martindale Hubbell rating ("Independent Counsel"). Such Independent Counsel shall be retained by and at the shared (50% each) expense of the parties for the purpose of providing an independent opinion as to whether there is a reasonably strong likelihood that, under the U.S. and Canadian Patent Laws then in existence, the manufacture, use, offer for sale or sale of any of Hollis-Eden's products set forth on Schedule 5.13 will infringe one or more claims of a ------------ Third-Party Patent, and whether such infringement will in the opinion of Independent Counsel have an "unavoidable" Hollis-Eden Material Adverse Effect upon said products. Independent Counsel, upon being retained, shall be provided with both (i) a copy of the final opinions of IAC Counsel and H-E Counsel (together with supporting documents) and (ii) an opportunity for each of IAC Counsel and H-E Counsel to be heard. The independent opinion of Independent Counsel shall be final and shall be binding upon IAC and Hollis-Eden. (d) As soon as possible following the execution of this Agreement, Hollis-Eden shall deliver, or cause to be delivered, to IAC all documentation in the possession of Hollis-Eden and Hollis-Eden's attorneys and other representatives regarding Hollis-Eden's licensed Intellectual Property. ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF IAC The obligations of IAC under this Agreement are subject to the satisfaction or waiver by IAC of the following conditions precedent on or before the Closing Date: 6.1 Warranties True as of Both Present Date and Closing -------------------------------------------------- Date. The representations and warranties of Hollis-Eden contained ---- herein shall be true and correct in all material respects on and as of the date of this Agreement, and shall also be true and correct in all material respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date. 6.2 Compliance With Agreements and Covenants. Hollis- ---------------------------------------- Eden shall have performed and complied with all of its covenants, obligations and agreements contained in this Agreement to be performed and complied with by it on or prior to the Closing Date. 6.3 Consents and Approvals. IAC, on the one hand, and ---------------------- Hollis-Eden, on the other hand, shall have received written evidence satisfactory to them that all consents and approvals required for the consummation of the transactions contemplated hereby have been obtained, and all required filings have been made, including (without limitation) those set forth on Schedule 3.3 ------------ hereto. 6.4 Documents. IAC shall have received all of the --------- agreements, documents and items specified in Section 8.1 below. 6.5 No Material Adverse Change. Since the date hereof, -------------------------- no "Material Adverse Change to Hollis-Eden" shall have occurred. Material Adverse Change to Hollis-Eden shall mean a change in the business, operations, assets, liabilities, results of operations, cash flows, condition (financial or otherwise) or prospects of Hollis-Eden which is materially adverse to Hollis-Eden. 6.6 Actions or Proceedings. No action or proceeding by ---------------------- any Governmental Authority or other Person shall have been instituted or threatened which (a) is likely to have a Hollis- Eden Material Adverse Effect, or (b) could enjoin, restrain or prohibit, or could result in substantial damages in respect of, any provision of this Agreement or the consummation of the transactions contemplated hereby. 6.7 Opinion of Counsel for Hollis-Eden. IAC shall have ---------------------------------- received the opinion of Cooley Godward LLP, counsel for Hollis- Eden, substantially in the form annexed hereto as Exhibit B. 6.8 Approval of Merger. The stockholders of Hollis-Eden ------------------- and IAC shall have approved this Agreement and the Merger contemplated hereby in accordance with their respective charters and by-laws and the DGCL and, with respect to IAC, in the manner set forth in IAC's Prospectus dated May 15, 1995 (the "Prospectus"). 6.9 IAC Redemption Right. The Solicited Stockholders -------------------- holding 15% or more of the shares of IAC Common Stock shall not have exercised their Redemption Rights in accordance with the Prospectus. 6.10 Patent Infringement and Patent Validity Analyses. ------------------------------------------------ The Patent Infringement Analysis and, if necessary, the Patent Validity Analysis, contemplated in Section 5.13 above, and, if given, the final opinion of Independent Counsel (which final opinion shall be binding upon the parties), shall not have resulted in an opinion of a patent infringement which will have an "unavoidable" Hollis-Eden Material Adverse Effect upon the products set forth on Schedule 5.13. ------------- 6.11 Appointment of Zizza as a Director. Zizza shall ---------------------------------- have been appointed a Director of the Surviving Corporation, effective at the Effective Time. ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF HOLLIS-EDEN The obligations of Hollis-Eden under this Agreement are subject to the satisfaction or waiver by Hollis-Eden of the following conditions precedent on or before the Closing Date: 7.1 Warranties True as of Both Present Date and Closing -------------------------------------------------- Date. The representations and warranties of IAC contained herein ---- shall be true and correct in all material respects on and as of the date of this Agreement, and shall also be true and correct in all material respects on and as of the Closing Date with the same force and effect as though made by IAC on and as of the Closing Date. 7.2 Compliance with Agreements and Covenants. IAC shall ---------------------------------------- have performed and complied with all of its covenants, obligations and agreements contained in this Agreement to be performed and complied with by it on or prior to the Closing Date. 7.3 Consents and Approvals. Hollis-Eden, on the one ---------------------- hand, and IAC, on the other hand, shall have received written evidence satisfactory to them that all consents and approvals required for the consummation of the transactions contemplated hereby have been obtained, and all required filings have been made, including (without limitation) those set forth on Schedule ------------ 3.3 hereto. --- 7.4 Documents. Hollis-Eden shall have received all of --------- the agreements, documents and items specified in Section 8.2. 7.5 No Material Adverse Change. Since the date hereof, -------------------------- no "Material Adverse Change to IAC" shall have occurred. Material Adverse Change to IAC shall mean a change in the business, operations, assets, liabilities, results of operations, cash flows, condition (financial or otherwise) or prospects of IAC which is materially adverse to IAC. 7.6 Actions or Proceedings. No action or proceeding by ---------------------- any Governmental Authority or other Person shall have been instituted or threatened which (a) is likely to have an IAC Material Adverse Effect, or (b) could enjoin, restrain or prohibit, or could result in substantial damages in respect of, any provision of this Agreement or the consummation of the transactions contemplated hereby. 7.7 Opinion of Counsel for IAC. Hollis-Eden shall have -------------------------- received the opinion of Reid & Priest LLP, counsel for IAC, substantially in the form annexed hereto as Exhibit C. 7.8 Approval of Merger. The stockholders of Hollis-Eden ------------------ and IAC shall have approved this Agreement and the Merger contemplated hereby in accordance with their respective charters and by-laws and the DGCL and, with respect to IAC, in the manner set forth in its Prospectus. 7.9 Registration Statement Effective. The Registration -------------------------------- Statement shall have been declared effective by the SEC in accordance with the Act and the rules and regulations promulgated thereunder. 7.10 IAC Cash Position. Hollis-Eden shall be satisfied, ----------------- in good faith, that IAC, as of the date of this Agreement and as of the Effective Time, has not less than $6.5 million of cash on hand, in excess of all liabilities. ARTICLE VIII DELIVERIES AT CLOSING 8.1 Deliveries by Hollis-Eden. At the Closing, in ------------------------- addition to any other documents or agreements required under this Agreement, Hollis-Eden shall deliver to IAC the following: (a) Evidence, in form satisfactory to IAC, that all filings, approvals and other matters set forth on Schedule 3.3 ---------- have been obtained; (b) A certificate, dated the Closing Date, of an officer of Hollis-Eden, certifying as to the compliance by it with Sections 6.1 and 6.2 hereof; (c) A certificate of the secretary or equivalent Person (a "Secretary") of Hollis-Eden certifying resolutions of the Board of Directors and stockholders of Hollis-Eden approving and authorizing the execution, delivery and performance of this Agreement and the Certificate of Merger and the consummation of the transactions contemplated hereby and thereby, including the Merger (together with an incumbency and signature certificate regarding the officer(s) signing on behalf of Hollis-Eden); (d) The Certificate of Incorporation of Hollis-Eden, certified by the Secretary of State of Delaware, and the by-laws of Hollis-Eden, certified by the Secretary of Hollis-Eden; (e) Certificates of Good Standing for Hollis-Eden from the State of Delaware and all the other jurisdictions set forth on Schedule 3.1 hereof; ------------ (f) The opinion referenced in Section 6.7 above; (g) Copies of the signed letters received by Hollis- Eden as contemplated by Section 5.12 above; and (h) The Certificate of Merger. 8.2 Deliveries by IAC. At the Closing, in addition to ----------------- any other documents or agreements required under this Agreement, IAC shall deliver to Hollis-Eden the following: (a) Evidence, in form satisfactory to Hollis-Eden, that all filings, approvals and other matters contemplated in Section 4.3 have been obtained; (b) A certificate, dated the Closing Date, of an officer of IAC, certifying as to compliance by IAC with Sections 7.1, 7.2 and 7.10 hereof; (c) A certificate of the Secretary of IAC certifying resolutions of the Board of Directors and stockholders of IAC approving and authorizing the execution, delivery and performance of this Agreement and the Certificate of Merger and the consummation of the transactions contemplated hereby and thereby, including the Merger (together with an incumbency and signature certificate regarding the officer(s) signing on behalf of IAC); (d) The Certificate of Incorporation of IAC, certified by the Secretary of State of Delaware, and the by-laws of IAC, certified by the Secretary of IAC; (e) A Certificate of Good Standing for IAC from the State of Delaware; (f) The opinion referenced in Section 7.7 above; (g) The Certificate of Merger; and (h) Written evidence, in form reasonably satisfactory to Hollis-Eden, that IAC has delivered to the Exchange Agent certificates representing the maximum number of shares of Surviving Corporation Common Stock, Surviving Corporation Warrants and Surviving Corporation Options that may be issued in connection with the Merger. ARTICLE IX TERMINATION; TERMINATION FEE 9.1 Termination. Anything herein or elsewhere to the ----------- contrary notwithstanding, this Agreement may be terminated and the Merger contemplated hereby may be abandoned at any time prior to the Closing Date, as follows: (a) With the mutual consent of all parties hereto; (b) Prior to, but not after, the approval hereof by the stockholders of each of Hollis-Eden and IAC, by Hollis-Eden or IAC, as the case may be, if the Closing shall not have taken place on or before February 15, 1997 (or such later date as contemplated by Section 5.13 above to permit the parties hereto to complete their patent analyses within the time parameters set forth in Section 5.13 above); provided, however, that the right ------------ ----------------- to terminate this Agreement under this Section 9.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of or resulted in the failure of the Closing to occur on or before such date; (c) By either party hereto if any court of competent jurisdiction in the United States or other United States governmental body shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the Merger or any of the other transactions contemplated hereby and such order, decree, ruling or other action shall have become final and non appealable; (d) By IAC, if Solicited Stockholders holding 15% or more of the shares of IAC Common Stock shall have exercised their Redemption Rights in accordance with the Prospectus; or (e) By IAC, if the condition precedent set forth in Section 6.10 hereof is not satisfied by the Closing Date. 9.2 Effect of Termination. If this Agreement is --------------------- terminated pursuant to Section 9.1, all obligations of the parties hereunder (except with respect to the obligations enumerated in Sections 9.3 and 12.3 below) shall terminate, except that no such termination shall relieve any party from liability for any prior willful breach of this Agreement. 9.3 Termination Fee. IAC and Hollis-Eden each --------------- acknowledge that upon the execution of this Agreement, Hollis- Eden placed $100,000 into an escrow account with Reid & Priest LLP, as escrow agent, pursuant to an Escrow Agreement of even date herewith (the "Escrow Agreement"), a form of which is annexed hereto as Exhibit D. Pursuant to the terms of the Escrow Agreement, in the event that Hollis-Eden terminates this Agreement and abandons the Merger contemplated hereby for any reason, other than due to a reason described in Section 9.1 above, the Escrow Agent shall release the $100,000 from escrow and deliver such sum to IAC as reimbursement for its costs and expenses in connection with this Agreement and the proposed Merger. In addition, and notwithstanding anything to the contrary set forth herein, in the event that IAC terminates this Agreement and abandons the Merger contemplated hereby in accordance with Section 9.1(e) above, the Escrow Agent shall release from escrow and deliver to IAC such sum as may be necessary to reimburse IAC for its costs and expenses in connection with this Agreement and the proposed Merger. ARTICLE X EXCLUSIVITY From and after the date of this Agreement and until either the Effective Time of the Merger or the termination of this Agreement in accordance with Article IX hereof, neither Hollis-Eden nor any of its affiliates shall solicit, initiate, encourage, continue or enter into negotiations or discussions of any type, directly or indirectly, with any other person, with respect to an offer for the sale of Hollis-Eden, or any substantial portion of Hollis-Eden's assets, or Hollis-Eden's capital stock, directly by merger, consolidation or any other form of purchase (collectively, an "Offer"); provided, however, that the foregoing shall not prohibit Hollis-Eden and its affiliates from soliciting, initiating, encouraging, continuing or entering into negotiations or discussions for the limited purpose of raising capital for Hollis-Eden. ARTICLE XI INDEMNIFICATION 11.1 Survival. Solely for purposes of indemnification -------- for the representations listed in Sections 11.2(a) and 11.3(a) below, the representations, warranties and covenants made herein and in the Schedules hereto by Hollis-Eden and IAC shall survive the Closing and continue in full force and effect until and including the date which is one year after the Closing Date. No other representation, warranty or covenant made herein shall survive the Closing Date. 11.2 Indemnification by Hollis. ------------------------- (a) Subject to Section 11.2(c) below, and in addition to the indemnification provided for in Section 11.2(b) below, Hollis hereby agrees to defend, indemnify and hold harmless IAC, the Surviving Corporation and their respective affiliates, officers, directors, stockholders, agents and employees (other than Hollis) (collectively, the "IAC Indemnified Parties"), from and against any and all loss or liability, accrued, absolute or otherwise, in respect of losses, suits, proceedings, demands, judgments, damages, expenses and costs (including reasonable attorneys' fees and litigation expenses, whether arising out of a third party claim or relating to recovering indemnifiable damages from Hollis) (collectively, the "IAC Indemnifiable Damages") which any of the IAC Indemnified Parties may suffer or incur by reason of the breach by Hollis-Eden of any of its representations and warranties set forth in Section 3.3, the third sentence of Section 3.4(b) (provided, however, that such numbers may vary by 5% without any breach taking place), Section 3.7(i) (provided, however, that no indemnification shall be made with respect to title to intangible assets) and Sections 3.8, 3.12, 3.14, 3.16 and 3.19 of this Agreement. Notwithstanding the foregoing, Hollis' indemnification obligations under this Section 11.2 shall only be triggered if Hollis knew, at the date of this Agreement or at the Closing Date, that the representation or warranty in question was false or misleading when made or given by Hollis- Eden. (b) In addition to the indemnification provided for in Section 11.2(a) above, Hollis shall indemnify and hold harmless IAC, the Surviving Corporation and Zizza from any and all losses or liabilities that IAC, Zizza or the Surviving Corporation may suffer or incur in the event any party other than Laidlaw claims that a brokerage or finder's fee is payable as a result of actions taken by Hollis or Hollis-Eden in connection with the Merger. (c) Hollis shall not be required to indemnify the IAC Indemnified Parties pursuant to Section 11.2(a) above (i) except to the extent that the aggregate amount of IAC Indemnifiable Damages exceeds $25,000, in which case Hollis shall only be responsible for such IAC Indemnifiable Damages in excess of $25,000 in the aggregate or (ii) for any amounts in excess of $250,000. Hollis may pay such Indemnifiable Damages in cash or by transfer of his shares of Surviving Corporation Common Stock pro rata to such IAC Indemnified Parties at the fair market price of such Surviving Corporation Common Stock calculated by reference to the average Closing Price per share of the Surviving Corporation Common Stock over a period of twenty consecutive Trading Days immediately prior to the date of receipt by Hollis of a claim for IAC Indemnifiable Damages made by such IAC Indemnified Party. 11.3 Indemnification by Zizza. (a) Subject to Section ------------------------ 11.3(c) below, and in addition to the indemnification provided for in Section 11.3(b) below, Zizza hereby agrees to defend, indemnify and hold harmless, Hollis-Eden, the Surviving Corporation and their respective affiliates, officers, directors, stockholders, agents and employees (other than Zizza) (collectively, the "Hollis-Eden Indemnified Parties"), from and against any and all loss or liability, accrued, absolute or otherwise, in respect of losses, suits, proceedings, demands, judgments, damages, expenses and costs (including reasonable attorneys' fees and litigation expenses, whether arising out of a third party claim or relating to recovering indemnifiable damages from Zizza) (collectively, the "Hollis-Eden Indemnifiable Damages") which any of the Hollis-Eden Indemnified Parties may suffer or incur by reason of the breach by IAC of any of its representations or warranties set forth in Sections 4.3, 4.4, 4.7, 4.8, 4.12, 4.13, 4.14 and 4.17. Notwithstanding the foregoing, Zizza's indemnification obligations under this Section 11.3 shall only be triggered if Zizza knew, at the date of this Agreement or at the Closing Date, that the representation or warranty in question was false or misleading when made or given by IAC. (b) In addition to the indemnification provided for in Section 11.3(a) above, Zizza shall indemnify and hold harmless Hollis-Eden, the Surviving Corporation and Hollis from any and all losses or liabilities that Hollis-Eden, the Surviving Corporation or Hollis may suffer or incur in the event any party other than Gruntal claims that a brokerage or finder's fee is payable as a result of actions taken by IAC or Zizza in connection with the Merger. (c) Zizza shall not be required to indemnify the Hollis-Eden Indemnified Parties pursuant to Section 11.3(a) above (i) except to the extent that the aggregate amount of Hollis-Eden Indemnifiable Damages exceeds $25,000, in which case Zizza shall only be responsible for such Hollis-Eden Indemnifiable Damages in excess of $25,000 in the aggregate or (ii) for any amounts in excess of $250,000. Zizza may pay such Indemnifiable Damages in cash or by transfer of his shares of Surviving Corporation Common Stock pro rata to such Hollis-Eden Indemnified Parties at the fair market price of such Surviving Corporation Common Stock calculated by reference to the average Closing Price per share of the Surviving Corporation Common Stock over a period of twenty consecutive Trading Days immediately prior to the date of receipt by Zizza of a claim for Hollis-Eden Indemnifiable Damages made by such Hollis-Eden Indemnified Party. 11.4 Notice and Right to Defend Third Party Claims. --------------------------------------------- Promptly upon receipt of notice of any third party claim, demand or assessment or the commencement of any suit, action or proceeding, or promptly following awareness of all relevant facts necessary to conclude that a non-third party claim may be made, in respect of which indemnity may be sought on account of an indemnity agreement contained in this Article XI, the party(ies) seeking indemnification (the "Indemnitee") will notify in writing, within sufficient time to respond to such claim or answer or otherwise plead in such action, the party(ies) from whom indemnification is sought (the "Indemnitor"). In case any claim, demand or assessment is asserted or suit, action or proceeding is commenced against an Indemnitee, and it notifies the Indemnitor of the commencement thereof, the Indemnitor will be entitled to participate therein, and, to the extent that it may wish, to assume the defense, conduct or settlement thereof, with counsel reasonably satisfactory to the Indemnitee, whose consent to the selection of counsel will not unreasonably be withheld. After notice from the Indemnitor to the Indemnitee of its election so to assume the defense, conduct or settlement thereof, the Indemnitor will not be liable to the Indemnitee for any legal or other expenses subsequently incurred by the Indemnitee in connection with the defense, conduct or settlement thereof. The Indemnitee will cooperate with the Indemnitor in connection with any such claim, make personnel, books and records relevant to the claim available to the Indemnitor, and grant such authorization or powers of attorney to the agents, representatives and counsel of the Indemnitor as the Indemnitor may reasonably consider desirable in connection with the defense of any such claim. ARTICLE XII MISCELLANEOUS 12.1 Expenses. Each party hereto shall bear its own -------- expenses with respect to the transactions contemplated hereby. 12.2 Amendment. This Agreement may be amended, modified --------- or supplemented but only in a writing signed by the parties hereto. 12.3 Confidentiality and Return of Information. ----------------------------------------- (a) On and after the date of this Agreement, IAC will keep secret and confidential (i) all information heretofore or hereafter acquired by it and deemed to be confidential by Hollis- Eden and (ii) all other information provided by Hollis-Eden to IAC relating to the business, operations, employees, customers and distributors of Hollis-Eden, including, but not limited to, any customer or distributor lists, documentation regarding Intellectual Property, marketing arrangements, business plans, sales plans, promotional sales materials, pricing information, manuals, correspondence, notes, financial data or employee information (all such information described in clauses (i) and (ii) above is hereinafter collectively referred to as "Confidential Information"). (b) Upon any termination of this Agreement pursuant to Article IX hereof, IAC shall return to Hollis-Eden all documents and copies of documents in its possession relating to any Confidential Information, and no director, officer, employee or representative of IAC shall make or retain any copy or extract of any of the foregoing. 12.4 Notices. Any notice, request, instruction or other ------- document to be given hereunder by a party hereto shall be in writing and shall be deemed to have been given (a) when received if given in person, (b) on the date of transmission if sent by telex, facsimile or other wire transmission or (c) three business days after being deposited in the U.S. mail, certified or registered mail, postage prepaid: (a) If to Hollis-Eden or Hollis: 808 S.W. Third Avenue, Suite 540 Portland, Oregon 97204 Facsimile No.: (503) 226-1489 with a copy to: Cooley Godward LLP 4365 Executive Drive, Suite 1100 San Diego, CA 92121 Attention: Eric J. Loumeau, Esq. Facsimile No.: (619) 453-3555 (b) If to IAC or Zizza: 810 Seventh Avenue New York, New York 10019 Facsimile No.: (212) 333-7240 with a copy to: Reid & Priest LLP 40 West 57th Street New York, NY 10019 Attention: Leonard Gubar, Esq. Facsimile No.: (212) 603-2001 or to such other individual or address as a party hereto may designate for itself by notice given as herein provided. 12.5 Waivers. The failure of a party hereto at any time ------- or times to require performance of any provision hereof shall in no manner affect its right at a later time to enforce the same. No waiver by a party of any condition or of any breach of any term, covenant, representation or warranty contained in this Agreement shall be effective unless in writing, and no waiver in any one or more instances shall be deemed to be a further or continuing waiver of any such condition or breach in other instances or a waiver of any other condition or breach of any other term, covenant, representation or warranty. 12.6 Interpretation. The headings preceding the text of -------------- Articles and Sections included in this Agreement and the headings to Schedules attached to this Agreement are for convenience only and shall not be deemed part of this Agreement or be given any effect in interpreting this Agreement. The use of the masculine, feminine or neuter gender herein shall not limit any provision of this Agreement. The use of the terms "including" or "include" shall in all cases herein mean "including, without limitation" or "include, without limitation," respectively. 12.7 Applicable Law. This Agreement shall be governed by --------------- and construed and enforced in accordance with the internal laws of the State of Delaware, without giving effect to the principles of conflicts of law thereof. 12.8 Assignment. This Agreement shall be binding upon ---------- and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that no assignment of any rights or obligations shall be made by any party without the prior written consent of all the other parties hereto. 12.9 No Third Party Beneficiaries. This Agreement is ---------------------------- solely for the benefit of the parties hereto and, to the extent provided herein, their respective directors, officers, employees, agents and representatives, and no provision of this Agreement shall be deemed to confer upon other third parties any remedy, claim, liability, reimbursement, cause of action or other right. 12.10 Further Assurances. Upon the request of the ------------------ parties hereto, the other parties hereto will, on and after the Closing Date, execute and deliver such other documents, releases, assignments and other instruments as may be required to effectuate completely the transactions contemplated by this Agreement. 12.11 Severability. If any provision of this Agreement ------------ shall be held invalid, illegal or unenforceable, the validity, legality or enforceability of the other provisions hereof shall not be affected thereby, and there shall be deemed substituted for the provision at issue a valid, legal and enforceable provision as similar as possible to the provision at issue. 12.12 Remedies Cumulative. The remedies provided in this ------------------- Agreement shall be cumulative and shall not preclude the assertion or exercise of any other rights or remedies available by law, in equity or otherwise. 12.13 Entire Understanding. This Agreement and the -------------------- Certificate of Merger set forth the entire agreement and understanding of the parties hereto and supersede all prior agreements, arrangements and understandings between the parties. 12.14 Counterparts. This Agreement may be executed in ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered on the date first above written. INITIAL ACQUISITION CORP. By: /s/ Salvatore J. Zizza ------------------------------------ Name: Salvatore J. Zizza Title: Chairman and President HOLLIS-EDEN, INC. By: /s/ Richard B. Hollis ------------------------------------ Name: Richard B. Hollis Title: Chairman, President and Chief Executive Officer FOR PURPOSES OF SECTION 5.6 AND ARTICLE XI ONLY: /s/ Salvatore J. Zizza --------------------------------- Salvatore J. Zizza FOR PURPOSES OF SECTION 5.6 AND ARTICLE XI ONLY: /s/ Richard B. Hollis --------------------------------- Richard B. Hollis EX-4 3 Exhibit 4.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF HOLLIS-EDEN, INC. Hollis-Eden, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certified as follows: FIRST: The name of this corporation is Hollis-Eden, Inc. SECOND: The date of the filing of the corporation's original Certificate of Incorporation with the Secretary of State of Delaware was August 15, 1994 under the name Holmedco Pharmaceuticals Corporation. THIRD: The Amended and Restated Certification of Incorporation was duly adopted by the Board of Directors in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware. FOURTH: In lieu of a meeting and vote of the stockholders of the Corporation, the holders of not less than a majority of the outstanding Common Stock have given written consent to the Amended and Restated Certificate of Incorporation in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. FIFTH: Prompt written notice was given pursuant to Section 228 of the General Corporation Law of the State of Delaware to those stockholders who did not approve the Amended and Restated Certificate of Incorporation by written consent. SIXTH: The Certificate of Incorporation of the corporation shall be amended and restated to read in full as follows: I. The name of this corporation is Hollis-Eden, Inc. II. The address of the registered office of the corporation in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, and the name of the registered agent of the corporation in the State of Delaware at such address is The Corporation Trust Company. III. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware. IV. A. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is forty million (40,000,000) shares. Thirty million (30,000,000) shares shall be Common Stock, each having a par value of one cent ($.01). Ten million (10,000,000) shares shall be Preferred Stock, each having a par value of one cent ($.01). B. The Preferred Stock may be issued, from time to time in one or more series. The Board of Directors is hereby authorized, by filing a certificate (a "Preferred Stock Designation") pursuant to the Delaware General Corporation Law, to fix or alter from time to time the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions of any wholly unissued series of Preferred Stock, and to establish from time to time the number of shares constituting any such series or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. V. For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: A. 1. The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of Directors which shall constitute the whole Board of Directors shall be fixed exclusively by one or more resolutions adopted by the Board of Directors. 2. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the adoption and filing of this Amended and Restated Certificate of Incorporation, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the adoption and filing of this Amended and Restated Certificate of Incorporation, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the adoption and filing of this Amended and Restated Certificate of Incorporation, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this Article, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 3. Subject to the rights of the holders of any series of Preferred Stock, no director shall be removed without cause. Subject to any limitations imposed by law, the Board of Directors or any individual director may be removed from office at any time with cause by the affirmative vote of the holders of a majority of the voting power of all the then-outstanding shares of voting stock of the corporation, entitled to vote at an election of directors (the "Voting Stock"). 4. Subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders, except as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. B. 1. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two- thirds percent (66-2/3%) of the voting power of all of the then- outstanding shares of the Voting Stock. The Board of Directors shall also have the power to adopt, amend, or repeal Bylaws. 2. The directors of the corporation need not be elected by written ballot unless the Bylaws so provide. 3. No action shall be taken by the stockholders of the corporation except at an annual or special meeting of stockholders called in accordance with the Bylaws. 4. Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption) and shall be held at such place, on such date, and at such time as the Board of Directors shall fix. 5. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. VI. A. A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended after approval by the stockholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director shall be eliminated or limited to the fullest extent permitted by the Delaware General corporation Law, as so amended. B. Any repeal or modification of this Article VI shall be prospective and shall not affect the rights under this Article VI in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. VII. A. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in paragraph B. of this Article VII, and all rights conferred upon the stockholders herein are granted subject to this reservation. B. Notwithstanding any other provisions of this Amended and Restated Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, this Amended and Restated Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal Articles V, VI and VII. IN WITNESS WHEREOF, the Corporation has caused this Amended and Restaetd Certificate of Incorporation to be signed by Richard B. Hollis, President, Chief Executive Officer and Secretary of the Corporation, this -- day of December, 1996. ------------------------------------ Richard B. Hollis President and Chief Executive Officer Attest: ----------------------------- Richard B. Hollis Secretary EX-4 4 Exhibit 4.2 BYLAWS OF HOLLIS-EDEN, INC. (A DELAWARE CORPORATION) TABLE OF CONTENTS PAGE Article I Offices . . . . . . . . . . . . . . . . . . . 1 Section 1. Registered Office . . . . . . . . . . . . 1 Section 2. Other Offices . . . . . . . . . . . . . . 1 Article II Corporate Seal . . . . . . . . . . . . . . . . 1 Section 3. Corporate Seal . . . . . . . . . . . . . 1 Article III Stockholders' Meetings . . . . . . . . . . . . 1 Section 4. Place of Meetings . . . . . . . . . . . . 1 Section 5. Annual Meeting . . . . . . . . . . . . . 1 Section 6. Special Meetings . . . . . . . . . . . . 3 Section 7. Notice of Meetings . . . . . . . . . . . 4 Section 8. Quorum . . . . . . . . . . . . . . . . . 4 Section 9. Adjournment and Notice of Adjourned Meetings . . . . . . . . . . . . . . . . 5 Section 10. Voting Rights . . . . . . . . . . . . . . 5 Section 11. Joint Owners of Stock . . . . . . . . . . 5 Section 12. List of Stockholders . . . . . . . . . . 6 Section 13. Action Without Meeting . . . . . . . . . 6 Section 14. Organization . . . . . . . . . . . . . . 6 Article IV Directors . . . . . . . . . . . . . . . . . . 7 Section 15. Number and Term of Office . . . . . . . . 7 Section 16. Powers . . . . . . . . . . . . . . . . . 7 Section 17. Classes of Directors . . . . . . . . . . 7 Section 18. Vacancies . . . . . . . . . . . . . . . . 7 Section 19. Resignation . . . . . . . . . . . . . . . 8 Section 20. Removal . . . . . . . . . . . . . . . . . 8 Section 21. Meetings . . . . . . . . . . . . . . . . 8 (a) Annual Meetings . . . . . . . . . . . . . 8 (b) Regular Meetings . . . . . . . . . . . . 8 (c) Special Meetings . . . . . . . . . . . . 9 (d) Telephone Meetings . . . . . . . . . . . 9 (e) Notice of Meetings . . . . . . . . . . . 9 (f) Waiver of Notice . . . . . . . . . . . . 9 Section 22. Quorum and Voting . . . . . . . . . . . . 9 Section 23. Action Without Meeting . . . . . . . . . 10 Section 24. Fees and Compensation . . . . . . . . . . 10 Section 25. Committees . . . . . . . . . . . . . . . 10 (a) Executive Committee . . . . . . . . . . . 10 (b) Other Committees . . . . . . . . . . . . 11 (c) Term . . . . . . . . . . . . . . . . . . 11 (d) Meetings . . . . . . . . . . . . . . . . 11 Section 26. Organization . . . . . . . . . . . . . . 12 Article V Officers . . . . . . . . . . . . . . . . . . . 12 Section 27. Officers Designated . . . . . . . . . . . 12 Section 28. Tenure and Duties of Officers . . . . . . 12 (a) General . . . . . . . . . . . . . . . . . 12 (b) Duties of Chairman of the Board of Directors . . . . . . . . . . . . . . . . 12 (c) Duties of President . . . . . . . . . . . 12 (d) Duties of Vice Presidents . . . . . . . . 13 (e) Duties of Secretary . . . . . . . . . . . 13 (f) Duties of Chief Financial Officer . . . . 13 Section 29. Delegation of Authority . . . . . . . . . 14 Section 30. Resignations . . . . . . . . . . . . . . 14 Section 31. Removal . . . . . . . . . . . . . . . . . 14 Article VI Execution Of Corporate Instruments And Voting Of Securities Owned By The Corporation . . . . . 14 Section 32. Execution of Corporate Instruments . . . 14 Section 33. Voting of Securities Owned by the Corporation . . . . . . . . . . . . . . . 15 Article VII Shares of Stock . . . . . . . . . . . . . . . 15 Section 34. Form and Execution of Certificates . . . 15 Section 35. Lost Certificates . . . . . . . . . . . . 16 Section 36. Transfers . . . . . . . . . . . . . . . . 16 Section 37. Fixing Record Dates . . . . . . . . . . . 16 Section 38. Registered Stockholders . . . . . . . . . 17 Article VIII Other Securities of the Corporation . . . . . 17 Section 39. Execution of Other Securities . . . . . . 17 Article IX Dividends . . . . . . . . . . . . . . . . . . 18 Section 40. Declaration of Dividends . . . . . . . . 18 Section 41. Dividend Reserve . . . . . . . . . . . . 18 Article X Fiscal Year . . . . . . . . . . . . . . . . . 18 Section 42. Fiscal Year . . . . . . . . . . . . . . . 18 Article XI Indemnification . . . . . . . . . . . . . . . 18 Section 43. Indemnification of Directors, Executive Officers, Other Officers, Employees and Other Agents . . . . . . . . . . . . . . 18 (a) Directors and Executive Officers . . . . 18 (b) Other Officers, Employees and Other Agents . . . . . . . . . . . . . . . . . 19 (c) Expenses . . . . . . . . . . . . . . . . 19 (d) Enforcement . . . . . . . . . . . . . . . 19 (e) Non-Exclusivity of Rights . . . . . . . . 20 (f) Survival of Rights . . . . . . . . . . . 20 (g) Insurance . . . . . . . . . . . . . . . . 20 (h) Amendments . . . . . . . . . . . . . . . 20 (i) Saving Clause . . . . . . . . . . . . . . 21 (j) Certain Definitions . . . . . . . . . . . 21 Article XII Notices . . . . . . . . . . . . . . . . . . . 22 Section 44. Notices . . . . . . . . . . . . . . . . . 22 (a) Notice to Stockholders . . . . . . . . . 22 (b) Notice to Directors . . . . . . . . . . . 22 (c) Affidavit of Mailing . . . . . . . . . . 22 (d) Time Notices Deemed Given . . . . . . . . 22 (e) Methods of Notice . . . . . . . . . . . . 22 (f) Failure to Receive Notice . . . . . . . . 22 (g) Notice to Person with Whom Communication Is Unlawful . . . . . . . . . . . . . . . 23 (h) Notice to Person with Undeliverable Address . . . . . . . . . . . . . . . . . 23 Article XIII Amendments . . . . . . . . . . . . . . . . . . 23 Section 45. Amendments . . . . . . . . . . . . . . . 23 Article XIV Loans to Officers . . . . . . . . . . . . . . 24 Section 46. Loans to Officers . . . . . . . . . . . . 24 Article XV Miscellaneous . . . . . . . . . . . . . . . . 24 Section 47. Annual Report . . . . . . . . . . . . . . 24 BYLAWS OF HOLLIS-EDEN, INC. (A DELAWARE CORPORATION) ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle. (Del. Code Ann., tit. 8,
131) SECTION 2. OTHER OFFICES. The corporation shall also have and maintain an office or principal place of business at such place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. (Del. Code Ann., tit. 8,
122(8)) ARTICLE II CORPORATE SEAL SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die bearing the name of the corporation and the inscription, "Corporate Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. (Del. Code Ann., tit. 8,
122(3)) ARTICLE III STOCKHOLDERS' MEETINGS SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the corporation shall be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the office of the corporation required to be maintained pursuant to Section 2 hereof. (Del. Code Ann., tit. 8,
211(a)) SECTION 5. ANNUAL MEETING. (a) The annual meeting of the stockholders of the corporation, for the purpose of election of directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors. (Del. Code Ann., tit. 8,
211(b)) (b) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (B) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (C) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not later than the close of business on the sixtieth (60th) day nor earlier than the close of business on the ninetieth (90th) day prior to the first anniversary of the preceding year's annual meeting; PROVIDED, HOWEVER, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received not earlier than the close of business on the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such annual meeting or, in the event public announcement of the date of such annual meeting is first made by the corporation fewer than seventy (70) days prior to the date of such annual meeting, the close of business on the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the corporation. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business and (v) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as a proponent to a stockholder proposal. Notwithstanding the foregoing, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholder's meeting, stockholders must provide notice as required by the regulations promulgated under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph (b). The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph (b), and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. (Del. Code Ann., tit. 8:
211(b)) (c) Only persons who are nominated in accordance with the procedures set forth in this paragraph (c) shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this paragraph (c). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation in accordance with the provisions of paragraph (b) of this Section 5. Such stockholder's notice shall set forth (i) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation which are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the 1934 Act (including without limitation such person's written consent to being named in the proxy statement, if any, as a nominee and to serving as a director if elected); and (ii) as to such stockholder giving notice, the information required to be provided pursuant to paragraph (b) of this Section 5. At the request of the Board of Directors, any person nominated by a stockholder for election as a director shall furnish to the Secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this paragraph (c). The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare at the meeting, and the defective nomination shall be disregarded. (Del. Code Ann., tit. 8,
212, 214). (d) For purposes of this Section 5, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. SECTION 6. SPECIAL MEETINGS. (a) Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption), and shall be held at such place, on such date, and at such time as the Board of Directors, shall fix. (b) If a special meeting is called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the Chairman of the Board of Directors, the Chief Executive Officer, or the Secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The Board of Directors shall determine the time and place of such special meeting, which shall be held not less than thirty-five (35) nor more than one hundred twenty (120) days after the date of the receipt of the request. Upon determination of the time and place of the meeting, the officer receiving the request shall cause notice to be given to the stockholders entitled to vote, in accordance with the provisions of Section 7 of these Bylaws. If the notice is not given within sixty (60) days after the receipt of the request, the person or persons requesting the meeting may set the time and place of the meeting and give the notice. Nothing contained in this paragraph (b) shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board of Directors may be held. SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, such notice to specify the place, date and hour and purpose or purposes of the meeting. Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof, either before or after such meeting, and will be waived by any stockholder by his attendance thereat in person or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. (Del. Code Ann., tit. 8,
222, 229) SECTION 8. QUORUM. At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by these Bylaws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, either by the chairman of the meeting or by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, all action taken by the holders of a majority of the vote cast, excluding abstentions, at any meeting at which a quorum is present shall be valid and binding upon the corporation; PROVIDED, HOWEVER, that directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Where a separate vote by a class or classes or series is required, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, a majority of the outstanding shares of such class or classes or series, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, the affirmative vote of the majority (plurality, in the case of the election of directors) of the votes cast, including abstentions, by the holders of shares of such class or classes or series shall be the act of such class or classes or series. (Del. Code Ann., tit. 8,
216) SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairman of the meeting or by the vote of a majority of the shares casting votes, excluding abstentions. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. (Del. Code Ann., tit. 8,
222(c)) SECTION 10. VOTING RIGHTS. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, as provided in Section 12 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Every person entitled to vote shall have the right to do so either in person or by an agent or agents authorized by a proxy granted in accordance with Delaware law. An agent so appointed need not be a stockholder. No proxy shall be voted after three (3) years from its date of creation unless the proxy provides for a longer period. (Del. Code Ann., tit. 8,
211(e), 212(b)) SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having voting power stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two (2) or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the majority so voting binds all; (c) if more than one (1) votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in the General Corporation Law of Delaware, Section 217(b). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of subsection (c) shall be a majority or even-split in interest. (Del. Code Ann., tit. 8,
217(b)) SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of meeting during the whole time thereof and may be inspected by any stockholder who is present. (Del. Code Ann., tit. 8,
219(a)) SECTION 13. ACTION WITHOUT MEETING. (a) No action shall be taken by the stockholders except at an annual or special meeting of stockholders called in accordance with these Bylaws, and no action shall be taken by the stockholders by written consent. SECTION 14. ORGANIZATION. (a) At every meeting of stockholders, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or, if the President is absent, a chairman of the meeting chosen by a majority in interest of the stockholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. (b) The Board of Directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure. ARTICLE IV DIRECTORS SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of directors of the corporation shall be fixed in accordance with the Certificate of Incorporation. Directors need not be stockholders unless so required by the Certificate of Incorporation. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. (Del. Code Ann., tit. 8,
141(b), 211(b), (c)) SECTION 16. POWERS. The powers of the corporation shall be exercised, its business conducted and its property controlled by the Board of Directors, except as may be otherwise provided by statute or by the Certificate of Incorporation. (Del. Code Ann., tit. 8,
141(a)) SECTION 17. CLASSES OF DIRECTORS. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the adoption and filing of this Certificate of Incorporation, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the adoption and filing of this Certificate of Incorporation, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the adoption and filing of this Certificate of Incorporation, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this Article, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. SECTION 18. VACANCIES. Unless otherwise provided in the Certificate of Incorporation, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this Bylaw in the case of the death, removal or resignation of any director. (Del. Code Ann., tit. 8,
223(a), (b)) SECTION 19. RESIGNATION. Any director may resign at any time by delivering his written resignation to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified. (Del. Code Ann., tit. 8,
141(b), 223(d)) SECTION 20. REMOVAL. Subject to the rights of the holders of any series of Preferred Stock, no director shall be removed without cause. Subject to any limitations imposed by law, the Board of Directors or any individual director may be removed from office at any time with cause by the affirmative vote of the holders of a majority of the voting power of all the then- outstanding shares of voting stock of the corporation, entitled to vote at an election of directors (the "Voting Stock"). SECTION 21. MEETINGS. (a) ANNUAL MEETINGS. The annual meeting of the Board of Directors shall be held immediately before or after the annual meeting of stockholders and at the place where such meeting is held. No notice of an annual meeting of the Board of Directors shall be necessary and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it. (b) REGULAR MEETINGS. Except as hereinafter otherwise provided, regular meetings of the Board of Directors shall be held in the office of the corporation required to be maintained pursuant to Section 2 hereof. Unless otherwise restricted by the Certificate of Incorporation, regular meetings of the Board of Directors may also be held at any place within or without the State of Delaware which has been designated by resolution of the Board of Directors or the written consent of all directors. (Del. Code Ann., tit. 8,
141(g)) (c) SPECIAL MEETINGS. Unless otherwise restricted by the Certificate of Incorporation, special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the Chairman of the Board, the President or any two of the directors (Del. Code Ann., tit. 8,
141(g)) (d) TELEPHONE MEETINGS. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. (Del. Code Ann., tit. 8,
141(i)) (e) NOTICE OF MEETINGS. Notice of the time and place of all special meetings of the Board of Directors shall be orally or in writing, by telephone, facsimile, telegraph or telex, during normal business hours, at least twenty-four (24) hours before the date and time of the meeting, or sent in writing to each director by first class mail, charges prepaid, at least three (3) days before the date of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. (Del. Code Ann., tit. 8,
229) (f) WAIVER OF NOTICE. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present shall sign a written waiver of notice. All such waivers shall be filed with the corporate records or made a part of the minutes of the meeting. (Del. Code Ann., tit. 8,
229) SECTION 22. QUORUM AND VOTING. (a) Unless the Certificate of Incorporation requires a greater number and except with respect to indemnification questions arising under Section 43 hereof, for which a quorum shall be one-third of the exact number of directors fixed from time to time in accordance with the Certificate of Incorporation, a quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time by the Board of Directors in accordance with the Certificate of Incorporation; PROVIDED, HOWEVER, at any meeting whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting. (Del. Code Ann., tit. 8,
141(b)) (b) At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by the affirmative vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation or these Bylaws. (Del. Code Ann., tit. 8,
141(b)) SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. (Del. Code Ann., tit. 8,
141(f)) SECTION 24. FEES AND COMPENSATION. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor. (Del. Code Ann., tit. 8,
141(h)) SECTION 25. COMMITTEES. (a) EXECUTIVE COMMITTEE. The Board of Directors may by resolution passed by a majority of the whole Board of Directors appoint an Executive Committee to consist of one (1) or more members of the Board of Directors. The Executive Committee, to the extent permitted by law and provided in the resolution of the Board of Directors shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, including without limitation the power or authority to declare a dividend, to authorize the issuance of stock and to adopt a certificate of ownership and merger, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation. (Del. Code Ann., tit. 8,
141(c)) (b) OTHER COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, from time to time appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall consist of one (1) or more members of the Board of Directors and shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committees, but in no event shall such committee have the powers denied to the Executive Committee in these Bylaws. (Del. Code Ann., tit. 8,
141(c)) (c) TERM. Each member of a committee of the Board of Directors shall serve a term on the committee coexistent with such member's term on the Board of Directors. The Board of Directors, subject to the provisions of subsections (a) or (b) of this Bylaw may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his death or voluntary resignation from the committee or from the Board of Directors. The Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. (Del. Code Ann., tit. 8,
141(c)) (d) MEETINGS. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 25 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter. Special meetings of any such committee may be held at any place which has been determined from time to time by such committee, and may be called by any director who is a member of such committee, upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends such special meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. (Del. Code Ann., tit. 8,
141(c), 229) SECTION 26. ORGANIZATION. At every meeting of the directors, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or if the President is absent, the most senior Vice President, or, in the absence of any such officer, a chairman of the meeting chosen by a majority of the directors present, shall preside over the meeting. The Secretary, or in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. ARTICLE V OFFICERS SECTION 27. OFFICERS DESIGNATED. The officers of the corporation shall include, if and when designated by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer, the President, one or more Vice Presidents, the Secretary, the Chief Financial Officer, the Treasurer, the Controller, all of whom shall be elected at the annual organizational meeting of the Board of Directors. The Board of Directors may also appoint one or more Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such other officers and agents with such powers and duties as it shall deem necessary. The Board of Directors may assign such additional titles to one or more of the officers as it shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors. (Del. Code Ann., tit. 8,
122(5), 142(a), (b)) SECTION 28. TENURE AND DUTIES OF OFFICERS. (a) GENERAL. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. (Del. Code Ann., tit. 8,
141(b), (e)) (b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors, when present, shall preside at all meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. If there is no President, then the Chairman of the Board of Directors shall also serve as the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in paragraph (c) of this Section 28. (Del. Code Ann., tit. 8,
142(a)) (c) DUTIES OF PRESIDENT. The President shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. Unless some other officer has been elected Chief Executive Officer of the corporation, the President shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. The President shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. (Del. Code Ann., tit. 8,
142(a)) (d) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume and perform the duties of the President in the absence or disability of the President or whenever the office of President is vacant. The Vice Presidents shall perform other duties commonly incident to their office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (Del. Code Ann., tit. 8,
142(a)) (e) DUTIES OF SECRETARY. The Secretary shall attend all meetings of the stockholders and of the Board of Directors and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the stockholders and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall perform all other duties given him in these Bylaws and other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (Del. Code Ann., tit. 8,
142(a)) (f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the President. The Chief Financial Officer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Chief Financial Officer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct the Treasurer or any Assistant Treasurer, or the Controller or any Assistant Controller to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and each Controller and Assistant Controller shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (Del. Code Ann., tit. 8,
142(a)) SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof. SECTION 30. RESIGNATIONS. Any officer may resign at any time by giving written notice to the Board of Directors or to the President or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract with the resigning officer. (Del. Code Ann., tit. 8,
142(b)) SECTION 31. REMOVAL. Any officer may be removed from office at any time, either with or without cause, by the affirmative vote of a majority of the directors in office at the time, or by the unanimous written consent of the directors in office at the time, or by any committee or superior officers upon whom such power of removal may have been conferred by the Board of Directors. ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation. (Del. Code Ann., tit. 8,
103(a), 142(a), 158) Unless otherwise specifically determined by the Board of Directors or otherwise required by law, promissory notes, deeds of trust, mortgages and other evidences of indebtedness of the corporation, and other corporate instruments or documents requiring the corporate seal, and certificates of shares of stock owned by the corporation, shall be executed, signed or endorsed by the Chairman of the Board of Directors, or the President or any Vice President, and by the Secretary or Treasurer or any Assistant Secretary or Assistant Treasurer. All other instruments and documents requiring the corporate signature, but not requiring the corporate seal, may be executed as aforesaid or in such other manner as may be directed by the Board of Directors. (Del. Code Ann., tit. 8,
103(a), 142(a), 158) All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do. Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. (Del. Code Ann., tit. 8,
103(a), 142(a), 158). SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman of the Board of Directors, the Chief Executive Officer, the President, or any Vice President. (Del. Code Ann., tit. 8,
123) ARTICLE VII SHARES OF STOCK SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, or the President or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Each certificate shall state upon the face or back thereof, in full or in summary, all of the powers, designations, preferences, and rights, and the limitations or restrictions of the shares authorized to be issued or shall, except as otherwise required by law, set forth on the face or back a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated stock, the corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to this section or otherwise required by law or with respect to this section a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Except as otherwise expressly provided by law, the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical. (Del. Code Ann., tit. 8,
158) SECTION 35. LOST CERTIFICATES. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed. (Del. Code Ann., tit. 8,
167) SECTION 36. TRANSFERS. (a) Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a properly endorsed certificate or certificates for a like number of shares. (Del. Code Ann., tit. 8,
201, tit. 6,
8- 401(1)) (b) The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. (Del. Code Ann., tit. 8,
160 (a)) SECTION 37. FIXING RECORD DATES. (a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; PROVIDED, HOWEVER, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. (Del. Code Ann., tit. 8,
213) SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. (Del. Code Ann., tit. 8,
213(a), 219) ARTICLE VIII OTHER SECURITIES OF THE CORPORATION SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and other corporate securities of the corporation, other than stock certificates (covered in Section 34), may be signed by the Chairman of the Board of Directors, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial Officer or Treasurer or an Assistant Treasurer; PROVIDED, HOWEVER, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature, or where permissible facsimile signature, of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation. ARTICLE IX DIVIDENDS SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. (Del. Code Ann., tit. 8,
170, 173) SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. (Del. Code Ann., tit. 8,
171) ARTICLE X FISCAL YEAR SECTION 42. FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. ARTICLE XI INDEMNIFICATION SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. (a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall indemnify its directors and executive officers (for the purposes of this Article XI, "executive officers shall have the meaning defined in Rule 3b-7 promulgated under the 1934 Act) to the fullest extent not prohibited by the Delaware General Corporation Law; PROVIDED, HOWEVER, that the corporation may modify the extent of such indemnification by individual contracts with its directors and executive officers; and, PROVIDED, FURTHER, that the corporation shall not be required to indemnify any director or executive officer in connection with any proceeding (or part thereof) initiated by such person unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the corporation, (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the Delaware General Corporation Law or (iv) such indemnification is required to be made under subsection (d). (b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation shall have power to indemnify its other officers, employees and other agents as set forth in the Delaware General Corporation Law. (c) EXPENSES. The corporation shall advance to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or executive officer, of the corporation, or is or was serving at the request of the corporation as a director or executive officer of another corporation, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request therefor, all expenses incurred by any director or executive officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under this Bylaw or otherwise. Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph (e) of this Bylaw, no advance shall be made by the corporation to an executive officer of the corporation (except by reason of the fact that such executive officer is or was a director of the corporation in which event this paragraph shall not apply) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to the proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation. (d) ENFORCEMENT. Without the necessity of entering into an express contract, all rights to indemnification and advances to directors and executive officers under this Bylaw shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the director or executive officer. Any right to indemnification or advances granted by this Bylaw to a director or executive officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. In connection with any claim for indemnification, the corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed. In connection with any claim by an executive officer of the corporation (except in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such executive officer is or was a director of the corporation) for advances, the corporation shall be entitled to raise a defense as to any such action clear and convincing evidence that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation, or with respect to any criminal action or proceeding that such person acted without reasonable cause to believe that his conduct was lawful. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. In any suit brought by a director or executive officer to enforce a right to indemnification or to an advancement of expenses hereunder, the burden of proving that the director or executive officer is not entitled to be indemnified, or to such advancement of expenses, under this Article XI or otherwise shall be on the corporation. (e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by this Bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the Delaware General Corporation Law. (f) SURVIVAL OF RIGHTS. The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (g) INSURANCE. To the fullest extent permitted by the Delaware General Corporation Law, the corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Bylaw. (h) AMENDMENTS. Any repeal or modification of this Bylaw shall only be prospective and shall not affect the rights under this Bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. (i) SAVING CLAUSE. If this Bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director and executive officer to the full extent not prohibited by any applicable portion of this Bylaw that shall not have been invalidated, or by any other applicable law. (j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the following definitions shall apply: (i) The term "proceeding" shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement, arbitration and appeal of, and the giving of testimony in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative. (ii) The term "expenses" shall be broadly construed and shall include, without limitation, court costs, attorneys' fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding. (iii) The term the "corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Bylaw with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (iv) References to a "director," "executive officer," "officer," "employee," or "agent" of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as, respectively, a director, executive officer, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. (v) References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Bylaw. ARTICLE XII NOTICES SECTION 44. NOTICES. (a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, it shall be given in writing, timely and duly deposited in the United States mail, postage prepaid, and addressed to his last known post office address as shown by the stock record of the corporation or its transfer agent. (Del. Code Ann., tit. 8,
222) (b) NOTICE TO DIRECTORS. Any notice required to be given to any director may be given by the method stated in subsection (a), or by facsimile, telex or telegram, except that such notice other than one which is delivered personally shall be sent to such address as such director shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such director. (c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, or director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall in the absence of fraud, be prima facie evidence of the facts therein contained. (Del. Code Ann., tit. 8,
222) (d) TIME NOTICES DEEMED GIVEN. All notices given by mail, as above provided, shall be deemed to have been given as at the time of mailing, and all notices given by facsimile, telex or telegram shall be deemed to have been given as of the sending time recorded at time of transmission. (e) METHODS OF NOTICE. It shall not be necessary that the same method of giving notice be employed in respect of all directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. (f) FAILURE TO RECEIVE NOTICE. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him in the manner above provided, shall not be affected or extended in any manner by the failure of such stockholder or such director to receive such notice. (g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. (h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice is required to be given, under any provision of law or the Certificate of Incorporation or Bylaws of the corporation, to any stockholder to whom (i) notice of two consecutive annual meetings, and all notices of meetings or of the taking of action by written consent without a meeting to such person during the period between such two consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a twelve-month period, have been mailed addressed to such person at his address as shown on the records of the corporation and have been returned undeliverable, the giving of such notice to such person shall not be required. Any action or meeting which shall be taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the corporation a written notice setting forth his then current address, the requirement that notice be given to such person shall be reinstated. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate need not state that notice was not given to persons to whom notice was not required to be given pursuant to this paragraph. (Del. Code Ann, tit. 8,
230) ARTICLE XIII AMENDMENTS SECTION 45. AMENDMENTS. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock. The Board of Directors shall also have the power to adopt, amend, or repeal Bylaws. ARTICLE XIV LOANS TO OFFICERS SECTION 46. LOANS TO OFFICERS. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a Director of the corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in these Bylaws shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. (Del. Code Ann., tit. 8,
143) ARTICLE XV MISCELLANEOUS SECTION 47. ANNUAL REPORT. (a) Subject to the provisions of paragraph (b) of this Bylaw, the Board of Directors shall cause an annual report to be sent to each stockholder of the corporation not later than one hundred twenty (120) days after the close of the corporation's fiscal year. Such report shall include a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, accompanied by any report thereon of independent accounts or, if there is no such report, the certificate of an authorized officer of the corporation that such statements were prepared without audit from the books and records of the corporation. When there are more than 100 stockholders of record of the corporation's shares, as determined by Section 605 of the California Corporations Code, additional information as required by Section 1501(b) of the California Corporations Code shall also be contained in such report, provided that if the corporation has a class of securities registered under Section 12 of the 1934 Act, that Act shall take precedence. Such report shall be sent to stockholders at least fifteen (15) days prior to the next annual meeting of stockholders after the end of the fiscal year to which it relates. (b) If and so long as there are fewer than 100 holders of record of the corporation's shares, the requirement of sending of an annual report to the stockholders of the corporation is hereby expressly waived. EX-8 5 Exhibit 8 [COOLEY GODWARD LLP LETTERHEAD] December 12, 1996 STOCKHOLDERS OF HOLLIS-EDEN, INC. Dear Sir or Madam: This opinion is being delivered to you in connection with the filing of a Registration Statement on Form S-4 with the Securities and Exchange Commission in connection with the Agreement and Plan of Merger dated as of November 1, 1996 (the "Agreement") by and among Initial Acquisition Corp., a Delaware corporation ("Acquiror"), Hollis-Eden, Inc., a Delaware corporation ("Target"), and certain stockholders of Target. Pursuant to the Agreement, Target will merge with and into Acquiror. Except as otherwise provided, capitalized terms not defined herein have the meanings set forth in the Agreement or in letters delivered to us by Acquiror and Target containing certain representations of Acquiror and Target, copies of which are attached as Exhibits hereto. All section references, unless otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the "Code"). We have acted as counsel to Target in connection with the Merger. As such, and for the purpose of rendering this opinion, we have examined and are relying upon (without any independent investigation or review thereof) the truth and accuracy, at all relevant times, of the statements, covenants, representations and warranties contained in the following documents (including all exhibits and schedules attached thereto): (a) the Agreement; (b) the Registration Statement of Form S-4 filed by Acquiror with the Securities and Exchange Commission relating to the Merger (the "Registration Statement"); (c) Continuity of Interest Certificates from certain Target stockholders (the "Continuity of Interest Certificates"); (d) A tax representation letter dated December 12, 1996 addressed to us signed by an authorized officer of Acquiror and delivered to us from Acquiror in the form attached hereto as Exhibit A and incorporated hereby by reference; STOCKHOLDERS OF HOLLIS-EDEN, INC. December 12, 1996 Page 2 (e) A tax representation letter dated December 12, 1996 addressed to us signed by an authorized officer of Target and delivered to us from Target in the form attached hereto as Exhibit A and incorporated hereby by reference; (f) such other instruments and documents related to the formation, organization and operation of Acquiror and Target and related to the consummation of the Merger and the transactions contemplated thereby as we have deemed necessary or appropriate. In connection with rendering this opinion, we have assumed or obtained representations (and are relying thereon), without any independent investigation or review thereof that: 1. Original documents (including signatures thereto) are authentic, documents submitted to us as copies conform to the original documents, and there has been (or will be by the Effective Time of the Merger) due execution and delivery of all documents where due execution and delivery are prerequisites to effectiveness thereof; 2. All representations, warranties and statements made or agreed to by Acquiror, Target and the Target stockholders, including but not limited to, those set forth in the Agreement (including all exhibits and schedules attached thereto), the tax representation letters attached hereto and the Continuity of Interest Certificates, are and will be true and accurate at all relevant times; 3. All covenants contained in the Agreements (including all exhibits thereto), the tax representation letters attached hereto and the Continuity of Interest Certificates will be performed without waiver or breach of any material provision thereof; and 4. The continuity of interest requirement as specified in Treas. Reg Section 1.368-1(b) and as interpreted in certain Internal Revenue Service rulings and federal judicial decisions will be satisfied. Based on the foregoing documents, materials, assumptions and information, and subject to the qualifications and assumptions set forth herein, our opinion is that, if the Merger is consummated in accordance with the provisions of the Agreement and the exhibits thereto, the Merger of Target with and into Acquiror, with Acquiror surviving the Merger, will qualify as a reorganization within the meaning of Section 368(a) of the Code. Our opinion set forth above is based on the existing provisions of the Code, Treasury Regulations (including Temporary and Proposed Treasury Regulations) promulgated under the Code, published Revenue Rulings, Revenue Procedures and other announcements of the Internal Revenue Service (the "Service") and existing court decisions, any of which could be STOCKHOLDERS OF HOLLIS-EDEN, INC. December 12, 1996 Page 3 changed at any time. Any such changes might be retroactive with respect to transactions entered into prior to the date of such changes and could significantly modify the opinion set forth above. Nevertheless, we undertake no responsibility to advise you of any subsequent developments in the application, operation or interpretation of the federal income tax laws. Our opinion concerning certain of the federal tax consequences of the Merger is limited to the specific federal tax consequence presented above. No opinion is expressed as to any transaction other than the Merger, including any transaction undertaken in connection with the Merger. In addition, this opinion does not address any estate, gift, state, local or foreign tax consequences that may result from the Merger. In particular, we express no opinion regarding: (i) the amount, existence, or availability after the Merger, of any of the federal income tax attributes of Target or Acquiror (including, without limitation, foreign tax credits or net operating loss carryforwards, if any of Target or Acquiror); (ii) any transaction in which Target capital stock is acquired or Acquiror common stock is disposed; (iii) the potential application of the "disqualifying disposition" rules of Section 421 to dispositions of Target common stock; (iv) the effects of the Merger and Acquiror's assumption of outstanding options to acquire Target common stock on the holders of such options under any Target employee stock option or stock purchase plan; (v) the effects of the Merger on any Target stockholder who pursuant to the Merger exchanges Target stock that was acquired subject to the provision of Section 83(a) of the Code; (vi) the effects of the Merger on any payment which is or may be subject to the provisions of Section 280G of the Code; (vii) the application of the collapsible corporation provisions of Section 341 of the Code to Acquiror or Target as a result of the Merger; (viii) the effects on any Target stockholder who exchanges Target Warrants for Merger Warrants; and (ix) the effects on any Acquiror stockholder who receives a distribution of Additional Merger Shares. In addition, we have reviewed the discussion contained in the Joint Proxy Statement included in the Registration Statement under "THE MERGER Certain Federal Income Tax Consequences" (the "Tax Discussion") and we believe that, subject to the qualifications and limitations in the Tax Discussion, the matters stated in the Tax Discussion, to the extent they present matters of law or legal conclusions, are fairly presented. This opinion is being delivered solely in connection with the filing of the Registration Statement. It may not be relied upon or utilized for any other purpose or by any other person or entity, and may not be made available to any other person or entity without our prior written consent. We consent to the reference to our firm under the caption "The Merger Certain Federal Income Tax Consequences" included in the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement. STOCKHOLDERS OF HOLLIS-EDEN, INC. December 12, 1996 Page 4 Very truly yours, Cooley Godward LLP By: /s/ Susan Cooper Philpot ------------------------------- Susan Cooper Philpot Attachments: Exhibit A - A representation letter dated December 12, 1996 addressed to us signed by authorized officers of Acquiror. Exhibit B - A representation letter dated December 12, 1996 addressed to us signed by authorized officers of Target. EX-10 6 Exhibit 10.3 1996 INCENTIVE STOCK OPTION PLAN OF INITIAL ACQUISITION CORP. 1. Purpose. The purpose of this Plan is to advance ------- the interests of the Company by encouraging and enabling the acquisition of a larger personal proprietary interest in the Company by key employees and directors of, and consultants to, the Company and its Subsidiaries, if any, upon whose judgment and keen interest the Company is largely dependent for the successful conduct of its operations. It is anticipated that the acquisition of such proprietary interest in the Company will stimulate the efforts of such key employees, directors and consultants on behalf of the Company and its Subsidiaries, if any, and strengthen their desire to remain with the Company and its Subsidiaries, if any. It is also expected that the opportunity to acquire such a proprietary interest will enable the Company and its Subsidiaries, if any, to attract desirable personnel and consultants. 2. Definitions. When used in this Plan, unless the ----------- context otherwise requires: (a) "Board" shall mean the Board of Directors of the Company, as constituted at any time. (b) "Chairman" shall mean the person who at the time shall be Chairman of the Board. (c) "Code" shall mean the Internal Revenue Code of 1986, as amended. (d) "Committee" shall mean the Committee hereinafter described in Section 3. (e) "Company" shall mean Initial Acquisition Corp., a Delaware Corporation. (f) "Delaware Act" shall mean the Delaware General Corporation Law, as from time to time amended. (g) "Director" shall mean any person who shall from time to time serve as a member of the Board of Directors of the Company. (h) "Effective Date" shall mean the date of the consummation of the merger of Hollis-Eden, Inc., a Delaware corporation, with and into the Company. (i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as from time to time amended. (j) "Fair Market Value" on a specified date shall mean the closing price at which one Share is traded on the Nasdaq National Market, or, if the Shares are not listed on the Nasdaq National Market, the closing price at which one Share is traded on the stock exchange, if any, on which Shares are primarily traded, or, if the Shares are not listed on a stock exchange, the average of the bid and ask closing prices at which one Share is traded on the over-the-counter market, as reported on the National Association of Security Dealers Automated Quotation System, but, in any case, if no Shares were traded on such date, then on the last previous date on which a Share was so traded, or, if none of the above are applicable, the value of a Share as established by the Committee for such date using any reasonable method of valuation. (k) "Independent Director" shall mean any Director who is not also an employee of the Company or any Subsidiary. (l) "Options" shall mean the stock options granted pursuant to this Plan. (m) "Participant" shall mean any person to whom an Option shall have been granted under this Plan. (n) "Plan" shall mean this 1996 Incentive Stock Option Plan of the Company, as adopted by the Board on November 1, 1996, as such Plan from time to time may be amended. (o) "President" shall mean the person who at the time shall be the President of the Company. (p) "Securities Act" shall mean the Securities Act of 1933, as amended. (q) "Share" shall mean a share of common stock, par value $.01 per share, of the Company. (r) "Subsidiary" shall mean any corporation or partnership 50% or more of whose stock having general voting power or, in the case of a partnership, equity securities is owned by the Company or by another Subsidiary of the Company. 3. Committee. The Plan shall be administered by a --------- Committee which shall consist of two or more Independent Directors each of whom is a "disinterested person" within the meaning of Rule 16b-3(c)(2)(i) under the Exchange Act (including the provisions of Rule 16b-3(d)(3) as in effect on April 30, 1991). The members of the Committee shall be selected by the Board. Any member of the Committee may resign by giving written notice thereof to the Board, and any member of the Committee may be removed at any time, with or without cause, by the Board. If, for any reason, a member of the Committee shall cease to serve, the vacancy shall be filled by the Board. The Committee shall establish such rules and procedures as are necessary or advisable to administer the Plan. 4. Participants. The class of persons who are ------------ potential recipients of Options granted under this Plan consist of the (i) Independent Directors (other than members of the Committee), (ii) key employees of the Company or any Subsidiary and (iii) consultants and advisors to the Company or any Subsidiary, in each case, as determined by the Committee. The key employees and consultants to whom Options are granted under this Plan, and the number of Shares subject to each such Option, shall be determined by the Committee in its sole discretion, subject, however, to the terms and conditions of this Plan. Employees to whom Options may be granted include key employees who are also Directors. No Independent Director who is a member of the Committee may be granted an Option while serving as such or during the one-year period prior to serving as such, other than in accordance with Section 12. 5. Shares. The Committee may, but shall not be ------ required to, grant, in accordance with this Plan, Options to purchase an aggregate of up to 1,000,000 Shares, which may be either Shares held in treasury or authorized but unissued Shares. At the time an Option is granted, the Committee may, in its sole discretion, designate whether such Option (a) is to be considered as an incentive stock option within the meaning of Section 422 of the Code, or (b) is not to be treated as an incentive stock option for purposes of this Plan and the Code. No Option which is intended to qualify as an incentive stock option shall be granted under this Plan to any individual who, at the time of such grant, is not an employee of the Company or a Subsidiary. Notwithstanding any other provision of this Plan to the contrary, to the extent that the aggregate Fair Market Value (determined as of the date an Option is granted) of the Shares with respect to which Options which are designated as incentive stock options, and any other incentive stock options, granted to an employee (under this Plan, or any other incentive stock option plan maintained by the Company or any Subsidiary that meets the requirements of Section 422 of the Code) first become exercisable in any calendar year exceeds $100,000, such Options shall be treated as Options which are not incentive stock options. Options with respect to which no designation is made by the Committee shall be deemed to be incentive stock options to the extent that the $100,000 limitation described in the preceding sentence is met. This paragraph shall be applied by taking options into account in the order in which they are granted. If any Option shall expire, be canceled or terminate for any reason without having been exercised in full, the unpurchased Shares subject thereto may again be made subject to Options under the Plan. Nothing herein contained shall be construed to prohibit the issuance of Options at different times to the same Participant. The form of Option shall be determined from time to time by the Committee. A certificate of Option signed by the Chairman or the President or any Vice President of the Company, attested by the Treasurer or an Assistant Treasurer, or Secretary or an Assistant Secretary of the Company, shall be issued to each Participant. The certificate of Option for an Option shall be legended to indicate whether or not the Option is an incentive stock option. 6. Price. The price per share of the Shares to be ----- purchased pursuant to the exercise of any Option shall be fixed by the Committee at the time of grant; provided, however, that the purchase price per share of the Shares to be purchased pursuant to the exercise of an incentive stock option shall not be less than the Fair Market Value of a Share on the day on which the Option is granted. 7. Duration of Options. The duration of any Option ------------------- granted under this Plan shall be fixed by the Committee in its sole discretion; provided, however, that no Option shall remain in effect for a period of more than ten years from the date upon which the Option is granted. 8. Ten Percent Stockholders. Notwithstanding any ------------------------ other provision of this Plan to the contrary, no Option which is intended to qualify as an incentive stock option may be granted under this Plan to any employee who, at the time the Option is granted, owns shares possessing more than ten percent (10%) of the total combined voting power or value of all classes of stock of the Company or a Subsidiary, unless the exercise price under ------ such Option is at least 110% of the Fair Market Value of a Share on the date such Option is granted and the duration of such Option is no more than five years. 9. Consideration for Options. Subject to the ------------------------- requirements of the Delaware Act, the Company shall obtain such consideration for the grant of an Option as the Committee in its discretion may request. 10. Non-transferability of Options. Options and all ------------------------------ rights thereunder shall be non-transferable and non-assignable by Participants, except to the extent that the estate of a deceased Participant may be permitted to exercise them. A Participant is required to notify the Company if he or she disposes of Shares acquired pursuant to exercise of an incentive stock option within two years after the date such option was granted or within one year of the date such option was exercised. 11. Exercise of Options. An Option, after the grant ------------------- thereof, shall be exercisable by the Participant at such rate and times as may be fixed by the Committee; provided, however, that no Option may be exercised in part or in full prior to the approval of the Plan by the stockholders of the Company as provided in Section 18, and no Option may be exercised until at least six months after the date upon which the Option was granted. Notwithstanding the foregoing, all or any part of any remaining unexercised Options granted to any Participant (other than a member of the Committee) may be exercised in the following circumstances (but in no event during the six-month period commencing on the date granted): (a) immediately upon (but prior to the expiration of the term of the Option) the Participant's retirement from the Company and all Subsidiaries on or after his 65th birthday, (b) subject to the provisions of Section 13 hereof, upon the disability (to the extent and in a manner as shall be determined by the Committee in its sole discretion) or death of the Participant, (c) upon the occurrence of such special circumstances or events as in the opinion of the Committee merits special consideration, or (d) if, while the Participant is employed by, or serving as a Director or consultant of the Company or a Subsidiary, there occurs a Change in Control. For purposes of this Plan, a "Change in Control" shall be deemed to have occurred if either (i) after the Effective Date, any person (within the meaning of Section 13(d) and 14(d)(2) of the Exchange Act) becomes, without the approval of the Board, the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of securities representing 30% or more of the combined voting power of the Company; (ii) the stockholders of the Company approve either (A) an agreement to merge or consolidate in a transaction in which the Company is not the surviving entity, (B) an agreement to sell or dispose of all or substantially all of the Company's assets, or (C) a plan to liquidate the Company, unless the Board determines that Options will not vest upon an event described in (A), (B) or (C); or (iii) during any period of two consecutive years, individuals constituting at least a majority of the Board at the beginning of such period cease to constitute a majority thereof, unless the election or nomination for election by the Company's stockholders of each new Director was approved by a vote of at least two-thirds of the Directors then still in office who were Directors at the beginning of such period. An Option shall be exercised by the delivery of a written notice duly signed by the Participant to such effect, together with the Option certificate and the full purchase price of the Shares purchased pursuant to the exercise of the Option, to the Chairman or an officer of the Company appointed by the Chairman for the purpose of receiving the same. Payment of the full purchase price shall be made as follows: in cash; by check payable to the order of the Company; by delivery to the Company of Shares which shall be valued at their Fair Market Value on the date of exercise of the Option; or by such other methods as the Committee may permit from time to time; provided, however, that a Participant may not use any Shares acquired pursuant to the exercise of an option granted under this Plan or any other stock option plan maintained by the Company or any Subsidiary unless the holder has beneficially owned such Shares for at least six months. No Option may be granted pursuant to the Plan or exercised at any time when such Option, or the granting, exercise or payment thereof, may result in the violation of any law or governmental order or regulation. The Plan is intended to comply with Rule 16b-3 under the Exchange Act. Any provision inconsistent with such Rule shall be inoperative and shall not affect the validity of the Plan. Within a reasonable time after the exercise of an Option, the Company shall cause to be delivered to the Participant a certificate for the Shares purchased pursuant to the exercise of the Option. If the Option shall have been exercised with respect to less than all of the Shares subject to the Option, the Company shall also cause to be delivered to the Participant a new Option certificate in replacement of the certificate surrendered at the time of the exercise of the Option, indicating the number of Shares with respect to which the Option remains available for exercise, or the original Option certificate shall be endorsed to give effect to the partial exercise thereof. In the event that the holder of an Option which is an incentive stock option disposes of any Shares purchased pursuant to the exercise of such Option in a "disqualifying disposition" (within the meaning of Section 421 of the Code) within two years from the date of grant of such Option or one year from the date of exercise of such Option, such holder shall notify the Company of such disposition. 12. Grants of Options to Members of the Committee. --------------------------------------------- Each Director who is a member of the Committee shall be granted Options (x) upon the effective date of his initial appointment as a member of the Committee ("Initial Options") and (y) on January 1 of each calendar year ("Annual Options"), which Options shall be non-incentive stock options; provided, however, that such -------- ------- Options shall only be granted to such person if he is a member of the Committee on the date such Option is to be granted and such Options (or portion thereof) shall not be granted if, in the opinion of counsel to the Company, the grant of such Options (or portion thereof) would be improper. Each Initial Option shall entitle such Director to purchase o Shares at a purchase price per share equal to the Fair Market Value of a Share on the date of grant. Each Annual Option shall entitle such Director to purchase o Shares at a purchase price per share equal to the Fair Market Value of a Share on the date of grant. Each Initial Option and Annual Option shall have a duration of ten years from the date of grant and shall become exercisable six months after the date upon which the Option was granted. Any Option granted pursuant to this Section 12, to the extent unexercised, shall terminate immediately upon the holder's ceasing to serve as a Director of the Company, except that the holder shall have until three months following the cessation of such service to exercise any unexercised Option that he or she could have exercised on the day on which such service terminated; provided that such exercise must be accomplished prior to the expiration of the term of such Option; and provided, further, however, that such three-month -------- ------- ------- period is extended to one year in the event that the holder's cessation of service is due to permanent disability (within the meaning of Section 22(e)(3) of the Code), or to death, in which case the estate or the heirs of the holder may exercise such Option. Notwithstanding the preceding, if the service of any holder of an Option granted pursuant to this Section 12 shall be terminated because of the holder's (a) fraud or intentional misrepresentation, or (b) embezzlement, misappropriation or conversion of assets or opportunities of the Company or any Subsidiary, then all such unexercised Options of the holder shall terminate immediately upon such termination of the holder's service. A Director may elect to decline the grant of any Option which otherwise would be granted pursuant to this Section 12 by notifying the Committee prior to the date of the grant of such Option, in which case the Director shall not receive anything in lieu of such Option (either at the time of such election or at any time thereafter). Upon the exercise of any Option granted pursuant to this Section 12, payment of the full purchase price shall be made in cash, by check payable to the order of the Company, or by delivery to the Company of Shares which shall be valued at their Fair Market Value on the date of exercise of the Option; provided, however, that a holder may not use any Shares acquired pursuant to the exercise of an option granted under this Plan or any other stock option plan maintained by the Company or any Subsidiary unless the holder has beneficially owned such Shares for at least six months. Notwithstanding any other provision of the Plan to the contrary, the provisions of this Section 12 shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations promulgated thereunder. 13. Termination of Employment or Service. All or any ------------------------------------ part of any Option, to the extent unexercised, shall terminate immediately upon (i) the cessation or termination for any reason of the Participant's employment by or consulting arrangements with the Company and all Subsidiaries and (ii) the Participant's ceasing to serve as a Director of the Company and as a Director of all Subsidiaries, except that the Participant shall have until the three months following the cessation of his employment or consulting arrangement with the Company and Subsidiaries or his service as a Director, and no longer, to exercise any unexercised Option that such Participant could have exercised on the day on which such employment, consulting arrangement or service terminated; provided that such exercise must be accomplished prior to the expiration of the term of such Option. Notwithstanding the foregoing, if the cessation of employment, consulting arrangement or service is due to disability (to an extent and in a manner as shall be determined in each case by the Committee in its sole discretion) or to death, the Option holder or the representative of the estate or the heirs of a deceased Participant shall have the privilege of exercising the Options which are unexercised at the time of such retirement or of such disability or death; provided, however, that such exercise must be accomplished prior to the expiration of the term of such Option and within one year of the Participant's disability or death, as the case may be. If the employment, consulting arrangement or service with the Company or a Subsidiary shall be terminated because of the Participant's violation of the duties of such employment, consulting arrangement or service with the Company or a Subsidiary as he or she may from time to time have, the existence of which violation shall be determined by the Committee in its sole discretion (which determination by the Committee shall be conclusive) all unexercised Options of such Participant shall terminate immediately upon such termination of such Participant's employment, consulting arrangement or service with the Company and all Subsidiaries, and a Participant whose employment, consulting arrangement or service with the Company and Subsidiaries is so terminated, shall have no right after such termination to exercise any unexercised Option he or she might have exercised prior to the termination of his or her employment, consulting arrangement or service with the Company and Subsidiaries. Nothing contained herein or in the Option certificate shall be construed to confer on any employee, Director (including an Independent Director), or consultant any right to be continued in the employ of the Company or any Subsidiary, to continue serving as a Director of the Company or of a Subsidiary or as a consultant to the Company or any Subsidiary, as the case may be, or derogate from any right of the Company or any Subsidiary to request the resignation of or discharge such employee, Director or consultant (without or with pay), at any time, with or without cause. 14. Adjustment of Optioned Shares. If prior to the ----------------------------- complete exercise of any Option there shall be declared and paid a distribution payable in Shares upon the Shares of the Company or if the Shares of the Company shall be split up, converted, exchanged, reclassified, or in any way substituted for, the Option, to the extent that it has not been exercised, shall entitle the holder thereof upon the future exercise of the Option to such number and kind of securities or other property subject to the terms of the Option to which such holder should have been entitled had such holder actually owned the Shares subject to the unexercised portion of the Option at the time of the occurrence of such stock dividend, split-up, conversion, exchange, reclassification or substitution; and the aggregate purchase price upon the future exercise of the Option shall be the same as if the originally optioned Shares were being purchased thereunder. Any fractional shares or securities payable upon the exercise of the Option as a result of such adjustment shall be payable in cash based upon the Fair Market Value of such shares or securities at the time of such exercise. If any such event should occur, the number of Shares with respect to which Options remain to be issued, or with respect to which Options may be reissued, shall be adjusted in a similar manner. Notwithstanding any other provision of the Plan, in the event of a recapitalization, merger, consolidation, rights offering, separation, reorganization or liquidation, or any other change in the corporate structure or outstanding Shares, the Committee may make such equitable adjustments to the number of Shares and the class of shares available hereunder or to any outstanding Options as it shall deem appropriate to prevent dilution or enlargement of rights. 15. Issuance of Shares and Compliance with Securities ------------------------------------------------- Act. The Company may postpone the issuance and delivery of --- Shares upon any exercise of an Option until (a) the admission of such Shares to listing on any stock exchange on which Shares of the Company of the same class are then listed, and (b) the completion of such registration or other qualification of such Shares under any State or Federal law, rule or regulation as the Company shall determine to be necessary or advisable. Any Participant exercising an Option shall make such representations and furnish such information as may, in the opinion of counsel of the Company, be appropriate to permit the Company, in the light of the then existence or non-existence with respect to such Shares of an effective registration statement under the Securities Act, to issue the Shares in compliance with the provisions of the Securities Act or any comparable act. The Company shall have the right, in its sole discretion, to legend any Shares which may be issued pursuant to the exercise of an Option, or may issue stop transfer orders in respect thereof. 16. Income Tax Withholding. If the Company or a ---------------------- Subsidiary shall be required to withhold any amounts by reason of any Federal, State or local tax rules or regulations in respect of the issuance of Shares pursuant to the exercise of such Option, the Company or the Subsidiary shall be entitled to deduct and withhold such amounts from any cash payments to be made to the holder of such Option. In any event, a holder with respect to whom any such withholding requirement exists shall make available to the Company or Subsidiary, promptly when requested by the Company or such Subsidiary, sufficient funds to meet the requirements of such withholding; and the Company or Subsidiary shall be entitled to take and authorize such steps as it may deem advisable in order to have such funds made available to the Company or Subsidiary out of any funds or property due or to become due to the holder of such Option. 17. Administration and Amendment of the Plan. Except ---------------------------------------- as hereinafter provided, the Board or the Committee may amend or terminate the Plan and any Options at any time or from time to time; provided, however, that any amendment that would (i) -------- ------- increase the maximum number of Shares as to which Options may be granted under the Plan, or (ii) materially modify the requirements as to eligibility for participation in the Plan, shall be subject to approval by the stockholders of the Company. No amendment may adversely affect the rights of any Participant under an Option granted prior to such amendment, unless the Participant consents thereto. In addition, no amendment may be made that would result in the disqualification of any incentive stock option as an "incentive stock option" within the meaning of Section 422 of the Code. Determinations of the Committee as to any question which may arise with respect to the interpretation of the provisions of the Plan and Options shall be final. The Committee may authorize and establish such rules, regulations and revisions thereof not inconsistent with the provisions of the Plan, as it may deem advisable to make the Plan and Options effective or provide for their administration, and may take such other action with regard to the Plan and Options as it shall deem desirable to effectuate their purpose. 18. Effective Date of the Plan. This Plan is -------------------------- conditioned upon its approval by the stockholders of the Company on or before November 1, 1997. 19. Final Issuance Date. No Option shall be granted ------------------- under the Plan after November 1, 2006. EX-10 7 Exhibit 10.4 HOLLIS-EDEN, INC. 1996 STOCK OPTION PLAN ADOPTED APRIL 16, 1996 1. PURPOSES. (a) The purpose of the Plan is to provide a means by which selected Employees and Directors of and Consultants to the Company, and its Affiliates, may be given an opportunity to purchase stock of the Company. (b) The Company, by means of the Plan, seeks to retain the services of persons who are now Employees or Directors of or Consultants to the Company or its Affiliates, to secure and retain the services of new Employees, Directors and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. (c) The Company intends that the Options issued under the Plan shall, in the discretion of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subsection 3(c), be either Incentive Stock Options or Nonstatutory Stock Options. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and in such form as issued pursuant to Section 6, and a separate certificate or certificates will be issued for shares purchased on exercise of each type of Option. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code. (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means a Committee appointed by the Board in accordance with subsection 3(c) of the Plan. (e) "COMPANY" means Hollis-Eden, Inc., a Delaware corporation. (f) "CONSULTANT" means any person, including an advisor, engaged by the Company or an Affiliate to render consulting services and who is compensated for such services, provided that the term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors. (g) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means that the service of an individual to the Company, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Board, in its sole discretion, may determine whether Continuous Status as an Employee, Director or Consultant shall be considered interrupted in the case of: (i) any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave; or (ii) transfers between the Company, Affiliates or their successors. (h) "DIRECTOR" means a member of the Board. (i) "DISINTERESTED PERSON" means a Director who is considered to be a "disinterested person" in accordance with Rule 16b-3, or any other applicable rules, regulations or interpretations of the Securities and Exchange Commission. (j) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (l) "FAIR MARKET VALUE" means, as of any date, the value of the common stock of the Company determined as follows: (1) If the common stock is listed on any established stock exchange or a national market system, including without limitation the National Market of The Nasdaq Stock Market, the Fair Market Value of a share of common stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in common stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (2) If the common stock is quoted on The Nasdaq Stock Market (but not on the National Market thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of common stock shall be the mean between the bid and asked prices for the common stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (3) In the absence of an established market for the common stock, the Fair Market Value shall be determined in good faith by the Board. (m) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (n) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (o) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (p) "OPTION" means a stock option granted pursuant to the Plan. (q) "OPTION AGREEMENT" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (r) "OPTIONEE" means a person who holds an outstanding Option. (s) "PLAN" means this Hollis-Eden 1996 Stock Option Plan. (t) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. 3. ADMINISTRATION. (a) The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (1) To determine from time to time which of the persons eligible under the Plan shall be granted Options; when and how each Option shall be granted; whether an Option will be an Incentive Stock Option or a Nonstatutory Stock Option; the provisions of each Option granted (which need not be identical), including the time or times such Option may be exercised in whole or in part; and the number of shares for which an Option shall be granted to each such person. (2) To construe and interpret the Plan and Options granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Option Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (3) To amend the Plan or an Option as provided in Section 11. (4) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan. (c) The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members (the "Committee"), all of the members of which Committee shall be Disinterested Persons. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board (and references in this Plan to the Board shall thereafter be to the Committee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. Additionally, prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, and notwithstanding anything to the contrary contained herein, the Board may delegate administration of the Plan to a committee of one or more members of the Board and the term "Committee" shall apply to any person or persons to whom such authority has been delegated. Notwithstanding anything in this Section 3 to the contrary, the Board or the Committee may delegate to a committee of one or more members of the Board the authority to grant Options to eligible persons who are not then subject to Section 16 of the Exchange Act. (d) Any requirement that an administrator of the Plan be a Disinterested Person shall not apply (i) prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, or (ii) if the Board or the Committee expressly declares that such requirement shall not apply. Any Disinterested Person shall otherwise comply with the requirements of Rule 16b-3. 4. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of Section 10 relating to adjustments upon changes in stock, the stock that may be sold pursuant to Options shall not exceed in the aggregate five hundred thousand (500,000) shares of the Company's common stock. If any Option shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the stock not purchased under such Option shall revert to and again become available for issuance under the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. ELIGIBILITY. (a) Incentive Stock Options may be granted only to Employees. Nonstatutory Stock Options may be granted only to Employees, Directors or Consultants. No Option shall be granted, however, if the grant of such Option or the issuance of shares of the Company s common stock pursuant to such Option does not qualify for exemption from the securities qualification requirements of the California Corporations Code. (b) A Director shall in no event be eligible for the benefits of the Plan unless at the time discretion is exercised in the selection of the Director as a person to whom Options may be granted, or in the determination of the number of shares which may be covered by Options granted to the Director: (i) the Board has delegated its discretionary authority over the Plan to a Committee which consists solely of Disinterested Persons; or (ii) the Plan otherwise complies with the requirements of Rule 16b-3. The Board shall otherwise comply with the requirements of Rule 16b-3. This subsection 5(b) shall not apply (i) prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, or (ii) if the Board or Committee expressly declares that it shall not apply. (c) No person shall be eligible for the grant of an Incentive Stock Option if, at the time of grant, such person owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates unless the exercise price of such Incentive Stock Option is at least one hundred ten percent (110%) of the Fair Market Value of such stock at the date of grant and the Incentive Stock Option is not exercisable after the expiration of five (5) years from the date of grant. 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) PRICE. The exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted; the exercise price of each Nonstatutory Stock Option shall be determined by the Board, but not less than fifty percent (50%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) CONSIDERATION. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised, or (ii) at the discretion of the Board or the Committee, at the time of the grant of the Option, (A) by delivery to the Company of other common stock of the Company, (B) according to a deferred payment arrangement, except that payment of the common stock's "par value" (as defined in the Delaware General Corporation Law) shall not be made by deferred payment, or other arrangement (which may include, without limiting the generality of the foregoing, the use of other common stock of the Company) with the person to whom the Option is granted or to whom the Option is transferred pursuant to subsection 6(d), or (C) in any other form of legal consideration that may be acceptable to the Board. In the case of any deferred payment arrangement, interest shall be payable at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (d) TRANSFERABILITY. An Option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the Option is granted only by such person. The person to whom the Option is granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionee, shall thereafter be entitled to exercise the Option. (e) VESTING. The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised. (f) SECURITIES LAW COMPLIANCE. The Company may require any Optionee, or any person to whom an Option is transferred under subsection 6(d), as a condition of exercising any such Option, (1) to give written assurances satisfactory to the Company as to the Optionee s knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Option; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Option for such person s own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise of the Option has been registered under a then currently effective registration statement under the Securities Act of 1933, as amended (the Securities Act ), or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may require the Optionee to provide such other representations, written assurances or information which the Company shall determine is necessary, desirable or appropriate to comply with applicable securities and other laws as a condition of granting an Option to such Optionee or permitting the Optionee to exercise such Option. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of stock. (g) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates (other than upon the Optionee's death or disability), the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant, or such longer or shorter period specified in the Option Agreement, or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (h) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates as a result of the Optionee's disability, the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (i) DEATH OF OPTIONEE. In the event of the death of an Optionee during, or within a period specified in the Option Agreement after the termination of, the Optionee's Continuous Status as an Employee, Director or Consultant, the Option may be exercised (to the extent the Optionee was entitled to exercise the Option as of the date of death) by the Optionee's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionee's death pursuant to subsection 6(d), but only within the period ending on the earlier of (i) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in the Option Agreement. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (j) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionee may elect at any time while an Employee, Director or Consultant to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any unvested shares so purchased may be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate. (k) RIGHT OF REPURCHASE. The Option may, but need not, include a provision whereby the Company may elect, prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, to repurchase all or any part of the vested shares exercised pursuant to the Option on such terms as the Board deems appropriate. (l) RIGHT OF FIRST REFUSAL. The Option may, but need not, include a provision whereby the Company may elect, prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, to exercise a right of first refusal following receipt of notice from the Optionee of the intent to transfer all or any part of the shares exercised pursuant to the Option. (m) WITHHOLDING. To the extent provided by the terms of an Option Agreement, the Optionee may satisfy any federal, state or local tax withholding obligation relating to the exercise of such Option by any of the following means or by a combination of such means: (1) tendering a cash payment; (2) authorizing the Company to withhold shares from the shares of the common stock otherwise issuable to the Optionee as a result of the exercise of the Option; or (3) delivering to the Company owned and unencumbered shares of the common stock of the Company. 7. COVENANTS OF THE COMPANY. (a) During the terms of the Options, the Company shall keep available at all times the number of shares of stock required to satisfy such Options. (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the Options; provided, however, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any Option or any stock issued or issuable pursuant to any such Option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Options unless and until such authority is obtained. 8. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to Options shall constitute general funds of the Company. 9. MISCELLANEOUS. (a) The Board shall have the power to accelerate the time at which an Option may first be exercised or the time during which an Option or any part thereof will vest pursuant to subsection 6(e), notwithstanding the provisions in the Option stating the time at which it may first be exercised or the time during which it will vest. (b) Neither an Optionee nor any person to whom an Option is transferred under subsection 6(d) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Option unless and until such person has satisfied all requirements for exercise of the Option pursuant to its terms. (c) Throughout the term of any Option, to the extent required by applicable law, the Company shall deliver to the holder of such Option, not later than one hundred twenty (120) days after the close of each of the Company's fiscal years during the Option term, a balance sheet and an income statement. This section shall not apply when issuance is limited to key employees whose duties in connection with the Company assure them access to equivalent information. (d) Nothing in the Plan or any instrument executed or Option granted pursuant thereto shall confer upon any Employee, Director, Consultant or Optionee any right to continue in the employ of the Company or any Affiliate (or to continue acting as a Director or Consultant) or shall affect the right of the Company or any Affiliate to terminate the employment of any Employee, with or without cause, to remove any Director as provided in the Company's By-Laws and the provisions of the General Corporation Law of the State of Delaware, or to terminate the relationship of any Consultant in accordance with the terms of that Consultant's agreement with the Company or Affiliate to which such Consultant is providing services. (e) To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its Affiliates exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. (f) The Board or the Committee shall have the authority to effect, at any time and from time to time (i) the repricing of any outstanding Options under the Plan and/or (ii) with the consent of the affected holders of Options, the cancellation of any outstanding Options and the grant in substitution therefor of new Options under the Plan covering the same or different numbers of shares of common stock, but having an exercise price per share not less than fifty percent (50%) of the Fair Market Value (one hundred percent (100%) of the Fair Market Value in the case of an Incentive Stock Option or, in the case of an Incentive Stock Option granted to a ten percent (10%) stockholder (as defined in subsection 5(c)), not less than one hundred and ten percent (110%) of the Fair Market Value) per share of common stock on the new grant date. 10. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the stock subject to the Plan, or subject to any Option (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan pursuant to subsection 4(a), and the outstanding Options will be appropriately adjusted in the class(es) and number of shares and price per share of stock subject to such outstanding Options. Such adjustments shall be made by the Board or Committee, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company.") (b) In the event of: (1) a dissolution, liquidation, or sale of all or substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) the acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or any Affiliate of the Company) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors, then to the extent permitted by applicable law: (i) any surviving or acquiring corporation shall assume any Options outstanding under the Plan or shall substitute similar Options (including an option to acquire the same consideration paid to the stockholders in the transaction described in this subsection 10(b)) for those outstanding under the Plan, or (ii) in the event any surviving or acquiring corporation refuses to assume such Options, or to substitute similar options for those outstanding under the Plan, then, with respect to Options held by persons then performing services as Employees, Directors or Consultants, the time during which such Option may be exercised shall be accelerated prior to such event and the Options terminated if not exercised after such acceleration and at or prior to such event. 11. AMENDMENT OF THE PLAN AND OPTIONS. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 10 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: (1) Increase the number of shares reserved for Options under the Plan; (2) Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code); or (3) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code or to comply with the requirements of Rule 16b-3. (b) The Board may in its sole discretion submit any other amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations promulgated thereunder regarding the exclusion of performance- based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. (c) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide Optionees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) Rights and obligations under any Option granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the Option was granted and (ii) such person consents in writing. (e) The Board at any time, and from time to time, may amend the terms of any one or more Options; provided, however, that the rights and obligations under any Option shall not be impaired by any such amendment unless (i) the Company requests the consent of the person to whom the Option was granted and (ii) such person consents in writing. 12. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate ten (10) years from the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Options may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any Option granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the written consent of the person to whom the Option was granted. 13. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no Options granted under the Plan shall be exercised unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. EX-10 8 Exhibit 10.5 INCENTIVE STOCK OPTION _______________________________, Optionee: Hollis-Eden, Inc. (the "Company"), pursuant to its 1996 Stock Option Plan (the "Plan"), has granted to you, the optionee named above, an option to purchase shares of the common stock of the Company ("Common Stock"). This option is intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The grant hereunder is in connection with and in furtherance of the Company's compensatory benefit plan for participation of the Company's employees (including officers), directors or consultants and is intended to comply with the provisions of Rule 701 promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"). Defined terms not explicitly defined in this agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your option are as follows: 1. TOTAL NUMBER OF SHARES SUBJECT TO THIS OPTION. The total number of shares of Common Stock subject to this option is ____________________ (__________). 2. VESTING. The date that vesting begins on this option is _________________. Subject to the limitations contained herein, 12/48ths of the shares vest (become exercisable) on the one-year anniversary of the date vesting begins and 1/48th of the shares will then vest on each successive one-month anniversary date thereafter until either (i) you cease to provide services to the Company for any reason, or (ii) this option becomes fully vested. 3. EXERCISE PRICE AND METHOD OF PAYMENT. (a) EXERCISE PRICE. The exercise price of this option is _________________ ($___________) per share, being not less than the fair market value of the Common Stock on the date of grant of this option. (b) METHOD OF PAYMENT. Payment of the exercise price per share is due in full upon exercise of all or any part of each installment which has accrued to you. You may elect, to the extent permitted by applicable statutes and regulations, to make payment of the exercise price under one of the following alternatives: (i) Payment of the exercise price per share in cash (including check) at the time of exercise; (ii) Payment pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds; (iii) Provided that at the time of exercise the Company's Common Stock is publicly traded and quoted regularly in the Wall Street Journal, payment by delivery of already-owned shares of Common Stock, held for the period required to avoid a charge to the Company's reported earnings, and owned free and clear of any liens, claims, encumbrances or security interests, which Common Stock shall be valued at its fair market value on the date of exercise; or (iv) Payment by a combination of the methods of payment permitted by subparagraph 3(b)(i) through 3(b)(iii) above. 4. WHOLE SHARES. This option may not be exercised for any number of shares which would require the issuance of anything other than whole shares. 5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, this option may not be exercised unless the shares issuable upon exercise of this option are then registered under the Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Act. 6. TERM. The term of this option commences on __________, 19__, the date of grant, and expires on ________________________ (the "Expiration Date," which date shall be no more than ten (10) years from the date this option is granted), unless this option expires sooner as set forth below or in the Plan. In no event may this option be exercised on or after the Expiration Date. This option shall terminate prior to the Expiration Date as follows: three (3) months after the termination of your Continuous Status as an Employee, Director or Consultant with the Company or an Affiliate of the Company unless one of the following circumstances exists: (a) Your termination of Continuous Status as an Employee, Director or Consultant is due to your disability. This option will then expire on the earlier of the Expiration Date set forth above or twelve (12) months following such termination of Continuous Status as an Employee, Director or Consultant. You should be aware that if your disability is not considered a permanent and total disability within the meaning of Section 422(c)(6) of the Code, and you exercise this option more than three (3) months following the date of your termination of employment, your exercise will be treated for tax purposes as the exercise of a "nonstatutory stock option" instead of an "incentive stock option." (b) Your termination of Continuous Status as an Employee, Director or Consultant is due to your death or your death occurs within three (3) months following your termination of Continuous Status as an Employee, Director or Consultant for any other reason. This option will then expire on the earlier of the Expiration Date set forth above or eighteen (18) months after your death. (c) If during any part of such three (3) month period you may not exercise your option solely because of the condition set forth in paragraph 5 above, then your option will not expire until the earlier of the Expiration Date set forth above or until this option shall have been exercisable for an aggregate period of three (3) months after your termination of Continuous Status as an Employee, Director or Consultant. (d) If your exercise of the option within three (3) months after termination of your Continuous Status as an Employee, Director or Consultant with the Company or with an Affiliate of the Company would result in liability under section 16(b) of the Securities Exchange Act of 1934, then your option will expire on the earlier of (i) the Expiration Date set forth above, (ii) the tenth (10th) day after the last date upon which exercise would result in such liability or (iii) six (6) months and ten (10) days after the termination of your Continuous Status as an Employee, Director or Consultant with the Company or an Affiliate of the Company. However, this option may be exercised following termination of Continuous Status as an Employee, Director or Consultant only as to that number of shares as to which it was exercisable on the date of termination of Continuous Status as an Employee, Director or Consultant under the provisions of paragraph 2 of this option. In order to obtain the federal income tax advantages associated with an "incentive stock option," the Code requires that at all times beginning on the date of grant of the option and ending on the day three (3) months before the date of the option's exercise, you must be an employee of the Company or an Affiliate of the Company, except in the event of your death or permanent and total disability. The Company has provided for continued vesting or extended exercisability of your option under certain circumstances for your benefit, but cannot guarantee that your option will necessarily be treated as an "incentive stock option" if you provide services to the Company or an Affiliate of the Company as a consultant or exercise your option more than three (3) months after the date your employment with the Company and all Affiliates of the Company terminates. 7. EXERCISE. (a) This option may be exercised, to the extent specified above, by delivering a notice of exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require pursuant to subsection 6(f) of the Plan. (b) By exercising this option you agree that: (i) as a precondition to the completion of any exercise of this option, the Company may require you to enter an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of this option; (2) the lapse of any substantial risk of forfeiture to which the shares are subject at the time of exercise; or (3) the disposition of shares acquired upon such exercise; (ii) you will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of the Common Stock issued upon exercise of this option that occurs within two (2) years after the date of this option grant or within one (1) year after such shares of Common Stock are transferred upon exercise of this option; and (iii) the Company (or a representative of the underwriters) may, in connection with the first underwritten registration of the offering of any securities of the Company under the Act, require that you not sell or otherwise transfer or dispose of any shares of Common Stock or other securities of the Company during such period (not to exceed one hundred eighty (180) days) following the effective date (the "Effective Date") of the registration statement of the Company filed under the Act as may be requested by the Company or the representative of the underwriters. You further agree that the Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such period. 8. TRANSFERABILITY. This option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise this option. 9. OPTION NOT A SERVICE CONTRACT. This option is not an employment contract and nothing in this option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company, or of the Company to continue your employment with the Company. In addition, nothing in this option shall obligate the Company or any Affiliate of the Company, or their respective stockholders, Board of Directors, officers or employees to continue any relationship which you might have as a Director or Consultant for the Company or Affiliate of the Company. 10. NOTICES. Any notices provided for in this option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the address specified below or at such other address as you hereafter designate by written notice to the Company. 11. GOVERNING PLAN DOCUMENT. This option is subject to all the provisions of the Plan, a copy of which is attached hereto and its provisions are hereby made a part of this option, including without limitation the provisions of Section 6 of the Plan relating to option provisions, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this option and those of the Plan, the provisions of the Plan shall control. Dated the ____ day of __________________, 19__. Very truly yours, Hollis-Eden, Inc. By Duly authorized on behalf of the Board of Directors ATTACHMENTS: Hollis-Eden, Inc. 1996 Stock Option Plan Notice of Exercise The undersigned: (a) Acknowledges receipt of the foregoing option and the attachments referenced therein and understands that all rights and liabilities with respect to this option are set forth in the option and the Plan; and (b) Acknowledges that as of the date of grant of this option, it sets forth the entire understanding between the undersigned optionee and the Company and its Affiliates regarding the acquisition of stock in the Company and supersedes all prior oral and written agreements on that subject with the exception of (i) the options previously granted and delivered to the undersigned under stock option plans of the Company, and (ii) the following agreements only: NONE ___________________________________ (Initial) OTHER __________________________________ __________________________________ __________________________________ ____________________________ OPTIONEE Address:______________________ ______________________ NONSTATUTORY STOCK OPTION _____________________, Optionee: Hollis-Eden, Inc. (the "Company"), pursuant to its 1996 Stock Option Plan (the "Plan"), has granted to you, the optionee named above, an option to purchase shares of the common stock of the Company ("Common Stock"). This option is not intended to qualify and will not be treated as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The grant hereunder is in connection with and in furtherance of the Company's compensatory benefit plan for participation of the Company's employees (including officers), directors or consultants and is intended to comply with the provisions of Rule 701 promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"). Defined terms not explicitly defined in this agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your option are as follows: 1. TOTAL NUMBER OF SHARES SUBJECT TO THIS OPTION. The total number of shares of Common Stock subject to this option is __________________________ (___________). 2. VESTING. The date that vesting begins on this option is _________________. Subject to the limitations contained herein, 12/48ths of the shares vest (become exercisable) on the one-year anniversary of the date vesting begins and 1/48th of the shares will then vest on each successive one-month anniversary date thereafter until either (i) you cease to provide services to the Company for any reason, or (ii) this option becomes fully vested. 3. EXERCISE PRICE AND METHOD OF PAYMENT. (a) EXERCISE PRICE. The exercise price of this option is _________________ ($________) per share, being not less than 85% of the fair market value of the Common Stock on the date of grant of this option. (b) METHOD OF PAYMENT. Payment of the exercise price per share is due in full upon exercise of all or any part of each installment which has accrued to you. You may elect, to the extent permitted by applicable statutes and regulations, to make payment of the exercise price under one of the following alternatives: (i) Payment of the exercise price per share in cash (including check) at the time of exercise; (ii) Payment pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds; (iii) Provided that at the time of exercise the Company's Common Stock is publicly traded and quoted regularly in the Wall Street Journal, payment by delivery of already-owned shares of Common Stock, held for the period required to avoid a charge to the Company's reported earnings, and owned free and clear of any liens, claims, encumbrances or security interests, which Common Stock shall be valued at its fair market value on the date of exercise; or (iv) Payment by a combination of the methods of payment permitted by subparagraph 3(b)(i) through 3(b)(iii) above. 4. WHOLE SHARES. This option may not be exercised for any number of shares which would require the issuance of anything other than whole shares. 5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, this option may not be exercised unless the shares issuable upon exercise of this option are then registered under the Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Act. 6. TERM. The term of this option commences on _________, 19__, the date of grant and expires on _____________________ (the "Expiration Date," which date shall be no more than ten (10) years from the date this option is granted), unless this option expires sooner as set forth below or in the Plan. In no event may this option be exercised on or after the Expiration Date. This option shall terminate prior to the Expiration Date as follows: three (3) months after the termination of your Continuous Status as an Employee, Director or Consultant with the Company or an Affiliate of the Company for any reason or for no reason unless: (a) such termination of Continuous Status as an Employee, Director or Consultant is due to your disability, in which event the option shall expire on the earlier of the Expiration Date set forth above or twelve (12) months following such termination of Continuous Status as an Employee, Director or Consultant; or (b) such termination of Continuous Status as an Employee, Director or Consultant is due to your death or your death occurs within three (3) months following your termination for any other reason, in which event the option shall expire on the earlier of the Expiration Date set forth above or eighteen (18) months after your death; or (c) during any part of such three (3) month period the option is not exercisable solely because of the condition set forth in paragraph 5 above, in which event the option shall not expire until the earlier of the Expiration Date set forth above or until it shall have been exercisable for an aggregate period of three (3) months after the termination of Continuous Status as an Employee, Director or Consultant; or (d) exercise of the option within three (3) months after termination of your Continuous Status as an Employee, Director or Consultant with the Company or with an Affiliate of the Company would result in liability under section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act), in which case the option will expire on the earlier of (i) the Expiration Date set forth above, (ii) the tenth (10th) day after the last date upon which exercise would result in such liability or (iii) six (6) months and ten (10) days after the termination of your Continuous Status as an Employee, Director or Consultant with the Company or an Affiliate of the Company. However, this option may be exercised following termination of Continuous Status as an Employee, Director or Consultant only as to that number of shares as to which it was exercisable on the date of termination of Continuous Status as an Employee, Director or Consultant under the provisions of paragraph 2 of this option. 7. EXERCISE. (a) This option may be exercised, to the extent specified above, by delivering a notice of exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require pursuant to subsection 6(f) of the Plan. (b) By exercising this option you agree that: (i) as a precondition to the completion of any exercise of this option, the Company may require you to enter an arrangement providing for the cash payment by you to the Company of any tax withholding obligation of the Company arising by reason of: (1) the exercise of this option; (2) the lapse of any substantial risk of forfeiture to which the shares are subject at the time of exercise; or (3) the disposition of shares acquired upon such exercise. You also agree that any exercise of this option has not been completed and that the Company is under no obligation to issue any Common Stock to you until such an arrangement is established or the Company's tax withholding obligations are satisfied, as determined by the Company; and (ii) the Company (or a representative of the underwriters) may, in connection with the first underwritten registration of the offering of any securities of the Company under the Act, require that you not sell or otherwise transfer or dispose of any shares of Common Stock or other securities of the Company during such period (not to exceed one hundred eighty (180) days) following the effective date (the "Effective Date") of the registration statement of the Company filed under the Act as may be requested by the Company or the representative of the underwriters. You further agree that the Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such period. 8. TRANSFERABILITY. This option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise this option. 9. OPTION NOT A SERVICE CONTRACT. This option is not an employment contract and nothing in this option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company, or of the Company to continue your employment with the Company. In addition, nothing in this option shall obligate the Company or any Affiliate of the Company, or their respective stockholders, Board of Directors, officers, or employees to continue any relationship which you might have as a Director or Consultant for the Company or Affiliate of the Company. 10. NOTICES. Any notices provided for in this option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the address specified below or at such other address as you hereafter designate by written notice to the Company. 11. GOVERNING PLAN DOCUMENT. This option is subject to all the provisions of the Plan, a copy of which is attached hereto and its provisions are hereby made a part of this option, including without limitation the provisions of Section 6 of the Plan relating to option provisions, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this option and those of the Plan, the provisions of the Plan shall control. Dated the ____ day of __________________, 19__. Very truly yours, Hollis-Eden, Inc. By Duly authorized on behalf of the Board of Directors ATTACHMENTS: Hollis-Eden, Inc. 1996 Stock Option Plan Notice of Exercise The undersigned: (a) Acknowledges receipt of the foregoing option and the attachments referenced therein and understands that all rights and liabilities with respect to this option are set forth in the option and the Plan; and (b) Acknowledges that as of the date of grant of this option, it sets forth the entire understanding between the undersigned optionee and the Company and its Affiliates regarding the acquisition of stock in the Company and supersedes all prior oral and written agreements on that subject with the exception of (i) the options previously granted and delivered to the undersigned under stock option plans of the Company, and (ii) the following agreements only: None _____________________________ (Initial) OTHER _______________________________ _______________________________ _______________________________ _____________________________ OPTIONEE Address:_____________________ _____________________ EX-10 9 Exhibit 10.6 EMPLOYMENT AGREEMENT BY AND BETWEEN HOLLIS-EDEN, INC. AND RICHARD B. HOLLIS EMPLOYMENT AGREEMENT This Employment Agreement ("the Agreement") is made and entered into effective as of November 1, 1996, by and between Hollis-Eden, Inc., a Delaware corporation (the "Company"), and Richard B. Hollis ("Executive"). The Company and Executive are hereinafter collectively referred to as the "Parties," and may individually be referred to as a "Party." RECITALS A. The Executive is presently employed by the Company as Chairman, President and Chief Executive Officer. B. As the Executive's contribution to the growth and success of the Company since its inception has been substantial, the Board of Directors (the "Board") of the Company desires to provide for the continued employment of the Executive and to make certain changes in the Executive's employment arrangements with the Company which the Board has determined will reinforce and encourage the continued attention and dedication to the Company of the Executive as a member of the Company's management. C. The Executive desires to continue his employment with the Company, and is willing to accept such continued employment on the terms and conditions set forth in this Agreement. AGREEMENT In consideration of the foregoing premises and the mutual covenants herein contained, and for other good and valuable consideration, the Parties, intending to be legally bound, agree as follows: 1. EMPLOYMENT. 1.1 The Company hereby agrees to continue to employ Executive, and Executive hereby accepts continued employment by the Company, upon the terms and conditions set forth in this Agreement, effective as of the date first set forth above ("Effective Date"). 1.2 Executive shall be the Chairman, President and Chief Executive Officer of the Company, its subsidiaries, and its successors (if any) and their subsidiaries (collectively, the "Company Affiliates"), and shall serve in such other capacity or capacities, with the consent of the Executive, as the Board may from time to time prescribe. 1.3 Executive shall do and perform all services, acts or things necessary or advisable to manage and conduct the business of the Company and which are normally associated with the positions of Chairman, President and Chief Executive Officer and are not inconsistent with the provisions of the charter documents of the Company Affiliates. However, at all times during his employment Executive shall be subject to the direction and policies from time to time established by the Board. Notwithstanding the foregoing, Executive shall have such corporate power and authority as shall be reasonably required to enable the Executive to discharge the Executive's duties in any office that Executive may hold. 1.4 Unless the Parties otherwise agree in writing, prior to Executive's termination in accordance with this Agreement, Executive shall perform the services he is required to perform pursuant to this Agreement at the Company's offices, located at 808 S.W. Third Avenue, Suite 540, Portland, Oregon 97204, or, with the consent of the Executive, at any other place at which the Company maintains an office; provided, however, that the Company may from time to time reasonably require Executive to travel temporarily to other locations in connection with the Company's business. 2. LOYAL AND CONSCIENTIOUS PERFORMANCE; NONCOMPETITION. 2.1 During his employment by the Company, Executive shall devote his full business energies, interest, abilities and productive time to the proper and efficient performance of his duties under this Agreement. The foregoing shall not preclude Executive from engaging in civic, charitable or religious activities, or from serving on boards of directors of companies or organizations which will not present any direct conflict of interest with the Company or affect the performance of Executive's duties hereunder. 2.2 Prior to the Executive's termination in accordance with this Agreement, Executive shall not engage in competition with the Company, either directly or indirectly, in any manner or capacity, as adviser, principal, agent, partner, officer, director, employee, member of any association or otherwise, in any phase of the business of developing, manufacturing and marketing of products which are in the same field of use or which otherwise directly compete with the products or proposed products of the Company. 2.3 Ownership by Executive, as a passive investment, of less than one percent (1%) of the outstanding shares of capital stock of any corporation with one or more classes of its capital stock listed on a national securities exchange or publicly traded in the over-the-counter market shall not constitute a breach of this paragraph. 3. COMPENSATION OF EXECUTIVE. 3.1 The Company shall pay Executive a base salary of not less than $195,000.00 per year, payable in regular periodic payments in accordance with Company policy but in no event less frequent than semi-monthly. Executive's base salary shall increase to not less than $225,000.00 at such time as the Company obtains financing of an aggregate of at least $5,000,000.00 from one or more transactions, including but not limited to the receipt of cash upon the exercise of warrants to purchase Common Stock of the Company. Such salaries shall be prorated for any partial year of employment on the basis of a 365-day fiscal year. 3.2 Executive's compensation may be changed from time to time by mutual agreement of Executive and the Board. 3.3 All of Executive's compensation shall be subject to customary withholding taxes and any other employment taxes as are commonly required to be collected or withheld by the Company. 3.4 Executive shall be entitled to at least four weeks of paid vacation each twelve-month period during Executive's employment hereunder, which shall continue to accrue during Executive's employment hereunder, in addition to all national holidays. 3.5 Executive shall, in the discretion of the Board and in accordance with Company policy, be entitled to participate in benefits under any employee benefit plan or arrangement made available by the Company now or in the future to its executives and key management employees. Notwithstanding the foregoing, during Executive's employment hereunder, the Company shall continuously provide Executive, at the Company's sole cost and expense, with (i) term life insurance equal to four times Executive's base salary, (ii) short and long-term disability insurance, (iii) medical, dental and vision care/insurance for Executive, Executive's spouse and Executive's children, and (iv) director and officer liability insurance in amounts customary for companies similar to the Company. 3.6 Executive's performance shall be reviewed by the Board on a periodic basis (not less than once each fiscal year) and the Board may, in its sole discretion, award such bonuses to Executive as shall be appropriate or desirable based on Executive's performance. The Company agrees that Executive shall be reviewed within twelve months of commencing employment hereunder. The Company agrees to negotiate with Executive an incentive bonus based upon performance targets mutually agreed to by the Board and Executive from time to time but at least annually, in advance of the applicable year. The performance targets shall be negotiated with the goal of achieving an annual bonus of 100% of Executive's base salary; provided, however, the bonus to be earned by Executive upon attaining any such performance target shall range from not less than 50% of Executive's base salary to any amount in excess of 100% of Executive's base salary in the applicable year. Executive and the Company shall negotiate the other criteria necessary for Executive's receipt of an annual bonus in excess of 100% of Executive's base salary. 3.7 Executive shall be entitled to receive prompt reimbursement of all reasonable expenses incurred by Executive in performing Company services, including expenses related to relocation, travel, entertainment, parking, business meetings and professional dues. Such expenses shall be accounted for in accordance with the policies and procedures established by the Company. 4. TERMINATION BY COMPANY. Executive's employment with the Company may be terminated by the Company under the following conditions: 4.1 DEATH. Upon Executive's death, in which case termination shall be effective on the last day of the month in which Executive's death occurs. 4.2 DISABILITY. If Executive becomes, for six consecutive months, completely disabled due to physical or mental illness as defined under Section 4.2.1, or if Executive shall be absent from duties on a full-time basis due to illness for six consecutive months, and shall not have returned to the performance of duties within thirty (30) days after receiving written notice of termination following such six-month period. 4.2.1 The term "completely disabled" as used in this Agreement shall mean the inability of Executive to perform the essential functions of his position under this Agreement by reason of any incapacity, physical or mental, which the Board, based upon medical advice or an opinion provided by a licensed physician acceptable to the Board and approved by the Executive, which approval shall not be unreasonably withheld, determines to have incapacitated Executive from satisfactorily performing any or all essential functions of his position for the Company during the foreseeable future. Based upon such medical advice or opinion, the determination of the Board shall be final and binding and the date such determination is made shall be the date of such complete disability for purposes of this Agreement. 4.3 FOR CAUSE. The Company may terminate Executive's employment under this Agreement "for cause" ("For Cause") by (i) delivery of written notice to Executive specifying the cause or causes relied upon for such termination; and (ii) giving Executive, together with his counsel, an opportunity to be heard before the Board. Any notice of termination given pursuant to this Section 4.3 shall effect termination as of the date specified in such notice or, in the event no such date is specified, on the last day of the month in which such notice is delivered or deemed delivered as provided in Section 10 below. If Executive's employment under this Agreement is terminated by the Company For Cause under this section, Executive shall be entitled to receive only accrued base salary and other accrued benefits required by law, prorated to the date of termination. Executive will not be entitled to severance pay, pay in lieu of notice or any other such compensation. Grounds for the Company to terminate this Agreement For Cause shall be limited to the occurrence of any of the following events without Board consent: 4.3.1 Executive is in material breach of any provision of this Agreement and, except as otherwise provided in this Section 4.3, such breach continues for a period of 30 days after notice of such breach is given to Executive by the Company; 4.3.2 Executive's engaging or in any manner participating in any activity which is directly competitive with or intentionally injurious to the Company or which violates any provision of Section 7 of this Agreement and such violation continues for a period of ten days after notice of such violation is given to Executive by the Company; 4.3.3 Executive's commission of any fraud against the Company; 4.3.4 Intentional improper use or appropriation for his personal use or benefit of any funds or properties of the Company not authorized by the Board to be so used or appropriated and the same has not been remedied within three days after notice of such violation is given to Executive by the Company; and 4.3.5 Executive's conviction of any crime involving dishonesty or moral turpitude. 4.4 WITHOUT CAUSE. The Company may terminate the Executive's employment without cause ("Without Cause") upon delivery of written notice to the Executive at any time. Any notice of termination given pursuant to this Section 4.4 shall effect termination not less than 60 days after the date of such notice. 5. TERMINATION BY EXECUTIVE. Executive may terminate Executive's employment with the Company (a) for Sufficient Reason (as defined below in Section 5.1) within three hundred sixty-five (365) consecutive days following the occurrence of an event or events constituting such Sufficient Reason; or (b) without Sufficient Reason. 5.1 "Sufficient Reason" shall mean any one or more of the following events: 5.1.1 The occurrence of a Change in Control of the Company (as defined below in Section 6.5); 5.1.2 The failure by the Company to comply with any material provision of this Agreement and such failure has continued for a period of ten days after notice of such failure has been given by Executive to the Company; 5.1.3 The assignment to Executive of any duties materially inconsistent with Executive's status as the Chairman, President and Chief Executive Officer of the Company or the reduction of Executive's authority as provided hereunder; and 5.1.4 The reduction by the Company in Executive's base salary or as the same may be increased from time to time under the terms of this Agreement, except for across-the-board salary reductions approved by 66-2/3% of the Board similarly affecting all management personnel of the Company; provided, however, that in no event shall Executive's base salary be reduced to an amount equal to less than 75% of the highest base salary at any time in effect during Executive's employment hereunder. 6. COMPENSATION UPON TERMINATION. 6.1 DEATH. If Executive's employment shall be terminated by death, the Company shall pay to Executive's designee(s), beneficiary(ies), or if there is no such designee or beneficiary, to Executive's estate, an amount equal to Executive's base salary and prior year's bonus for one (1) year. 6.2 DISABILITY. If Executive shall become disabled as provided in Section 4.1, the Company shall continue to pay to Executive an amount which, when combined with disability or income-continuance benefits pursuant to a Company plan or provided under state law and received by Executive, shall equal but not exceed Executive's base salary, provided that Executive has submitted claims for any and all such disability benefits to which he may be entitled. For any waiting period during which Executive receives no benefits under any disability plan, the Company shall pay his entire base salary. The Company shall continue to integrate such salary payments with benefits until such time as Executive's employment is terminated in accordance with Section 4.2 hereof. Upon any such termination, the Company shall pay to Executive an amount equal to Executive's base salary and prior year's bonus for one (1) year. 6.3 CAUSE, WITHOUT SUFFICIENT REASON. If Executive's employment shall be terminated by the Company For Cause, or if Executive terminates employment hereunder without Sufficient Reason, the Company shall pay Executive his base salary through the date of termination at the rate in effect at the time of the notice of termination, and the Company shall thereafter have no further obligations to Executive under this Agreement. 6.4 WITHOUT CAUSE, SUFFICIENT REASON. If (a) Executive shall terminate Executive's employment with the Company or the New Company (as defined in Section 6.5 of this Agreement) for Sufficient Reason under Section 5.1 of this Agreement; or (b) the Company shall terminate Executive's employment Without Cause, then upon Executive's furnishing to the Company (or the New Company, as the case may be) an executed waiver and release of claims (a form of which is attached hereto as Exhibit A), Executive shall be entitled to the following: 6.4.1 Executive's base salary through the date of termination; 6.4.2 Executive's annual base salary in effect at the time of termination times five; 6.4.3 An amount equal to the prior calendar year's bonus awarded to Executive times five; 6.4.4 Immediate vesting of all unvested stock options of the Company held by Executive, and the continuation of the period for exercise of all stock options of the Company held by Executive until the final expiration of the original term of such stock options; and 6.4.5 Continued receipt for three years of all employee benefit plans and programs in which the Executive and Executive's family were entitled to participate immediately prior to the date of termination, provided that the Executive's continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Executive's participation in any such plan or program is barred, the Company shall arrange to provide the Executive with benefits substantially similar to those which the Executive would otherwise have been entitled to receive under such plans and programs from which his continued participation is barred. 6.5 CHANGE IN CONTROL. 6.5.1 A "Change in Control" of the Company shall be deemed to have occurred if and when: (i) Any person or entity or group of persons and/or entities acting in concert shall acquire, directly or indirectly, beneficial ownership of more than twenty percent (20%) of the outstanding shares of voting stock of the Company or other securities of the Company convertible (after giving effect to such conversion) into more than twenty percent (20%) of the outstanding shares of voting stock of the Company; or (ii) The Company is a participant in a merger or consolidation in which the Company does not survive as an independent company; or (iii) The business or businesses of the Company for which Executive's services are principally performed are disposed of by the Company pursuant to a partial or complete liquidation of the Company, a sale of assets or otherwise; or (iv) During any period of two consecutive years during the term of Executive's employment hereunder, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period. 6.5.2 If any of the above four events occurs, then for purposes of this Agreement, the Company or the Company's successor will be considered the "New Company." 6.5.3 If within three hundred sixty-five (365) days following the occurrence of a Change in Control, Executive's employment with the New Company is terminated by the New Company for any reason whatsoever other than as specified in Section 4.3, upon Executive's furnishing to the New Company an executed waiver and release of claims (Exhibit A), Executive shall be entitled to the following: (i) The New Company shall pay Executive's base salary through the date of termination; (ii) The New Company shall pay Executive his annual base salary in effect immediately prior to the event or events resulting in a Change in Control, times five; (iii) The New Company shall pay Executive an amount equal to five times the bonus awarded to Executive in the calendar year immediately preceding the calendar year in which the event or events resulting in a Change in Control occurred; (iv) All unvested stock options of the New Company held by Executive shall immediately vest, and the continuation of the period for exercise of all stock options of the Company held by Executive until the final expiration of the original term of such stock options; and (v) Executive shall continue to receive for three years all employee benefit plans and programs in which the Executive and Executive's family were entitled to participate immediately prior to the date of termination, provided that the Executive's continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Executive's participation in any such plan or program is barred, the New Company shall arrange to provide the Executive with benefits substantially similar to those which the Executive would otherwise have been entitled to receive under such plans and programs from which his continued participation is barred. All payments provided for in this Section 6 to be made to Executive shall be made in one lump sum within thirty (30) calendar days of Executive's date of termination unless otherwise directed by Executive. 6.6 Prior to Executive's termination in accordance with this Agreement, the Company agrees to (i) nominate Executive and two of the Executive's designees for election to the Board and the Board of each of the Company Affiliates, (ii) use the Company's reasonable best efforts to support such nominations and elections, (iii) take no action, by amendment of the Company's charter documents or otherwise, to avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by the Company hereunder and (iv) at all times in good faith assist in the carrying out of all of the provisions herein and in the taking of all such action as may be necessary or appropriate in order to protect Executive's rights hereunder against impairment. 7. CONFIDENTIAL INFORMATION; NONSOLICITATION. 7.1 Executive recognizes that his employment with the Company will involve contact with information of substantial value to the Company, which is not old and generally known in the trade, and which gives the Company an advantage over its competitors who do not know or use it, including but not limited to, techniques, designs, drawings, processes, inventions, developments, equipment, prototypes, sales and customer information, and business and financial information relating to the business, products, practices and techniques of the Company (hereinafter referred to as "Confidential Information"). Executive will at all times regard and preserve as confidential such Confidential Information obtained by Executive from whatever source and will not, either during his employment with the Company or thereafter, publish or disclose any part of such Confidential Information in any manner at any time, or use the same except on behalf of the Company, without the prior written consent of the Company. Notwithstanding the foregoing sentence, disclosure of Confidential Information shall not be precluded if such information (i) is now, or hereafter becomes, through no act or failure to act on the part of the Executive, generally known or available, or (ii) is required to be disclosed by law. 7.2 While employed by the Company and for one (1) year thereafter, the Executive agrees that, in order to protect the Company's confidential and proprietary information from unauthorized use, Executive will not, either directly or through others, solicit or attempt to solicit (i) any employee, consultant or independent contractor of the Company to terminate his or her relationship with the Company in order to become an employee, consultant or independent contractor to or for any other person or business entity; or (ii) the business of any customer, vendor or distributor of the Company which, at the time of termination or one (1) year immediately prior thereto, was listed on the Company's customer, vendor or distributor list. 8. SUCCESSORS. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance reasonably satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such an agreement prior to the effectiveness of any such succession shall be a material breach of this Agreement and shall entitle the Executive to compensation and all other benefits from the Company in the same amount and on the same terms as he would be entitled to hereunder if he terminated his employment for Sufficient Reason hereunder. 9. ASSIGNMENT AND BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of Executive and Executive's heirs, executors, personal representatives, assigns, administrators and legal representatives. Because of the unique and personal nature of Executive's duties under this Agreement, neither this Agreement nor any rights or obligations under this Agreement shall be assignable by Executive. This Agreement shall be binding upon and inure to the benefit of the Company and its successors, assigns and legal representatives. 10. NOTICES. All notices or demands of any kind required or permitted to be given by the Company or Executive under this Agreement shall be given in writing and shall be personally delivered (and receipted for) or mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: Hollis-Eden, Inc. 808 S.W. Third Avenue, Suite 540 Portland, Oregon 97204 With a copy to: Eric J. Lourmeau, Esq. Cooley Godward LLP 4365 Executive Drive, Suite 1100 San Diego, California 92121 If to Executive: Richard B. Hollis 3807 N.E. 127th Circle Vancouver, WA 98686 With a copy to: Martin P. Florman, Esq. McDermott, Will & Emery 1301 Dove Street, Suite 500 Newport Beach, California 92660 Any such written notice shall be deemed received when personally delivered or three (3) days after its deposit in the United States mail as specified above. Either Party may change its address for notices by giving notice to the other Party in the manner specified in this section. 11. CHOICE OF LAW. This Agreement shall be construed and interpreted in accordance with the laws of the State of California, without regard to the conflict of laws provision thereof. 12. INTEGRATION. This Agreement contains the complete, final and exclusive agreement of the Parties relating to the subject matter of this Agreement, and supersedes all prior oral and written employment agreements or arrangements between the Parties. 13. AMENDMENT. This Agreement cannot be amended or modified except by a written agreement signed by Executive and the Company. 14. WAIVER. No term, covenant or condition of this Agreement or any breach thereof shall be deemed waived, except with the written consent of the Party against whom the waiver in claimed, and any waiver or any such term, covenant, condition or breach shall not be deemed to be a waiver of any preceding or succeeding breach of the same or any other term, covenant, condition or breach. 15. SEVERABILITY. The finding by a court of competent jurisdiction of the unenforceability, invalidity or illegality of any provision of this Agreement shall not render any other provision of this Agreement unenforceable, invalid or illegal. Such court shall have the authority to modify or replace the invalid or unenforceable term or provision with a valid and enforceable term or provision which most accurately represents the parties' intention with respect to the invalid or unenforceable term or provision. 16. INTERPRETATION; CONSTRUCTION. The headings set forth in this Agreement are for convenience of reference only and shall not be used in interpreting this Agreement. This Agreement has been drafted by legal counsel representing the Company, but Executive has been encouraged, and has consulted with, his own independent counsel and tax advisors with respect to the terms of this Agreement. The Parties acknowledge that each Party and its counsel has reviewed and revised, or had an opportunity to review and revise, this Agreement, and the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement. 17. REPRESENTATIONS AND WARRANTIES. Executive represents and warrants that, to the best of Executive's knowledge, he is not restricted or prohibited, contractually or otherwise, from entering into and performing each of the terms and covenants contained in this Agreement, and that his execution and performance of this Agreement will not violate or breach any other agreements between Executive and any other person or entity. 18. COUNTERPARTS. This Agreement may be executed in two counterparts, each of which shall be deemed an original, all of which together shall contribute one and the same instrument. IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first above written. THE COMPANY: HOLLIS-EDEN, INC. By: /s/ Robert Weber ---------------------------- ROBERT WEBER VICE PRESIDENT AND CONTROLLER EXECUTIVE: /s/ Richard B. Hollis ------------------------------- RICHARD B. HOLLIS EXHIBIT A RELEASE AND WAIVER OF CLAIMS In exchange for payment to me of amounts pursuant to Sections 6.4 and 6.5 (and for the other benefits provided therein) of my Employment Agreement (the "Agreement"), to which this form is attached, I hereby furnish ____________ (the "Company") with the following release and waiver. I hereby release, and forever discharge the Company, its officers, directors, agents, employees, stockholders, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys' fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed, arising at any time prior to and including my employment termination date with respect to any claims relating to my employment and the termination of my employment, including but not limited to, claims pursuant to any federal, state or local law relating to employment, including, but not limited to, discrimination claims, claims under the California Fair Employment and Housing Act, and the Federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"), or claims for wrongful termination, breach of the covenant of good faith, contract claims, tort claims, and wage or benefit claims, including but not limited to, claims for salary, bonuses, commissions, stock, stock options, vacation pay, fringe benefits, severance pay or any form of compensation (other than the obligations under Sections 6.4 and 6.5 of the Agreement.) I also acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to any claims I may have against the Company. I acknowledge that, among other rights, I am waiving and releasing any rights I may have under ADEA, that this waiver and release is knowing and voluntary, and that the consideration given for this waiver and release is in addition to anything of value to which I was already entitled as an employee of the Company. I further acknowledge that I have been advised, as required by the Older Workers Benefit Protection Act, that: (a) the waiver and release granted herein does not relate to claims which may arise after this agreement is executed; (b) I have the right to consult with an attorney prior to executing this agreement (although I may choose voluntarily not to do so); (c) I have twenty-one (21) days from the date I receive this agreement, in which to consider this agreement (although I may choose voluntarily to execute this agreement earlier); (d) I have seven (7) days following the execution of this agreement to revoke my consent to the agreement; and (e) this agreement shall not be effective until the seven (7) day revocation period has expired. Date: By: ------------------- ------------------------- EX-10 10 Exhibit 10.7 LICENSE AGREEMENT THIS LICENSE AGREEMENT ("Agreement") is made as of the 18th day of May 1994, by and between COLTHURST LIMITED, a corporation duly organized and existing under the laws of Delaware (hereinafter "Colthurst") (Colthurst is sometimes referred to herein as the "Licensor"), PATRICK T. PRENDERGAST, Baybush, Straffan, Ireland (hereinafter "Owner"), HOLMEDCO PHARMACEUTICALS CORPORATION, 3807 NW 127th Circle, Vancouver, WA 98686, U.S.A., a corporation to be duly formed and organized by Richard B. Hollis and existing under the laws of Delaware hereinafter ("Holmedco" and/or "Licensee") (each a "Party" and collectively the "Parties"). Capitalized terms shall have the meanings given them in Section I of this Agreement. WHEREAS, Owner is the full owner of Patent Rights and Know-How (each as defined below) and as of April 19th, 1994 the following patents were granted to Patrick T. Prendergast: Country Patent No. ------- ---------- United States of America 4,956,355 Australia 608824 Belgium 1004315 Canada 564,245 Greece 88 01 00248 Israel 86089 Italy 1.227.073 Luxembourg 87.202 New Zealand 224272 Oapi 08729 Philippines 25907 Portugal 87259 South Africa 88/2667 Switzerland 675358 United Kingdom 2 204 237 B France 8805043 Patent applications are pending (none are under prior art rejection) in the following countries: Country Application No. ------- --------------- Austria A984/88 Denmark 2081/88 Germany P 38 12 595.1 Ireland 997/87 Japan 93293/88 Netherlands 8800926 New Zealand 236303 South Korea 88-4283 Sweden 8801406-3 WHEREAS, Colthurst has been assigned Owner's rights in the Patent Rights and Know-How relating to the treatment of human/animal immunodeficiency as disclosed in U.S. Patent No. 4,956,355 entitled "Agents for the Arrest and Therapy of Retrieval Infections," the said assignment between Colthurst and Owner allows Colthurst sufficient portion of rights to grant licenses to make, use, exercise and vend the Products and Licensed Processes (as defined below); and WHEREAS, Colthurst has been granted an Investigational New Drug (IND) status from the U.S. Food and Drug Authority for the use of the technology outlined in the U.S. Patent No. 4,956,355 in the treatment of HIV infection, IND No. 31,980; and WHEREAS, Holmedco desires to obtain a license under the Patent Rights and Know-How upon the outlined terms and conditions hereinafter set forth. NOW, THEREFORE, the Parties hereby agree as follows: 1. DEFINITIONS ----------- 1.1 "AFFILIATE" means (a) any company owned or controlled to the extent of at least fifty percent (50%) of its issued and voting capital stock by a Party to this Agreement and any other company so owned or controlled (directly or indirectly) by any such company or the owner of any such company, or (b) any partnership, joint venture or other entity directly or indirectly controlled by, controlling, or under common control of, to the extent fifty percent (50%) or more of voting power (or otherwise having power to control its general activities), a Party to this Agreement, but in each case only for so long as such ownership or control shall continue. 1.2 "BACKGROUND TECHNOLOGY" shall mean all Elements of Technology (as defined below) that are necessary or useful to commercialize and exploit the Products and that Colthurst or Owner (or any of their respective Affiliates) has an ownership interest in or has the right to acquire an ownership interest, controls in or may conceive, develop or acquire an ownership interest in (under licenses from others or otherwise) at any time prior to or during the term of this Agreement. 1.3 "COMBINATION PRODUCT" shall mean any product that is formulated in part of any Product (or any part thereof) and in part of any Combination Substances. 1.4 "COMBINATION PRODUCT NET SALES" shall have the meaning given that term in the definition for "Product Revenues." 1.5 "COMBINATION SUBSTANCES" shall mean the product or substance, other than a Product, that is sold in combination with a Product. 1.6 "DAMAGES" shall have the meaning given to it in Section 11.1. 1.7 "ELEMENTS OF TECHNOLOGY" shall mean all technical information, whether tangible or intangible, that relates to any Product or is from which the Product is based, including any and all data, preclinical and clinical results, techniques, discoveries, inventions, ideas, processes, know-how, patents (including any extension, reissue or renewal patents), patent applications, inventor's certificates, trade secrets and other proprietary information, licenses and sublicenses and samples of any physical, biological or chemical material. 1.8 "FDA" means the United States Food and Drug Administration, or any state governmental agency in the United States that may also have jurisdiction over the drug approval process in conjunction with the United States Food and Drug Administration or any governmental agency performing similar functions in any country within the Territory; provided, if the governmental agency is outside the United States, it shall only be considered an "FDA" for purposes of this definition if the approval by such agency will allow Licensee to exploit and commercialize a sizeable and profitable market segment. 1.9 "FIELD OF ACTIVITY" shall mean the use (including any use in connection with research, development, demonstration, testing or experimentation) of the Products for, or the manufacture, sale or other disposition of the Products for, human or animal therapeutic or prophylactic use within the Territory, including without limitation, any use for arrest and therapy of, or for vaccination against, retroviruses and bacterial infections. 1.10 "FORCE MAJEURE EVENT" shall have the meaning given it in Section 13. 1.11 "IMPROVEMENTS" shall mean any findings, discoveries, inventions, additions, modifications, formulations or changes made by licensees during the term of this Agreement which directly relate to the Products or Licensed Processes including, without limitation, new or improved methods of administration, improved side effect profile, new medical indications and improvements in the manufacturing process. 1.12 "INFRINGEMENT PROCEEDS" shall have the meaning given that term in Section 8.4. 1.13 "INTELLECTUAL PROPERTY" means any invention, modification, discovery, design, development, improvement, process, software program, work of authorship, documentation, formula, data, technique, know-how, secret or other intellectual property whatsoever or any interest therein (whether or not patentable or registrable under copyright or similar statutes or subject to analogous protection) that relates to any Product being developed by Licensor under this Agreement, BUT EXCLUDING any (i) ------------- trademarks or (ii) the manuscript currently being completed on the life of the Owner or any film, documentary or copyright relating to such manuscript or any future additions of a similar manuscript. 1.14 "KNOW-HOW" shall mean any and all technical information presently available or generated during the term of this Agreement which directly relates to the Products, Licensed Processes or Improvements and shall include, without limitation, (i) the medical, clinical, chemical, pharmaceutical, pharmacological, topological, toxicological or other scientific data or information relating to any Product (including without limitation, pre-clinical and clinical data, notes, reports, models and samples) and (ii) the manufacturing, production, and purification procedures and processes, as well as analytical methodology, used in testing, assaying, analysis, production, and packaging of any Product. 1.15 "LICENSED PROCESSES" shall mean the processes which are used in any country in the Territory, and which; (a) is covered in whole or in part by any of the Patent Rights or Know-How; (b) is derived from the Patent Rights or Know-How; or (c) is covered in whole or in part by the Background Technology. 1.16 "NET SALES" with respect to sales for any period and with respect to any item, shall mean the actual proceeds received by Holmedco, its Affiliates and/or sublicensees, from third parties, whose dealings shall be at arms length, for Products and Combination Products sold under this Agreement, net of trade, quantity and cash discounts, if any, actually allowed or paid with respect to Products or Combination Products; and less each and all of the following allowed or paid by Holmedco, its Affiliates and sublicensees; trade credits, rebates and allowances actually granted on account of price adjustments, rebate programs, billing errors or the rejection or return of goods; commissions actually allowed or paid to independent brokers or agents; export packaging, outbound freight or transportation charges; and all taxes (except income taxes), tariffs, duties and other similar governmental charges paid by Holmedco or its Affiliates or sublicensees, all determined in accordance with the generally accepted accounting principles applicable in the United States, consistently applied. In calculating Net Sales, any given unit of a Product or Combination Product shall be taken into account only once. 1.17 "NDA" shall mean any pending or approved application or any application to be filed with respect to the Products, including any Improvements thereof, submitted or to be submitted to the FDA under the applicable food and drug law in each and any country of the Territory. 1.18 "PATENT RIGHTS" shall mean all of each of the Licensor's and Owner's rights in the following intellectual property: (a) the United States and foreign patents and/or patent applications listed in Recitals. (b) United States and foreign patents issued from the applications listed in Recitals and from divisional and continuations of the applications; (c) claims of US. and foreign patents issued from the applications, and of the resulting patents, which are directed to subject matter specifically described in the U.S. and foreign applications listed in Recitals. (d) claims of all foreign patent applications, and of the resulting patents, which are directed to subject matter specifically described in the United States patents and/or patent applications described in (a), (b) or (c) above; and (e) any reissues or re-examinations of United States patents or other patents within the Territory described in (a), (b), (c) or (d) above. 1.19 "PRODUCT" shall mean treatment process, pharmaceutical preparation, compound or biologic agent and any process or product or part thereof which: (a) is covered in whole or in part by an issued, unexpired claim or a pending claim contained in the Patent Rights in any country within the Territory in which any Product is to be made, used or sold; or (b) is manufactured by using a process which is covered in whole or in part by any of the Patent Rights and/or Know-How in any country within the Territory in which such Licensed Process or part thereof is used or the country in which Products made through the use of such Licensed Process are used or sold; or (c) is derived from the Patent Rights, Know-How or Background Technology or related thereto. 1.20 "PRODUCT APPROVAL" means final FDA approval to market commercially the specified product for use by humans or animals. 1.21 "PRODUCT REVENUES" for any period shall mean the sum of (i) the aggregate amount of Net Sales (excluding Combination Product Net Sales) in such period in the Field of Activity in respect of any Product and (ii) an amount equal to: (A) the aggregate amount of Net Sales in such period in the Field of Activity in respect of any Combination Product (the "Combination Product Net Sales") multiplied by (B) a fraction the numerator of which equals the fair market value of the Product (or any part thereof) included in such Combination Product and the denominator of which equals the sum of (x) the fair market value of such Product (or part thereof) and (y) the fair market value of such Combination Substance included in such Combination Product. For purposes of this definition, "fair market value" of any Product or product (or part thereof) shall be the list retail price of such Product or product (or part thereof sold separately or, if such Product or product (or part thereof) is not ordinarily sold separately, a value determined in the good faith business judgment of the Licensor and Holmedco. Product Revenues realized by Holmedco, its Affiliates or sublicensees within the Territory as a result of sales or trading utilizing the facilities available pursuant to the Young Initiative (FDA July 1988) for sales of Products treating terminally ill patients, prior to United States Product Approval, shall be utilized in calculating royalties due. 1.22 "RULES" shall have the meaning given that term in Section 12. 1.23 "TERRITORY" shall mean the world. 2. LICENSE GRANT ------------- 2.1 LICENSE GRANT. Colthurst and Owner hereby jointly grant to ------------- Holmedco the exclusive world rights (even as to Colthurst and Owner) to all present and future Patent Rights, Know-How and the Background Technology for all uses thereunder with the right to sublicense, to make, have made, use and sell the Products and Combination Products, and to practice, modify and improve the Licensed Processes within the Field of Activity, in the Territory, and to sublicense others to do the same, all as herein provided. 2.2 LICENSE FEES. In consideration of the license granted in Section ------------ 2.1 above, Holmedco shall pay the following licensing fees: (a) Payment to Licensor of a license fee upon signing this Agreement of $100,000; (b) Payment to Licensor of $250,000 as provided in Section 3.1. 2.3 PROGRESS REPORTS ON FUNDING. During the first six months of this --------------------------- Agreement and any extension thereof, Holmedco shall furnish to Colthurst a written report on its progress towards the securing of the funding on a monthly basis. If during this period Owner or Licensor employees, executives or consultants are required to attend presentations or discussions by Holmedco all reasonable out-of-pocket expenses will be paid by Holmedco, such expenses to be agreed in advance. 2.4 AGREEMENTS WITH THIRD PARTIES. During the term of this Agreement ----------------------------- Holmedco shall not enter into any agreement concerning the rights of Owner without the prior written approval of Owner provided however nothing herein shall prohibit Holmedco from entering into agreements concerning its own rights hereunder without Owner's consent including the sublicensing of Holmedco's rights under this Agreement. 3. LICENSE TERMS ------------- The terms of the License Agreement, are as set out hereunder: 3.1 $250,000 LICENSE FEE. Licensing fee of US. Two Hundred Fifty -------------------- Thousand Dollars ($250,000) to be paid not later than 18th, November 1994; provided, however, that date shall be extended for a reasonable period of time to permit Holmedco to close its initial financing, if Holmedco demonstrates that it has used reasonable efforts to secure financing which, without limitation, can be demonstrated by preliminary letters of intent from accredited investors. Contemporaneously with payment in full of such license fee, Colthurst and Owner shall grant Holmedco a first perfected security interest in the Patent Rights and Know-How to secure Holmedco's exclusive license hereunder and the obligations of Colthurst and Owner hereunder and shall execute such documents as are reasonably necessary and desirable to create and perfect such security interests. 3.2 ROYALTIES. Holmedco shall pay to Colthurst royalties of six (6%) ---------- percent which shall be calculated on the basis of Product Revenues generated through the use, lease or sale of the Products or Combination Products by or for Licensee or its sublicensees. Royalties shall not be payable on Product released by Licensee for clinical trials. Licensee may deduct from this royalty payment for Product Revenues received from any country an amount equal to any payments made to Licensor for that country under Section 3.3 below. 3.3 ROYALTIES ON SUBLICENSES. In the event of the sale of sublicenses ------------------------ or any other third-party agreements twenty-five (25%) percent of any fees so generated, either by monetary or other means, shall be payable to Colthurst. 3.4 LIMITATION ON ROYALTIES DUE. --------------------------- (a) From and after the fifth (5th) anniversary of the Product Approval for a particular Product and through the tenth (10th) anniversary thereof, the six percent (6%) royalty due under Section 3.2 shall be reduced to three percent (3%) for Product Revenues generated in each country where neither the Product nor the Licensed Process was ever covered in whole or in part by any issued or pending claim contained in the Patent Rights in such country; provided, however, upon the written request of Holmedco, Licensor and Holmedco shall consider in good faith further reducing such royalties based upon the then current competition in such country generated by competing pharmaceutical products and its effect on Holmedco's profitability. (b) No royalties shall be payable under Section 3.2 or 3.3 on Product Revenues generated from a Product sold after the tenth (1Oth) anniversary of the Product Approval for such Product, in each country where neither the Product nor the Licensed Process was ever covered in whole or in part by any issued or pending claim contained in the Patent Rights. (c) No royalties shall be payable under Section 3.2 or 3.3 on Product Revenues generated from a Product sold in each country where the Product and the Licensed Process from which such Product is made cease to be covered in whole or in part by any issued or pending claim contained in the Patent Rights in each such country. 3.5 CONTINGENT MINIMUM ROYALTY. A renewable annual license fee of -------------------------- $500,000 shall be payable commencing eighteen (18) months after Holmedco pays the $250,000 required under Section 2.2. This fee amount is deductible from royalty payments, due as per Section 3.2, which become payable in the 12-month period following renewal of license. Holmedco may deduct from this annual fee an amount equal to any payments made under Section 3.3 above. 3.6 ROYALTY REPORTS AND PAYMENTS. Within a period of sixty (60) days ---------------------------- from the end of each quarter commencing from the first quarter after Product is sold, Holmedco shall submit to Colthurst a detailed report detailing the amount of all royalties owing to Colthurst during the quarter to which the report refers, including full details of the sales made by Holmedco and its sublicensees, and the considerations received by Holmedco for the granting of sublicenses under Section 3.3 above, including, but without derogating from the generality of the foregoing, sales according to countries, itemization of the Product Revenues, the currency of sale, the date of invoice, and any other detail relevant to enable the determination of the royalties payable hereunder. Holmedco shall pay at the time of each of the said reports the amount of the royalties owing to Colthurst pursuant to the said report for the period of the report, reduced by the amount of any U.S. (at the federal and state level) and any other country's income tax withholding which Holmedco may be required to pay under U.S. or such other country's tax laws in respect of such royalties. Holmedco shall discuss the most appropriate methods of payment with Colthurst prior to transmission of funds from countries within the Territory that may result in the deduction of withholding taxes. 3.7 COLTHURST'S RIGHT TO INSPECT RECORDS. Colthurst or its ------------------------------------ authorized representatives shall have the right from time to time (but not more than twice each calendar year) during normal business hours to inspect Holmedco's books of accounts, records and other relevant documentation insofar as they relate to the manufacture or marketing of the Products, in order to ascertain or verify the amount of royalties due to Colthurst hereunder and the accuracy of the information provided to Colthurst in the aforementioned reports. Holmedco's agreement with any licensees shall grant Holmedco similar inspection rights and Holmedco shall share any information received in exercising such rights with Colthurst. 3.8 ROYALTIES IN COUNTRIES PROHIBITING TRANSFER OF CURRENCY ABROAD. --------------------------------------------------------------- Where royalties are due Colthurst hereunder for sales of Products in a country where, by reason of currency regulations or taxes of any kind, it is impossible or illegal for Holmedco, any Affiliate or sublicensee to transfer royalty payments to Colthurst for Product Revenues in that country, such royalties shall be deposited in whatever currency is allowable by the person or entity not able to make the transfer for the benefit or credit of Colthurst in an accredited bank in that country that is acceptable to Colthurst. 4. CERTAIN REPRESENTATIONS. WARRANTIES AND COVENANTS OF OWNER AND -------------------------------------------------------------- LICENSOR. --------- 4.1 PATENT RIGHTS. KNOW-HOW AND BACKGROUND TECHNOLOGY. Colthurst and ------------------------------------------------- Owner represent that they are the only persons who hold any interest in the Patent Rights, Know-How and Background Technology, that such information is not based upon any non-public information obtained from any other person, that they are the true and first inventors of the invention described in the Patent Rights, that there are no lawful grounds of objection to the grant of the Patent Rights, that they have not done or omitted any act to obtain the Patent Rights which would impair the validity of the Patent Rights, that there are no encumbrances or liens thereon, that execution of this License Agreement is duly authorized and does not breach any agreement with any third person or entity, or any applicable law or regulation. Neither Colthurst nor Owner will grant any other person any right or portion thereof in the Patent Rights, Know-How or Background Technology to any other person or entity. Colthurst and Owner represent that their Patent Rights are for all uses of their invention for the arrest and therapy of human retroviral infections and not limited to use for HIV and AIDS. 4.2 COVENANT AGAINST GRANTING INTERESTS TO THIRD PARTIES. During the ---------------------------------------------------- term of this Agreement, neither Colthurst nor Owner will grant interest in the Patent Rights, Know-How or Background Technology to any other person or entity. 4.3 COOPERATION WITH DUE DILIGENCE INVESTIGATION. Subject to -------------------------------------------- Holmedco's payment of all reasonable out-of-pocket expenses in accordance with Section 2.3 above, Owner and Licensor shall cooperate in all respects with any due diligence review conducted in connection with any proposed financing of Holmedco. 5. IMPROVEMENTS ------------ Holmedco and Owner and Licensor shall disclose to each other all Improvements developed or discovered by any Party, including without limitation any developmental results generated under this Agreement by Holmedco during the term of this Agreement, immediately upon the development or discovery of such Improvements or the generation of such developmental results. All Owner and Licensor Improvements shall be part of the rights licensed hereunder with no additional costs to Holmedco. Holmedco hereby grants and agrees to grant, assign, transfer and convey irrevocably to Owner all ownership interest in and to all such Improvements developed or discovered by Holmedco during the term of this Agreement; provided, that to the extent Owner or Licensor is remunerated by third parties in respect of such Improvements made by Holmedco or its sublicensees, Holmedco shall be the Party receiving such remuneration. Nothing in this Agreement shall in any way affect the full and absolute ownership of Owner with regard to the Patent Rights, Know-How and Background Technology of Colthurst and Holmedco acknowledges that Owner has the full right, title and interest in the ownership of the said Patent Right, Know-How and Background Technology subject to the assigned portions granted to Colthurst. 6. DEVELOPMENT AND COMMERCIALIZATION. --------------------------------- 6.1 DEVELOPMENT COSTS. The Parties recognize that Licensor and Owner ----------------- have performed certain preclinical and clinical development work on the Products. Holmedco shall, at its own expense, be responsible for the development of the Products. 6.2 ASSISTANCE BY OWNER. The Licensor and Owner shall be responsible ------------------- for reasonably assisting Holmedco in the Development of the Products and securing financing. Holmedco shall pay the reasonable out of pocket expenses thereof. After Holmedco obtains seed financing of at least $10,000,000 U.S., Holmedco shall pay Owner for such services at the rate of $15,000 US per month, such payments to be retroactively paid for services commencing June 1, 1994 through FDA Phase II approval for marketing. 6.3 CLINICAL AND PRECLINICAL STUDIES. Holmedco shall have the right -------------------------------- to conduct clinical and preclinical studies at its cost and expense in support of human anti-viral indications for and formulations of the Products. 7. REGULATORY AFFAIRS ------------------ 7.1 OVERSIGHT OF REGULATION MATTERS. Holmedco shall be responsible ------------------------------- for regulatory activities necessary for the development of the Products, in each country in the Territory. Within a reasonable period after Holmedco obtains financing of at least $10,000,000 U.S., Holmedco and Owner shall interview prospective FDA consultants and shall engage the top-choice consultant as soon as possible. 7.2 LICENSOR AND OWNER SUPPORT OF REGULATING ACTIVITIES. Licensor and --------------------------------------------------- Owner shall support, where it is possible, the regulatory activities of Holmedco in all relevant countries in the Territory. At all times during the term of this Agreement, the Licensor and Owner and Holmedco shall each promptly after learning thereof notify the other in writing of any serious or unexpected adverse reactions or side effects with respect to the Products. 7.3 IND APPLICATIONS AND NDA'S. Holmedco shall file all new IND -------------------------- applications and NDA's in its own name. Upon the termination of this agreement the ownership of Holmedco's IND applications and grants shall become the property of Licensor. During and after the term of this Agreement, the NDA's concerning the Products shall remain the property of Holmedco. The Parties shall make joint announcements of all IND and NDA approvals on the Products. Owner and Colthurst will get full credit in all publications for the invention, and will be kept fully involved in the development, of any Product. 7.4 REPORTING OF ADVERSE REACTIONS. Holmedco and Licensor shall ------------------------------- comply in each country of the Territory with a common adverse reaction reporting system to be agreed between the Parties and, if required, the more stringent of the adverse reaction reporting requirements of: (a) the U.S. Food and Drug Administration; or (b) the Food and Drug Law of the relevant country. 8. INTELLECTUAL PROPERTY --------------------- 8.1 OWNERSHIP. Owner shall have and retain ownership of and title to --------- all intellectual property rights in all inventions and discoveries (except for inventions and discoveries which are independently developed by Holmedco and not derived from or based on the Patent Rights and Know-How or other intellectual property of Owner or the Licensor) relating to the Products, Licensed Processes or Improvements, including without limitation patents and other intellectual property relating to the Products, Licensed Processes or Improvements, which are made, conceived, reduced to practice or generated by the Parties or their respective affiliates, including employees, agents and other representatives or contractors, in the course of work performed under this Agreement and/or any other agreements between the Parties relating to the Products or the Licensed Processes; provided, however, Holmedco shall be the sole owner of all trademarks or service marks arising from marketing and sale of the Products or any services related thereto and shall have sole discretion for the naming of any Products or related services. The Parties acknowledge that Holmedco reserves certain rights under Section 5 above in the Improvements and under Section 10.3 below in the Know-How, Background Technology and Improvements (excluding Patent Rights). 8.2 PATENT PROSECUTION FOR EXISTING PATENT RIGHTS. Subject only to ---------------------------------------------- the assignments between Owner and Colthurst, Owner shall have the exclusive right and obligation to prepare, file, prosecute and maintain all patent applications and patents relating to the Products, Licensed Processes, Know-How, Background Technology or Improvements. New patent applications (to be paid for by Licensee) shall be filed in such countries as shall be mutually agreed upon in good faith by Colthurst and Holmedco; Licensor and Owner shall be free to file patent applications and prosecute patents in countries not agreed to with Licensee at Licensor's or Owner's sole expense (it being understood by the Parties that the rights arising therefrom shall be considered Patent Rights under this Agreement). In determining where and when new patent applications shall be filed, Colthurst and Holmedco shall consider (i) the size and profitability to Holmedco of market segments that will be covered by the Patent Rights in a particular country, (ii) the degree to which such protection sufficiently precludes Holmedco's competitors from making, using or selling a product similar to the Product to be covered by the Patent Rights in such country, (iii) Holmedco's international plans for marketing and distributing the Product, and (iv) the general commercial standards in the pharmaceutical industry for determining in which countries to seek patent protection. Colthurst agrees to keep Holmedco fully informed at all levels of the patent application process and, if reasonably requested by Holmedco, to withdraw or cease prosecuting a patent application in a particular country unless Licensor or Owner is willing to continue such patent prosecution at its sole expense. If Licensor has not, within ninety (90) days after the written request of Holmedco, prepared and filed a patent application in a country where Colthurst and Holmedco have agreed that an application shall be filed, then Holmedco shall be entitled to prepare, file, prosecute and maintain such patent applications and patents and Licensor and Owner shall cooperate fully with Holmedco in connection therewith and execute all necessary documents. Holmedco shall provide reasonable assistance to Owner to facilitate the filing and maintenance of all such patent applications and patents, and shall execute all documents which Owner deems necessary or desirable therefore. Without prejudice to the above, all applications for patents shall be drafted by a patent attorney nominated by Holmedco. Prior to lodgment all patent applications shall be subject to review by patent agents nominated by Colthurst. The reasonable expenses of the agents shall be discharged by the Licensee. 8.3 CERTAIN INTELLECTUAL PROPERTY. Subject to Section 8.1 above, ----------------------------- Colthurst and Owner and Holmedco shall retain their rights to all intellectual property rights in its own logos or name and other intellectual property used in the development of the Products and Licensed Processes, except as otherwise provided herein. 8.4 THIRD PARTY INFRINGEMENT. ------------------------ (a) Each Party shall promptly report in writing to each other Party during the term of this Agreement any (i) known infringement or suspected infringement of any of the Patent Rights, or (ii) unauthorized use or misappropriation of Know-How or Background Technology by a third party of which it becomes aware, and shall provide each other Party with all available evidence to support said infringement, suspected infringement or unauthorized use or misappropriation. (b) Except as provided in Section 8.4(d) below, Holmedco shall have the right to initiate an infringement or other appropriate suit anywhere in the world against any third party who at any time has infringed, or is suspected of infringing, any of the Patent Rights or of using without proper authorization all or any portion of the Know-How or Background Technology. Holmedco shall give Colthurst sufficient advance notice of its intent to file said suit and the reasons therefore, and shall provide Colthurst with an opportunity to make suggestions and comments regarding such suit. Holmedco shall keep Colthurst promptly informed, and shall from time to time consult with Colthurst regarding the status of any such suit and shall provide Colthurst with copies of all documents filed in, and all written communications relating to, such suit. (c) Holmedco shall have the sole and exclusive right to select counsel for any suit referred to in subsection (b) above and shall pay all expenses of the suit, including without limitation attorneys' fees and court costs but shall be entitled to receive and retain any damages, royalties, settlement fees or other consideration (collectively, "Infringement Proceeds"); provided, however, Holmedco shall remit to Colthurst such portion of the Infringement Proceeds as Holmedco and Colthurst may agree upon in light of Colthurst's royalty rights under this Agreement or, if they cannot agree on an amount, such amount as determined by the arbitrator under Section 12 below. If necessary, Colthurst shall be joined as a party to the suit but shall be under no obligation to participate except to the extent that such participation is required as the result of being a named party to the suit. Colthurst shall offer reasonable assistance to Holmedco in connection therewith at no charge to Holmedco except for reimbursement of reasonable out-of-pocket expenses, including salaries of Colthurst personnel, incurred in rendering such assistance. Colthurst shall have the right to participate and be represented in any such suit by its own counsel at its own expense. Holmedco shall not settle any such suit involving rights of Colthurst without obtaining the prior written consent of Colthurst which consent shall not be unreasonably withheld. (d) In the event that Holmedco elects not to initiate an infringement or other appropriate suit pursuant to subsection (b) above, Holmedco shall promptly advise Colthurst of its intent not to initiate such suit, and Colthurst shall have the right, at the expense of Colthurst, of initiating an infringement or other appropriate suit against any third party who at any time has infringed, or is suspected of infringing, any of the Patent Rights or of using without proper authorization all or any portion of the Know-How or Background Technology. In exercising its rights pursuant to this subsection (d), Colthurst shall have the sole and exclusive right to select counsel and shall pay all expenses of the suit, including without limitation attorneys' fees and court costs, and shall be entitled to receive and retain the Infringement Proceeds; provided, however, Colthurst shall remit to Holmedco such portion of the Infringement Proceeds as Holmedco and Colthurst may agree upon in light of Holmedco's exclusive license rights under this Agreement or, if they cannot agree on an amount, such amount as determined by the arbitrator under Section 12 below. If necessary, Holmedco shall be joined as a party to the suit but shall be under no obligation to participate except to the extent that such participation is required as a result of being named party to the suit. At Colthurst's request, Holmedco shall offer reasonable assistance to Colthurst in connection therewith at no charge to Colthurst except for reimbursement of reasonable out-of-pocket expenses, including salaries of Holmedco's personnel, incurred in rendering such assistance. Holmedco shall have the right to participate and be represented in any such suit by its own counsel at its own expense. 9. EXCHANGE AND USE OF DATA ------------------------ 9.1 DEVELOPMENT DATA. Each Party and its Affiliates shall provide ----------------- the other Parties with access to and (upon request) copies of all information and data generated by it in connection with the development of the Products or Combination Products, including without limitation all information and data regarding Improvements and all information and data filed with the US. FDA and all other applicable regulatory agencies in the Territory, and each Party shall have the unrestricted right free of charge to utilize the information and data or any portion thereof for any purpose under this Agreement in its sole discretion. 9.2 STUDIES. Each Party shall make available to the other Parties -------- all information and data relating to the unpublished or not-yet-published studies on the Products or Licensed Processes at least four weeks prior to any use of such information or data for marketing purposes. If data becomes available which is required to be utilized immediately in order to maintain commercial and scientific advantage a waiver from this Section must be obtained in writing prior to the use of the said data. 9.3 IMPROVEMENTS. All parties shall have the unrestricted right to ------------ use all information and data generated by the other relating to the Products or Licensed Processes as set forth under Section 5 at no cost within the Territory. 9.4 PUBLICATIONS. No Party shall submit for written or oral ------------ publication any proprietary data or other proprietary information in violation of Section 9.5 below. To ensure compliance with the provisions of this Section 9.4, the Party proposing to submit such publication shall provide the other Parties a reasonable opportunity to review the proposed submission prior to its publication. Notwithstanding the above, the Owner has made all Parties to this Agreement aware of both a substantial autobiography contract with Transworld Publishers and a BBC Documentary concerning his research work in relation to HIV. In the course of completing the above two contracts, the Owner will keep all Parties informed of developments; however, Owner is not in a position, due to his signed contracts with the Publishers and the BBC, to allow the other parties to this License Agreement the opportunity to review the autobiography or film prior to either publication. Access for filming and interviews will be required during patient testing at test sites. No proprietary information will be disclosed by Owner. The Owner is at present in negotiations concerning film rights to the above autobiography. 9.5 CONFIDENTIAL INFORMATION. During the term of this Agreement and ------------------------ for two (2) years thereafter, no Party shall, without the specific written consent of all parties, disclose to any other person (except disclosures required by law and disclosures to Affiliates and third persons workings as outside contractors to such Party under confidentiality obligations consistent with those set forth in this Section 9.5) any confidential information or trade secret concerning the Products or Licensed Processes (including the Know-How and Background Technology) or another Party's business that is subject to, or obtained or developed in the course of performing, this Agreement unless such information: (a) was or becomes public through no fault of the receiving Party; (b) was, at the time of receipt, already in the receiving Party's possession as evidenced by written records; or (c) was obtained from a third party legally entitled to use and disclose the same. Upon termination of this Agreement, each Party shall forthwith return to the appropriate other Party all physical manifestations of any confidential information or trade secrets in its possession or control which are owned or assigned by such other Party except as otherwise provided in Section 10.3 below. 10. TERM AND TERMINATION -------------------- 10.1 TERM. This Agreement shall remain in effect, unless sooner ----- terminated as set forth in Section 10.2 below, until the later of (a) the expiration of the last to expire Patent Right and (b) ten (10) years from the date of the first commercial sale of the Products by Holmedco hereunder. 10.2 TERMINATION. ------------ (a) This Agreement shall automatically terminate with regard to a specific Product if that Product is permanently and completely withdrawn from all markets in the Territory for serious adverse health or safety reasons. (b) Licensor may terminate this Agreement immediately upon written notice if, at any time, Holmedco shall be involved in financial difficulties as exclusively evidenced by the filing in any court pursuant to any statute of the United States or of any individual state or foreign country a petition in bankruptcy or insolvency or for reorganization or for an arrangement or for the appointment of a receiver or trustee of the Licensee or of its assets; or if Holmedco proposes a written agreement of composition for extension of its debts; or if Holmedco shall be served with an involuntary petition against it, filed in any insolvency proceeding, and such petition shall not be dismissed within sixty (60) days after the filing thereof; or if Holmedco shall propose or be a party to any dissolution or liquidation, or if Holmedco shall make an assignment for the benefit of its creditors. (c) In the event either of Colthurst or Owner materially breaches any term or provision of this Agreement, Holmedco may and, in the event Holmedco materially breaches any term or provision of this Agreement, either of Colthurst or Owner may, terminate this Agreement thirty (30) days after giving the breaching Party written notice of such breach, unless: (i) the breaching Party cures the breach within such 30-day period; or (ii) if a cure cannot reasonably be effected within such 30-day period, the breaching Party commences the cure of such breach within such 30-day period and diligently prosecutes such cure to completion. This thirty (30) day cure period shall not apply to a breach by Holmedco to meet the terms of Section 3.1 of this Agreement; provided, however, no arbitration or legal recourse shall be available to Holmedco or Colthurst as a result of Holmedco's inability to meet the conditions under Section 3.1 or this Agreement. 10.3 RIGHTS AND DUTIES UPON TERMINATION. The following Sections shall ----------------------------------- survive termination of this Agreement: Sections 5, 8.1, 8.3, 10.3, 11, 12, and 14.1 through 14.10, inclusive. Further, upon termination of this Agreement by Colthurst or Owner pursuant to Sections 10.2(b) or 10.2(c) or Section 13 below, Holmedco shall return to each of Colthurst and Owner all of its respective Intellectual Property received by Holmedco, as well as all information generated by any Party in the course of its performance hereunder, including any Patent Rights, Know-How, Improvements, development studies and other information generated or developed in the course of performance of this Agreement (except for information which if independently developed by Holmedco and not derived from or based on the Patent Rights, Know-How or other Intellectual Property of either of Licensor or Owner and except for any trademarks or service marks relating to the Products or services related thereto which shall be owned solely by Holmedco). Upon such termination and return of Intellectual Property and other information, Holmedco shall have no further rights to or interest in the Patent Rights, Know-How, Improvements, the Products, the Licensed Processes, or the IND's granted. If this Agreement expires naturally in accordance with its term as provided in Section 10.1, Holmedco is hereby granted a non-exclusive perpetual license to use the Know-How, Background Technology and Improvements (excluding Patent Rights). 11. INDEMNIFICATION --------------- 11.1 BREACH OF REPRESENTATION. WARRANTY OR COVENANT: ACTS AND -------------------------------------------------------- OMISSIONS; INFRINGEMENT. Colthurst and Owner shall indemnify ------------------------ Holmedco and its Affiliates and Holmedco shall indemnify Colthurst and Owner against any and all claims, suits, actions or threats of action, liabilities, settlement amounts, damages, expenses or costs of any kind whatsoever, including without limitation reasonable attorneys' fees and costs (collectively "Damages"), which result from or arise out of (a) any inaccuracy of a representation, or breach of a warranty, made by the indemnifying Party under this Agreement, (b) the indemnifying Party's failure to perform any covenant which it is required to perform under this Agreement, and (c) intentional or grossly negligent actions or omissions, misconduct or wrongdoing by the indemnifying Party, its Affiliates or their agents in its performance under this Agreement. In addition, Colthurst and Owner shall indemnify Holmedco and its Affiliates from any and all third party claims arising from the Patent Rights, Know-How, and Background Technology, including without limitation, any claims that they infringe upon any rights of third persons. The indemnification provisions of this Section 11.1 shall also cover the indemnified Party's directors, officers, employees and other agents that may suffer any Damages. Owner and Licensor agree that the indemnification provisions of this Section 11.1 shall not apply to any failure by Holmedco to make the payments under Section 2.2 hereof and that Owner's and Licensor's exclusive remedy for such failure shall be the right to terminate this Agreement in accordance with Section 10.2(c) after expiration of the applicable cure period. 11.2 THIRD PARTY CLAIMS. Upon receiving notice of any claim or suit ------------------ under Section 11 above, the indemnified Party shall immediately notify the indemnifying Party and shall allow the indemnifying Party and/or its insurer the opportunity to assume direction and control of the defense of such claim, including without limitation the settlement thereof at the sole option of the indemnifying Party or its insurer. The indemnified Party agrees to co-operate with the indemnifying Party in the conduct of any negotiations, dispute resolution or litigation of any such claim or suit; and the indemnifying Party shall inform the indemnified Party of the progress of the claim or suit at such time and in such manner as is reasonable under the circumstances. Notwithstanding anything to the contrary herein, Colthurst or Owner, if it is the indemnified Party, shall at all times have the right to assume the loss and expense of any litigation relating to the Products or Licensed Processes and thereby control the contest and defense thereof. 11.3 INSURANCE. To the extent each party may have such insurance, for ---------- the applicable term and of this Agreement, each party agrees to make the other Party a named insured under its product liability insurance and clinical trial/malpractice insurance. 12. ARBITRATION ----------- The parties to any dispute or controversy arising out of, in connection with or relating to this Agreement, its negotiation, performance or breach, shall attempt to resolve any such dispute in an amicable manner, failing which the parties shall submit the same to arbitration. The arbitration panel shall consist of one arbitrator and shall be formed in accordance with the Rules for Commercial Arbitration of the American Arbitration Association then obtaining (the "Rules"). The arbitration shall be held in the State of Washington pursuant to the Rules, and the award shall be rendered in such form that judgment may be entered thereon in the highest court of any forum, state, federal or foreign, having jurisdiction. In making its award, the arbitrator shall be guided, in descending order of priority, by the terms of this Agreement, the usages of the trade in the business in which Colthurst, Owner and Holmedco are engaged and what is just and equitable under the circumstances. The cost of such arbitration shall be borne by the party against which an award is rendered in the arbitration proceeding or as the arbitrator may determine. Notwithstanding anything to the contrary contained herein, either party may apply to a court of competent jurisdiction for equitable relief for any breach or threatened breach of this Agreement, including but not limited to restraining orders and affirmative injunctive relief, and for ancillary orders in aid of the arbitrator. 13. FORCE MAJEURE ------------- Neither Party shall be liable for failure to perform any activities hereunder if such failure is due to a cause beyond the reasonable control of such Party, including without limitation, strikes, lockouts or other labor disturbances, riots, floods, fires, accidents, wards, embargoes, delays of carriers, inability to obtain materials from sources of supply, acts, or injunctions (each a "Force Majeure Event"). Upon the occurrence of any Force Majeure Event, the Party whose performance is affected shall immediately be given written notice of such Force Majeure Event to the other Party, and shall thereafter exert all reasonable efforts to overcome such Force Majeure Event and resume performance of this Agreement. If, despite such efforts the Party is unable to perform six (6) months following notification given hereunder, then the other Party may terminate this Agreement. 14. MISCELLANEOUS ------------- 14.1 ASSIGNMENT. Except as provided above, no Party may assign this ----------- Agreement except upon prior written consent of the Owner. Notwithstanding the foregoing, any Party may assign its rights and obligations to an Affiliate upon thirty (30) days prior written notice of such assignment to the other parties, although no such assignment shall relieve the Party of its primary responsibility for performance hereunder. 14.2 WAIVER. The failure of any Party hereto at any time to require ------ performance by another Party of any provision of this Agreement shall not affect the right of such Party to require future performance of that provision. Any waiver by any Party of any breach of any provision of this Agreement must be in writing to be effective and shall not be construed as a waiver of any continuing or succeeding breach of such provision, a waiver of the provision itself, or a waiver of any right under this Agreement. 14.3 GOVERNING LAW. This Agreement shall be governed by and construed ------------- in accordance with the laws of the State of Washington, U.S.A. 14.4 ENTIRE AGREEMENT. This Agreement and any other written agreements ---------------- between the Parties signed on or after the date hereof and relating to the subject matter hereof constitute the entire understanding of the Parties hereto and supersede all previous agreements between the Parties with respect to the matters contained herein. No modifications of this Agreement shall be binding upon any Party unless approved in writing by an authorized representative of each of the Parties. 14.5 PARTIAL INVALIDITY. In case any one or more of the provisions ------------------ contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision or provisions had never been contained herein unless the deletion of such provision or provisions would result in such a material change as to cause completion of the transaction contemplated herein to be impossible. 14.6 EFFECTIVENESS. This Agreement shall become effective immediately ------------- upon execution and delivery by the Parties. 14.7 EXECUTION IN COUNTERPARTS. This Agreement may be executed in one ------------------------- or more counterparts, all of which shall be considered one and the same agreement, and shall become a binding agreement when one or more counterparts have been signed by each of the parties and delivered to the other party. 14.8 BUY-OUT. In the event Holmedco is acquired by merger, asset ------- acquisition or stock acquisition, Holmedco shall take all steps necessary to ensure the acquirer assumes the obligations of Licensee under the license agreement. In the event Colthurst is acquired by merger, asset acquisition or stock acquisition, Colthurst shall take all steps necessary to ensure the acquirer assumes the obligations of Colthurst under the license agreement. 14.9 SET-OFF. In the event any Party is owed any sums which are not ------- paid when due under this Agreement, the Development Agreement or any other agreement or note between the parties, such Party may set-off such amounts against any payments due the other Party hereunder. 14.10 NOTICES. Except as otherwise provided herein, any notice or ------- other communications sent or delivered hereunder shall be in writing and shall be effective if hand-delivered or if sent by certified or registered mail or postage prepaid or by international courier service: To Colthurst: Colthurst, Inc. ------------ Baybush, Straffan County Kildare, Ireland Attention: Mr. Leo J. Prendergast Telephone: 353-1-6272636 Telecopier: 353-1-6272703 To Owner: Patrick T. Prendergast -------- Baybush, Straffan County Kildare, Ireland Telephone: 353-1-6272636 Telecopier: 353-1-6272703 To Holmedco: Holmedco Pharmaceuticals Corporation ----------- 3807 NW 127th Circle Vancouver, WA 98686 Attention: Richard B. Hollis, Chairman and CEO Telephone: 206-573-2489 Telecopier: 206-573-2489 or to such address as any Party shall hereafter designate by notice to the other Parties. A notice shall be deemed to have been given on the date of receipt by the Party. 14.11 INTELLECTUAL PROPERTY OF OWNER'S SPOUSE. The Parties --------------------------------------- acknowledge that Owner's spouse is also a microbiologist. The Parties further acknowledge and agree that nothing in this Agreement is intended to confer to any Party an interest in any of the intellectual property rights of Owner's spouse that relate to her cancer research projects or any other project unrelated to the development of the Products. 14.12 NON-LIABILITY OF PROMOTER. Owner and Licensor acknowledge ------------------------- and agree that Richard B. Hollis is a promoter of Holmedco and that they will only look to Holmedco, once formed and organized as a corporation, for performance of any obligation under this Agreement including, without limitation, the indemnification provisions of Section 11. IN WITNESS WHEREOF, the Parties have caused this License Agreement to be signed by their duly authorized representatives as of the day and year first above written. "Licensee" "Licensor" HOLMEDCO PHARMACEUTICALS COLTHURST LIMITED CORPORATION By: /s/ Richard B. Hollis By: /s/ Patrick T. Prendergast ----------------------------- --------------------------- Its: Chairman & CEO Its: Chairman & Managing Director ----------------------------- ------------------------------ "Owner" /s/ Patrick T. Prendergast ---------------------------------- PATRICK T. PRENDERGAST AMENDMENT NO. 1 TO LICENSE AGREEMENT This Amendment is made as of this 5th day of February 1995, by and between COLTHURST LIMITED, a Delaware corporation ("Colthurst" or "Licensor"), PATRICK T. PRENDERGAST, an individual ("Owner"), and HOLLIS-EDEN, INC., a Delaware corporation (formerly Holmedco Pharmaceuticals Corporation) (the "Hollis-Eden"). W I T N E S S E T H: -------------------- WHEREAS, Licensor, Owner and Hollis-Eden are parties to that certain License Agreement dated May 18, 1994 ("Agreement). WHEREAS, Licensor, Owner and Hollis-Eden desire to amend the Agreement in the manner set forth herein. NOW, THEREFORE, in consideration of the premises, the provisions and the respective agreements hereinafter set forth, the parties hereby agree as follows: 1. The first sentence (including the proviso) of Section 3.1 of the Agreement is hereby deleted in its entirety and replaced with the following first sentence: "Licensing fee of U.S. Two Hundred Fifty Thousand Dollars ($250,000) due on February 15, 1995 and payable no later than February 28, 1995. " 2. Section 6.2 is hereby deleted and replaced with the following Section 6.2: "6.2 ASSISTANCE BY OWNER. The Licensor and Owner shall ------------------- be responsible for reasonably assisting in the Development of the Products and securing financing. Hollis-Eden shall pay the reasonable out of pocket expenses thereof. After Hollis-Eden obtains seed financing of at least U.S. $10,000,000 in the aggregate, Hollis-Eden shall pay Owner for such services at a rate of U.S. $15,000 per month (the "Monthly Compensation"), such payments to be retroactively paid for such services commencing June 1, 1994 through the completion of FDA Phase II; provided, the aggregate Monthly Compensation to be paid Owner under this Section 6.2 shall not exceed U.S. $250,000. In the event Hollis-Eden has not obtained seed financing of U.S. $10,000,000 in the aggregate by December 31, 1995, then, on such date, Hollis-Eden shall pay Owner the maximum amount payable to Owner under this Section 6.2 less any amounts, if any, paid to Owner prior to December 31, 1995." 3. The following sentence is hereby added to the end of Section 3.5: "If Hollis-Eden fails to make the annual renewable license fee for any given year, Colthurst's exclusive remedy, provided Colthurst has provided written notice to Hollis-Eden and allowed Hollis-Eden thirty days to cure such failure, shall be (i) to terminate this Agreement and (ii) to license such rights to a third party at Colthurst's discretion. " 4. Except as specifically set forth herein, the Agreement shall remain unaffected and shall remain in full force and effect. This Amendment shall be deemed part of, and construed in accordance with, the Agreement. IN WITNESS WHEREOF, the parties have executed this Amendment and caused the same to be duly delivered on their behalf on the day and year hereinabove first set forth. "Hollis-Eden" "Colthurst" or "Licensor" HOLLIS-EDEN, INC. COLTHURST LIMITED By: /s/ Richard B. Hollis By: /s/ Leo Prendergast ---------------------------- ---------------------------- Its: CEO Its: Director ---------------------------- ---------------------------- "Owner" /s/ Patrick T. Prendergast -------------------------------- PATRICK T. PRENDERGAST AMENDMENT NO. 2 TO LICENSE AGREEMENT This Amendment is made as of this 28th day of February 1995, by and between COLTHURST LIMITED, a Delaware corporation ("Colthurst" or "Licensor"), PATRICK T. PRENDERGAST, an individual ("Owner"), and HOLLIS-EDEN, INC, a Delaware corporation (formerly Holmedco Pharmaceuticals Corporation) ("Hollis-Eden"). W I T N E S S E T H: -------------------- WHEREAS, Licensor, Owner and Hollis-Eden are parties to that certain License Agreement dated May 18, 1994, as amended by that certain Amendment No.l to License Agreement dated February 5, 1995 ("Agreement"); WHEREAS, Licensor, Owner and Hollis-Eden desire to amend the Agreement in the manner set forth herein; NOW, THEREFORE, in consideration of the premises, the provisions and the respective agreements hereinafter set forth, the parties hereby agree as follows: 1. In consideration of Licensor entering into this Amendment, Hollis-Eden shall immediately issue to Licensor One Hundred Thousand (100,000) shares of Hollis-Eden's Common Stock. 2. The first sentence (including the proviso) of Section 3.1 of the Agreement is hereby deleted in its entirety and replaced with the following first sentence: "Licensing fee of U.S. Two Hundred Fifty Thousand Dollars ($250,000), payable on or before March 17, 1995." 3. Except as specifically set forth herein, the Agreement shall remain unaffected and shall remain in full force and effect. This Amendment shall be deemed part of, and construed in accordance with, the Agreement. IN WITNESS WHEREOF, the parties have executed this Amendment and caused the same to be duly delivered on their behalf on the day and year hereinabove first set forth. "Hollis-Eden" "Colthurst" or "Licensor" HOLLIS-EDEN, INC. COLTHURST LIMITED By: /s/ Richard B. Hollis By: /s/ Leo Prendergast ---------------------------- ---------------------------- Its: CEO Its: Director --------------------------- --------------------------- "Owner" /s/ Patrick T. Prendergast ------------------------------ PATRICK T. PRENDERGAST AMENDMENT NO. 3 TO LICENSE AGREEMENT This Amendment is made to be effective as of the 17th day of March 1995, by and between COLTHURST LIMITED, a Delaware corporation ("Colthurst" or "Licensor"), PATRICK T. PRENDERGAST, an individual ("Owner"), and HOLLIS-EDEN, INC., a Delaware corporation (formerly Holmedco Pharmaceuticals Corporation) ("Hollis-Eden"). W I T N E S S E T H: -------------------- WHEREAS, Licensor, Owner and Hollis-Eden are parties to that certain License Agreement dated May 18, 1994, as amended by that certain Amendment No. 1 to License Agreement dated February 5, 1995 and that certain Amendment No. 2 to License Agreement dated February 28, 1995 (as amended, the "Agreement"); WHEREAS, Licensor, Owner and Hollis-Eden desire to amend the Agreement in the manner set forth herein; ' NOW, THEREFORE, in consideration of the premises, the provisions, and the respective agreements hereinafter set forth, the parties hereby agree as follows: 1. It is a condition precedent to the effectiveness of this Amendment that the U.S. $125,000 payment per Section 3.1 of the Agreement, as amended below, be transmitted to Licensor's account no later than March 27th, 1995. Failure to make this payment shall invalidate this Amendment. The parties providing the said funding shall confirm in writing to Licensor their agreement to wire transfer said funds not later than March 26th 1995. 2. The first sentence of Section 3.1 of the Agreement is hereby deleted in its entirety and replaced with the following first sentence: "Licensing fee of U.S. Two Hundred Fifty Thousand dollars (250,000) payable as follows: U.S. $125,000 is payable on or before March 27th, 1995 and the remaining U.S. $125,000 is due and payable from funds realized per Section 3 of this Amendment." 3. As of March 28th, 1995, fifteen percent (15%) of all funds or investments acquired by or expended, on behalf of, Hollis-Eden, Inc. by way of equity sale, loan or other means, but excluding the funds outlined in the following sentence, to be transmitted in payment of the Licensing fees outstanding per Section 2 of this Amendment together with the fees due per Section 2 of Amendment No. 3 to the Edenland Inc. License Agreement to Licensor's account within ten days of the beneficial receipt of such funding by Hollis-Eden, Inc. but no later than April 28th, 1996. However, without prejudice to the preceding sentence funding to a maximum of $1,000,000 may be raised in the interim by Hollis-Eden, Inc. prior to the payment of the outstanding Licensing fees due per the Colthurst Licensing Agreement and the Edenland, Inc. Licensing Agreement, provided $500,000 of such funds are utilized for the sole purpose of performing and servicing patient clinical trials to verify the clinical efficacy of Inactivin. Without prejudice to the preceding sentence the final date for payment of the outstanding Licensing fees of Colthurst Licensing Agreement and the Edenland, Inc. Licensing Agreement is 28th, April, 1996." 4. Hollis-Eden shall make any necessary payments, commencing when working capital is available to Hollis-Eden but not later than August 1995, due per clause 8.2 of the Colthurst License Agreement in order to protect the World Patent Rights granted to Hollis-Eden per the said Agreement. These payments shall be in the order of $5,000 per month and shall not be deductible from the fees payable under Section 2 above. 5. Except as specifically set forth herein, the Agreement shall remain unaffected and shall remain in full force and effect. This Amendment shall be deemed part of, and construed in accordance with, the Agreement. IN WITNESS WHEREOF, the parties have executed this Amendment and caused the same to be duly delivered on their behalf on the day and year hereinabove first set forth. "Hollis-Eden" "Colthurst" or "Licensor" By: /s/ Richard B. Hollis By: /s/ Leo Prendergast ------------------------------ ------------------------------ Its: CEO Its: Director ----------------------------- ----------------------------- "Owner" /s/ Patrick T. Prendergast ---------------------------------- PATRICK T. PRENDERGAST AMENDMENT NO. 4 TO LICENSE AGREEMENT This Amendment is made to be effective as of the 17th day of March 1995, by and between COLTHURST LIMITED, a Delaware corporation ("Colthurst" or "Licensor"), PATRICK T. PRENDERGAST, an individual ("Owner"), and HOLLIS-EDEN, INC., a Delaware corporation (formerly Holmedco Pharmaceuticals Corporation) ("Hollis-Eden"). W I T N E S S E T H: -------------------- WHEREAS, Licensor, Owner and Hollis-Eden are parties to that certain License Agreement dated May 18, 1994, as amended by that certain Amendment No. 1 to License Agreement dated February 5, 1995 and that certain Amendment No. 2 to License Agreement dated February 28, 1995 and Amendment No. 3 dated 17th March 1995 (as amended, the "Agreement"); WHEREAS, Licensor, Owner and Hollis-Eden desire to amend the Agreement in the manner set forth herein; NOW, THEREFORE, in consideration of the premises, the provisions and the respective agreements hereinafter set forth, the parties hereby agree as follows: 1. It is a condition precedent to the effectiveness of this Amendment that the U.S. $125,000 payment per Section 3.1 of the Agreement, as amended per Amendment No. 3 dated 17th March 1995, be transmitted to Licensor's account no later than March 27th, 1995. Failure to make this payment shall invalidate this Amendment. The parties providing the said funding shall confirm in writing to Licensor their agreement to wire transfer said funds not later than March 26th 1995. 2. Section 6.2 is deleted in its entirety. 3. Except as specifically set forth herein, the Agreement shall remain unaffected and shall remain in full force and effect. This Amendment shall be deemed part of, and construed in accordance with, the Agreement. AMENDMENT NO. 4 TO LICENSE AGREEMENT IN WITNESS WHEREOF, the parties have executed this Amendment and caused the same to be duly delivered on their behalf on the day and year hereinabove first set forth. "Hollis-Eden" "Colthurst" or "Licensor" By: /s/ Richard B. Hollis By: /s/ Leo Prendergast ------------------------- ------------------------- Its: CEO Its: Director ------------------------- ------------------------- "Owner" /s/ Patrick T. Prendergast ----------------------------- PATRICK T. PRENDERGAST Page 1 of 3 AMENDMENT NO. 5 TO LICENSE AGREEMENT This Amendment is made to be effective as of the day of August, l 995, by and between COLTHURST LIMITED, a Delaware corporation ("Colthurst" and/or "Licensor"), EDENLAND INC, a Delaware corporation ("Edenland" and/or "Licensor"), PATRICK T. PRENDERGAST, an individual ("Owner"), and HOLLIS-EDEN, INC., a Delaware corporation (formerly Holmedco Pharmaceuticals Corporation) ("Hollis-Eden"). W I T N E S S E T H: -------------------- WHEREAS, Licensor, Owner and Hollis-Eden are parties to that certain License Agreement dated May 18, 1994 as amended by that certain Amendment No. 1 to License Agreement dated February 5, 1995 and that certain Amendment No. 2 to License Agreement dated February 28, 1995, Amendment No. 3 dated 17th March, 1995 and Amendment No. 4 dated 17th, March, 1995 (as amended, the "Colthurst Agreement") and WHEREAS, Licensor, owner and Hollis-Eden are parties to that certain License Agreement dated August 25, 1994, as amended by that certain Amendment No. 1 to License Agreement dated February 5, 1995 and that certain Amendment No. 2 to License Agreement dated February 28, 1995 and Amendment No. 3 dated 17th, March, 1995 (as amended, the "Edenland Agreement") and WHEREAS, Colthurst, Edenland, Patrick T. Prendergast and Hollis-Eden desire to amend the above cited Agreements in the manner set forth herein in order to facilitate a unification and strengthening of the asset base or Hollis-Eden in order that a certain Private Placement Memorandum which is to be published within the month of August 1995 may reflect a more beneficial commercial potential to fixture investors. NOW, THEREFORE, in consideration of the premises, the provisions and the respective agreements hereinafter set forth, the parties to each of the individual agreements outlined above, that is the Colthurst Agreement, the Edenland Agreement hereby jointly and severally agree as follows: 1. It is the understanding of all parties to this Amendment, which is to be considered a joint amendment to each of the above cited Agreements, that a Private Offering Memorandum, which offers for sale certain securities ("OFFER") by Hollis-Eden Inc., a party to all the above Agreements, in order to raise a minimum of $2,500,000 U.S. will be published within 60 days of this Amendment and that the closing of the said OFFER will occur prior to the 1st, April, 1996. 2. The payments due per Section 3.1 of the Colthurst Agreement, that is per Items 2 and 3 of Amendment No. 3 dated 17th, March, 1995 to the Colthurst Agreement and the payments due per the Edenland Agreement, that is per Item 2 of Amendment No. 3 to the Edenland Agreement are hereby amended and combined and replaced with the following schedule of payments: Page 2 of 3 Section 3.1 of the Colthurst Agreement is hereby deleted in its entirety and is replaced with the following: "Within seven (7) days of the closing of the said OFFER a Licensing Fee of U.S. Three Hundred and Fifty Thousand Dollars (350,000) shall be payable as directed by Patrick T. Prendergast to either Colthurst Inc. or Edenland Inc. This payment shall satisfy all the terms of payment due per sections 2.2 of the Colthurst Agreement and 2 of the Edenland Agreement. Contemporaneously with payment in full of such license fee, Colthurst, Edenland and Owner shall grant Eden a first perfected security interest in the Patent Rights and Know-How to secure Hollis-Eden's exclusive license hereunder and the obligations of Colthurst, Edenland and owner hereunder and shall execute such documents as are reasonably necessary and desirable to create and perfect such security interests. If the OFFER is unsuccessful or does not take place then the final date for payment of the above amount shall be 28th, April 1, 996. An additional Licensing Fee, which shall not be less than U.S. Six Hundred Thousand Dollars (600,000), shall be payable not later than 24 months from the payment of the above Three Hundred and Fifty Thousand Dollars (350,000), by way of a five percent (5%) payment of all net proceeds or funds or investments acquired by or expended, on behalf of, Hollis-Eden, Inc. by way of equity sale, partnership agreements, loan or other means within 24 months following the payment of the above Three Hundred and Fifty Thousand Licensing Fee, such percentage shall not apply to any funds raised in this initial OFFER of Hollis-Eden. After the above sum of Six Hundred Thousand Dollars (600,000) has been paid the said 5% shall be reduced to 2.5% for the remaining time period of the allowed 24 months. Funds payable per Clause 3.3 of the Colthurst License Agreement and 3.3 of the Edenland Agreement shall not be considered payments towards this Licensing Fee of U.S. Six Hundred Thousand dollars (600,000) which must be paid from funds raised by the (Company." 3. Except as specifically set forth herein, the Agreement shall remain unaffected and shall remain in fill force and effect. This Amendment shall be deemed part of, and consumed in accordance with, the Agreement. Page 3 of 3 IN WITNESS WHEREOF, the parties have executed this Amendment and caused the same to be duly delivered on their behalf on the day and year hereinabove first set forth. "Hollis-Eden" "Colthurst" or "Licensor" By: /s/ Richard B. Hollis By: /s/ Leo Prendergast ------------------------------- ------------------------------- Its: CEO Its: Director ------------------------------ ------------------------------ "Owner" /s/ Patrick T. Prendergast ------------------------------------ PATRICK T. PRENDERGAST Amendment No. 6 Page 1 of 3 AMENDMENT NO. 6 TO LICENSE AGREEMENT This Agreement is made to be effective as of the 31st day of October, 1996, by and between COLTHURST LIMITED, a Delaware corporation ("Colthurst" and/or "Licensor"), PATRICK T. PRENDERGAST, an individual ("Owner"), and HOLLIS-EDEN, INC., a Delaware corporation (formerly Holmedco Pharmaceuticals Corporation) ("Hollis-Eden"). W I T N E S S E T H: -------------------- WHEREAS, Licensor, Owner and Hollis-Eden are parties to that certain License Agreement dated May 18, 1994, as amended by that certain Amendment No. 1 to License Agreement dated February 5, 1995 and that certain Amendment No. 2 to License Agreement dated February 28, 1995, Amendment No. 3 dated 17th, March, 1995, Amendment No. 4 dated 17th, March, 1995 and Amendment No. 5 dated 25th, August, 1995 (as amended, the "Colthurst Agreement") WHEREAS, Licensor, Owner and Hollis-Eden desire to amend the Agreement in the manner set forth herein: NOW, THEREFORE, in consideration of the premises, the provisions and the respective agreement hereinafter set forth, the parties hereby agree as follows: A. In consideration for the changes to the Colthurst and Research, Development, and Option Agreements, Hollis-Eden agrees to pay an additional licensing fee to Owner of $10,000 per month beginning on November 5th, 1996 and on the fifth day of each month thereafter until the Effective date of the Merger or May 5th, 1997. All advances to date will be deducted from the final license fees owed per amendment No. 5, Section 3.1. B. Section 3.5 of the Agreement is hereby amended in its entirety as follows upon the understanding that Hollis-Eden closes its proposed merger with Initial Capital acquisition Corporation, a Delaware corporation on or before May 15th, 1997. If the Initial Acquisition Corporation Merger with Hollis-Eden does not occur on or before May 15th, 1997 then this Amendment No. 6 shall become null and void and the present Agreement, as amended by Amendments No. 1, No. 2, No. 3, No. 4 and No. 5 only, prior to this within Amendment, shall be the full and true Agreement between the parties. Amendment No. 6 Page 2 of 3 3.5 CONTINGENT MINIMUM ROYALTY. A renewable annual license fee of -------------------------- US$500,000 shall be payable, as outlined herein. This fee amount is deductible from royalty payments, due as per Section 3.2, which become payable in the 12-month period following renewal of license. Hollis-Eden may deduct from this annual fee an amount equal to any payments made under Section 3.3 above. Hollis- Eden's payment obligation under this Section 3.5 shall become due and payable within 30 days from the Effective Date of the occurrence of one, or any, of the following events; (a) Hollis-Eden raises $18,000,000 in the aggregate from Capital Funding Events, as defined herein occurring after May 18th, 1994; or (b) Hollis-Eden sub-licenses either in full or any part thereof, of the technology received pursuant to, or developed from, the Colthurst License Agreement provided that funds received by Licensor from the sub-licensing arrangement shall be applied toward the minimum royalty amount in the year in which such funds are received by Licensor; or (c) Hollis-Eden generates or commences sales or marketing of any product; or (d) Hollis-Eden licenses or funds research of any technology not developed or based upon its Licensed technology pursuant to its Agreements with Edenland, Inc., Colthurst and/or Patrick T. Prendergast; or (e) If none of the events described in (a), (b), (c) or (d) occur prior to the 10th, February, 1999 then that date, 10th, February, 1999, shall be the Effective Date. The minimum annual renewal fee of US$500,000 shall commence and be payable within 30 days of the Effective Date as defined above and shall become due and payable each anniversary of the initial Effective Date. Hollis-Eden can elect to pay the said minimum annual renewable fee by way of cash or a cash value in Hollis-Eden Stock, valued at the price quoted for the stock at the Effective Date as defined above. The term "Capital Funding Events" shall mean all funds received, after May 18th, 1994, by Hollis-Eden, from sale of stock or equity, sublicense, partnership or joint venture agreements, loans, private placements, the exercise of warrants or stock options, or other similar transactions. If Hollis-Eden fails to make the annual renewable license fee for any given year, Colthurst's exclusive remedy, provided Colthurst has provided written notice to Hollis-Eden and allowed Hollis-Eden thirty days to cure such failure, shall be (i) to terminate this Agreement and (ii) to license such rights to a third party at Colthurst's discretion. C. Except as specifically set forth herein, the Agreement shall remain unaffected and shall remain in full force and effect. This Amendment shall be deemed part of, and construed in accordance with, the Agreement. Amendment No. 6 Page 3 of 3 IN WITNESS WHEREOF, the parties have executed this Amendment and caused the same to be duly delivered on their behalf on the day and year hereinabove first set forth. "Hollis-Eden" "Colthurst" or "Licenser" HOLLIS-EDEN, INC. COLTHURST LIMITED By: /s/ Richard B. Hollis By: /s/ Leo Prendergast ---------------------------- ---------------------------- Its: Chairman/CEO Its: Director --------------------------- --------------------------- Date: 1st Nov. 96 Date: 1st Nov. 96 -------------------------- -------------------------- "Owner" /s/ Patrick T. Prendergast -------------------------------- PATRICK T. PRENDERGAST Date: 1st Nov. 1996 --------------------------- EX-10 11 Exhibit 10.8 LICENSE AGREEMENT THIS LICENSE AGREEMENT ("Agreement") is made as of the 25th day of August 1994, by and between EDENLAND INC., a corporation duly organized and existing under the laws of Delaware (hereinafter "Edenland") (Edenland is sometimes referred to herein as the "Licensor"), PATRICK T. PRENDERGAST, Baybush, Straffan, Ireland (hereinafter "Owner"), HOLMEDCO PHARMACEUTICALS CORPORATION, 3807 NW 127th Circle, Vancouver WA 98686, U.S.A., a corporation duly organized and existing under the laws of Delaware ("Holmedco" and/or "Licensee") and, only for purposes of Section 3.11, RICHARD B. HOLLIS ("Hollis") (each a "Party" and collectively the "Parties"). Capitalized terms shall have the meanings given them in Section 1 of this Agreement. R E C I T A L S - - - - - - - - A. Owner has developed a non-HIV based Anti-Serum which is capable of binding the HIV virus and removing it from the bloodstream. B. Owner has assigned via Licensor's Affiliate companies, to Licensor all of his rights to the Patent Rights, Know-How and Background Information from which the Anti-Serum is based to facilitate Licensor's undertakings and representations as per the terms of this Agreement. C. Holmedco desires to acquire an exclusive worldwide license from Licensor to allow Holmedco to use the Patent Rights, Know-How and Background Information and to practice the Licensed Processes on the terms and conditions set forth below. D. Owner, Licensor and Licensee are also parties to the Development Agreement pursuant to which (i) Licensor will further develop 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 (ii) Licensor has granted Holmedco the right of first option on New Products conceived or developed by Licensor, which are funded according to the conditions of the said Development Agreement, to make such New Products and the Patent Rights, Know-How and Background Technology relating to such New Products subject to this Agreement. NOW, THEREFORE, the Parties hereby agree as follows: 1. DEFINITIONS ----------- 1.1 "ABSTRACT" shall mean that certain official abstract prepared for the 9th Mediterranean Congress of Chemotherapy entitled "Clinical Trial for the Safety and Effectiveness of HIV Reactive, Immunoaffinity Purified Anti-Human Alpha Fetoprotein in Patients with HIV Infections," as attached in Appendix B to the Development Agreement. 1.2 "AFFILIATE" means (a) any company owned or controlled to the extent of at least fifty percent (50%) of its issued and voting capital stock by a Party to this Agreement and any other company so owned or controlled (directly or indirectly) by any such company or the owner of any such company, or (b) any partnership, joint venture or other entity directly or indirectly controlled by, controlling, or under common control of, to the extent fifty percent (50%) or more of voting power (or otherwise having power to control its general activities), a Party to this Agreement, but in each case only for so long as such ownership or control shall continue. 1.3 "ANTI-SERUM" means the anti-serum derived from the Existing Patent Rights, Know-How and Background Technology which is referenced in the Abstract and any other product for human and/or animal therapeutic or prophylactic use, now or hereafter developed by Licensor, which is derived (or capable of being derived) from or incorporates any of the Existing Patent Rights, Know-How or Background Technology upon which the anti-serum is based. 1.4 "BACKGROUND TECHNOLOGY" shall mean all Elements of Technology (as defined below) that are necessary or useful to commercialize and exploit the Products and that Edenland or Owner (or any of their respective Affiliates) has an ownership interest in or has the right to acquire an ownership interest, controls in or may conceive, develop or acquire an ownership interest in (under licenses from others or otherwise) at any time prior to or during the term of this Agreement. 1.5 "COMBINATION PRODUCT" shall mean any product that is formulated in part of any Product (or any part thereof) and in part of any Combination Substances. 1.6 "COMBINATION PRODUCT NET SALES" shall have the meaning given that term in the definition for "Product Revenues." 1.7 "COMBINATION SUBSTANCES" shall mean the product or substance, other than a Product, that is sold in combination with a Product. 1.8 "DAMAGES" shall have the meaning given to it in Section 10.1. 1.9 "DEVELOPMENT AGREEMENT" shall mean the Research, Development and Option Agreement between the parties of even date herewith. 1.10 "ELEMENTS OF TECHNOLOGY" shall mean all technical information, whether tangible or intangible, that relates to any Product or is from which the Product is based, including any and all data, preclinical and clinical results, techniques, discoveries, inventions, ideas, processes, know-how, patents (including any extension, reissue or renewal patents), patent applications, inventor's certificates, trade secrets and other proprietary information, licenses and sublicenses and samples of any physical, biological or chemical material. 1.11 "EXISTING PATENT RIGHTS" shall mean the United States and foreign patents and/or patent applications listed in Exhibit A. 1.12 "FDA" means the United States Food and Drug Administration, or any state governmental agency in the United States that may also have jurisdiction over the drug approval process in conjunction with the United States Food and Drug Administration or any governmental agency performing similar functions in any country within the Territory; provided, if the governmental agency is outside the United States, it shall only be considered an "FDA" for purposes of this definition if the approval by such agency will allow Licensee to exploit and commercialize a sizeable and profitable market segment. 1.13 "FIELD OF ACTIVITY" shall mean the use (including any use in connection with research, development, demonstration, testing or experimentation) of the Products for, or the manufacture, sale or other disposition of the Products for, human or animal therapeutic or prophylactic use within the Territory, including without limitation, any use for arrest and therapy of, or for vaccination against, retroviruses and bacterial infections. 1.14 "FORCE MAJEURE EVENT" shall have the meaning given it in Section 12. 1.15 "FUTURE PATENT RIGHTS" shall mean any U.S. or foreign patent rights arising from the Know-How, Background Technology, Intellectual Property or the Improvements. 1.16 "IMPROVEMENTS" shall mean any findings, discoveries, inventions, additions, modifications, formulations or changes made by licensees during the term of this Agreement which directly relate to the Products or Licensed Processes including, without limitation, new or improved methods of administration, improved side effect profile, new medical indications and improvements in the manufacturing process. 1.17 "INFRINGEMENT PROCEEDS" shall have the meaning given that term in Section 7.4. 1.18 "INTELLECTUAL PROPERTY" means any invention, modification, discovery, design, development, improvement, process, software program, work of authorship, documentation, formula, data, technique, know-how,, secret or other intellectual property whatsoever or any interest therein (whether or not patentable or registrable under copyright or similar statutes or subject to analogous protection) that relates to any Product being developed by Licensor under the Development Agreement, BUT EXCLUDING --- --------- any (i) trademarks or (ii) the manuscript currently being completed on the life of the Owner or any film, documentary or copyright relating to such manuscript or any future additions of a similar manuscript. 1.19 "KNOW-HOW" shall mean any and all technical information presently available or generated during the term of this Agreement which directly relates to the Products, Licensed Processes or Improvements and shall include, without limitation, (i) the medical, clinical, chemical, pharmaceutical, pharmacological, topological, toxicological or other scientific data or information relating to any Product (including without limitation, pre-clinical and clinical data, notes, reports, models and samples) and (ii) the manufacturing, production, and purification procedures and processes, as well as analytical methodology, used in testing, assaying, analysis, production, and packaging of any Product. 1.20 "LICENSED PROCESSES" shall mean the processes which are used in any country in the Territory, and which; (a) is covered in whole or in part by any of the Patent Rights or Know-How; (b) is derived from the Patent Rights or Know-How; or (c) is covered in whole or in part by the Background Technology. 1.21 "NET SALES" with respect to sales for any period and with respect to any item, shall mean the actual proceeds received by Holmedco, its Affiliates and/or sublicensees, from third parties, whose dealings shall be at arms length, for Products and Combination Products sold under this Agreement, net of trade, quantity and cash discounts, if any, actually allowed or paid with respect to Products or Combination Products; and less each and all of the following allowed or paid by Holmedco, its Affiliates and sublicensees; trade credits, rebates and allowances actually granted on account of price adjustments, rebate programs, billing errors or the rejection or return of goods; commissions actually allowed or paid to independent brokers or agents; export packaging, outbound freight or transportation charges; and all taxes (except income taxes), tariffs, duties and other similar governmental charges paid by Holmedco or its Affiliates or sublicensees, all determined in accordance with the generally accepted accounting principles applicable in the United States, consistently applied. In calculating Net Sales, any given unit of a Product or Combination Product shall be taken into account only once. 1.22 "NEW PRODUCT" means any new pharmaceutical or medical product or process conceived or developed by Licensor, Owner or any of their Affiliates, or any person acting under the direction of Licensor, Owner or any of their Affiliates, whether conceived or developed prior to or during the term of the Development Agreement. Owner has already entered into an Exclusive License Agreement concerning his patent rights and know-how for the use, development and exploitation of DHEA, its improvements and combination in the treatment of humans and animals and all Parties to this Agreement are fully aware of this previous license. Funder hereby acknowledges that the rights so granted are not and shall not become, under any conditions, a part of this Agreement. 1.23 "NDA" shall mean any pending or approved application or any application to be filed with respect to the Products, including any Improvements thereof, submitted or to be submitted to the FDA under the applicable food and drug law in each and any country of the Territory. 1.24 "PATENT RIGHTS" shall mean all of each of the Licensor's and Owner's rights in the following intellectual property: (a) the Existing Patent Rights and Future Patent Rights; (b) United States and foreign patents issued from the Existing Patent Rights or Future Patent Rights and from divisions and continuations thereof; (c) claims of U.S. and foreign patents issued from the Existing Patent Rights and Future Patent Rights; (d) claims of all foreign patent applications, and of the resulting patents, which are counterparts to the claims in the U.S. and foreign patents described in (a), (b) or (c) above; and (e) any reissues or re-examinations of United States patents or other patents within the Territory described in (a), (b), (c) or (d) above. 1.25 "PRODUCT" shall mean treatment process, pharmaceutical preparation, compound or biologic agent and any process or product or part thereof which: (a) is covered in whole or in part by an issued, unexpired claim or a pending claim contained in the Patent Rights in any country within the Territory; or (b) is manufactured by using a process which is covered in whole or in part by any of the Patent Rights and/or Know-How in any country within the Territory in which such Licensed Process or part thereof is used or the country in which Products made through the use of such Licensed Process are used or sold; or (c) is derived from the Patent Rights, Know-How or Background Technology or related thereto. 1.26 "PRODUCT APPROVAL" means final FDA approval to market commercially the specified product for use by humans or animals. 1.27 "PRODUCT REVENUES" for any period shall mean the sum of (i) the aggregate amount of Net Sales (excluding Combination Product Net Sales) in such period in the Field of Activity in respect of any Product and (ii) an amount equal to: (A) the aggregate amount of Net Sales in such period in the Field of Activity in respect of any Combination Product (the "Combination Product Net Sales") multiplied by (B) a fraction the numerator of which equals the fair market value of the Product (or any part thereof) included in such Combination Product and the denominator of which equals the sum of (x) the fair market value of such Product (or part thereof) and (y) the fair market value of such Combination Substance included in such Combination Product. For purposes of this definition, "fair market value" of any Product or product (or part thereof) shall be the list retail price of such Product or product (or part thereof sold separately or, if such Product or product (or part thereof) is not ordinarily sold separately, a value determined in the good faith business judgment of the Licensor and Holmedco. Product Revenues realized by Holmedco, its Affiliates or sublicensees within the Territory as a result of sales or trading utilizing the facilities available pursuant to the Young Initiative (FDA duly 1988) for sales of Products treating terminally ill patients, prior to United States Product Approval, shall be utilized in calculating royalties due. 1.28 "RULES" shall have the meaning given that term in Section l 1. 1.29 "TERRITORY" shall mean the world. 1.30 "US. PATENT APPLICATIONS" shall have the meaning given that term in Section 4.3. 1.31 "UNIVERSITY" means Louisiana State University. 2. LICENSE GRANT ------------- 2.1 LICENSE GRANT. Edenland and Owner hereby jointly grant to ------------- Holmedco the exclusive world rights (even as to Edenland and Owner) to all present and future Patent Rights, Know-How and the Background Technology for all uses thereunder with the right to sublicense, to make, have made, use and sell the Products and Combination Products, and to practice, modify and improve the Licensed Processes within the Field of Activity, in the Territory, all as herein provided. 2.2 LICENSE FEES. In consideration of the license granted in Section ------------ 2.1 above, Holmedco shall pay the following licensing fees: (a) Payment to Licensor of $25,000 upon signing this Agreement; (b) Monthly payments to Licensor of $20,000 beginning on October I, 1994 and ending on February l, 1995 unless Holmedco sooner pays in full the license fee under subsection (c) of this Section 2.2; (c) Payment to Licensor of $1,250,000 or such lesser amount as provided in Section 3.1. 2.3 PROGRESS REPORTS ON FUNDING. During the first six months of this --------------------------- Agreement, Holmedco shall furnish to Edenland a written report on its progress towards the securing of the funding on a monthly basis. If during this period Owner or Licensor employees, executives or consultants are required to attend presentations or discussions by Holmedco all reasonable out-of-pocket expenses will be paid by Holmedco, such expenses to be agreed in advance. 2.4 AGREEMENTS WITH THIRD PARTIES. During the term of this Agreement ----------------------------- Holmedco shall not enter into any agreement concerning the rights of Owner without the prior written approval of Owner provided however nothing herein shall prohibit Holmedco from entering into agreements concerning its own rights hereunder without Owner's consent, after payment of the license fees specified in Section 2.2(c) above, including the sublicensing of its rights under this Agreement. 3. LICENSE TERMS ------------- The terms of the License Agreement, are as set out hereunder: 3.1 $1,250,000 LICENSE FEE. Licensing fee of U.S. One Million Two ---------------------- Hundred Fifty Thousand Dollars ($1,250,000.00) to be paid not later than 28th, February, 1995; provided, however, such amount shall be reduced by all payments made by Holmedco pursuant to subsections (a) and (b) of Section 2.2 above. Contemporaneously with payment in full of such license fee, Edenland and Owner shall grant Holmedco a first perfected security interest in the Patent Rights and Know-How to secure Holmedco's exclusive license hereunder and the obligations of Edenland and Owner hereunder and shall execute such documents as are reasonably necessary and desirable to create and perfect such security interests. 3.2 ROYALTIES. Holmedco shall pay to Edenland royalties of four (4%) --------- percent which shall be calculated on the basis of Product Revenues generated through the use, lease or sale of the Products or Combination Products by or for Licensee or its sublicensees. Royalties shall not be payable on Product released by Licensee for clinical trials. Licensee may deduct from this royalty payment for Product Revenues received from any country an amount equal to any payments made to Licensor for that country under Section 3.3 below. In no event shall Licensee's payment of Development Costs to Licensor under the Development Agreement constitute the payment of royalties under this Section 3.2 or Section 3.3 below. 3.3 ROYALTIES ON SUBLICENSES. In the event of the sale of ------------------------ sublicenses or any other third-party agreements twenty-five (25 %) percent of any fees so generated, either by monetary or other means, shall be payable to Edenland upon execution of such sale. 3.4 LIMITATION ON ROYALTIES DUE. --------------------------- (a) From and after the fifth (5th) anniversary of the Product Approval for a particular Product and through the tenth (10th) anniversary thereof, the four percent (4%) royalty due under Section 3.2 shall be reduced to two percent (2%) for Product Revenues generated in each country where neither the Product nor the Licensed Process was ever covered in whole or in part by any issued or pending claim contained in the Patent Rights in such country; provided, however, upon the written request of Holmedco, Licensor and Holmedco shall consider in good faith further reducing such royalties based upon the then current competition in such country generated by competing pharmaceutical products and its effect on Holmedco's profitability. (b) No royalties shall be payable under Section 3.2 or 3.3 on Product Revenues generated from a Product sold after the tenth (10th) anniversary of the Product Approval for such Product, in each country where neither the Product nor the Licensed Process was ever covered in whole or in part by any issued or pending claim contained in the Patent Rights. (c) No royalties shall be payable under Section 3.2 or 3.3 on Product Revenues generated from a Product sold in each country where the Product and the Licensed Process from which such Product is made cease to be covered in whole or in part by any issued or pending claim contained in the Patent Rights in each such country. 3.5 CONTINGENT MINIMUM ROYALTY. Beginning on the second anniversary -------------------------- of the Product Approval for any Product with projected annual revenues to Holmedco in excess of $25,000,000 (as determined in good faith by Holmedco and Edenland on an annual basis before the annual license fee is due hereunder), as a condition to retain the rights to commercially exploit the Product under this Agreement, Holmedco shall pay Licensor, within thirty (30) days following the anniversary date, an annual renewable (minimum guaranteed royalty) license fee of $500,000 for such Product for a period of six (6) years. The license fee shall be deducted from any royalty payments due Licensor under Sections 3.2 and 3.3 during the term of this Agreement. If Holmedco does not make the annual renewable license fee for any given year, Edenland's exclusive remedy shall be (i) to terminate Holmedco's right to make, use and sell such Product under this Agreement and (ii) to license such rights to a third party at Edenland's discretion, provided Licensor reimburses to Licensee all Development Costs paid by Licensee to Licensor in accordance with the terms of Section 5.5 of the Development Agreement. 3.6 ROYALTY REPORTS AND PAYMENTS. Within a period of sixty (60) days ---------------------------- from the end of each quarter commencing from the first quarter after Product is sold, Holmedco shall submit to Edenland a detailed report detailing the amount of all royalties owing to Edenland during the quarter to which the report refers, including full details of the sales made by Holmedco and its sublicensees, and the considerations received by Holmedco for the granting of sublicenses under Section 3.3 above, including, but without derogating from the generality of the foregoing, sales according to countries, itemization of the Product Revenues, the currency of sale, the date of invoice, and any other detail relevant to enable the determination of the royalties payable hereunder. Holmedco shall pay at the time of each of the said reports the amount of the royalties owing to Edenland pursuant to the said report for the period of the report, reduced by the amount of any U.S. (at the federal and state level) and any other country's income tax withholding which Holmedco may be required to pay under U.S. or such other country's tax laws in respect of such royalties. Holmedco shall discuss the most appropriate methods of payment with Edenland prior to transmission of funds from countries within the Territory that may result in the deduction of withholding taxes. 3.7 EDENLAND'S RIGHT TO INSPECT RECORDS. Edenland or its authorized ----------------------------------- representatives shall have the right from time to time (but not more than twice each calendar year) during normal business hours to inspect Holmedco's books of accounts, records and other relevant documentation insofar as they relate to the manufacture or marketing of the Products, in order to ascertain or verify the amount of royalties due to Edenland hereunder and the accuracy of the information provided to Edenland in the aforementioned reports. Holmedco's agreement with any licensees shall grant Holmedco similar inspection rights and Holmedco shall share any information received in exercising such rights with Edenland. 3.8 ROYALTIES IN COUNTRIES PROHIBITING TRANSFER OF CURRENCY ABROAD. -------------------------------------------------------------- Where royalties are due Edenland hereunder for sales of Products in a country where, by reason of currency regulations or taxes of any kind, it is impossible or illegal for Holmedco, any Affiliate or sublicensee to transfer royalty payments to Edenland for Product Revenues in that country, such royalties shall be deposited in whatever currency is allowable by the person or entity not able to make the transfer for the benefit or credit of Edenland in an accredited bank in that country that is acceptable to Edenland. 3.9 STOCK OWNERSHIP. Holmedco shall issue to Edenland fifteen --------------- percent (15%) of the currently outstanding shares of Holmedco's common stock. Ten percent (10%) of such equity shall be freely assignable amongst Edenland's Affiliates. Further, Holmedco shall issue one percent (l %) of the currently outstanding shares of Holmedco's Common Stock to Owner without restriction on transfer other than compliance with applicable securities laws. 3.10 STOCK OPTION. Holmedco shall grant Edenland the option to ------------ receive payment of its royalties under the license agreement in the form of Holmedco's common stock. This option shall be limited to a maximum of five percent (5%) of Holmedco's currently outstanding shares. The option is subject to the Anti-Serum and/or vaccine developed therefrom receiving Product Approval and generating cumulative Product Revenues to Holmedco of $200,000,000. The option exercise price per share shall be the fair market value on the date such revenue milestone is achieved and the option shall have a term of five (5) years beginning from such date. 3.11 BOARD SEAT. Holmedco shall appoint either Leo Prendergast or ---------- Patrick Prendergast, at Edenland's election, to serve on Holmedco's Board of Directors for at least a one (1) year term. Thereafter, for a period of two (2) years, Holmedco agrees to nominate, and Hollis agrees to vote for, Leo Prendergast or Patrick Prendergast, at Edenland's election, to serve on Holmedco's Board of Directors. 4. CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS OF OWNER AND -------------------------------------------------------------- LICENSOR. -------- 4.1 EXISTING PATENT RIGHTS, KNOW-HOW AND BACKGROUND INFORMATION. ----------------------------------------------------------- Edenland and Owner represent and warrant that (i) they and their Affiliates are the only persons who hold any interest in the Existing Patent Rights, Know-How and Background Technology from which the Anti-Serum has been derived, (ii) that such information is not based upon any non-public information obtained from any other person, (iii) that they are the true and first inventors of the invention described in the Existing Patent Rights, (iv) that, as of the date of this Agreement, there are no lawful grounds of objection to the grant of patents or the Existing Patent Rights, (v) that they have not done or omitted any act to obtain the Existing Patent Rights which would impair the validity of the Existing Patent Rights, (vi) that there are no encumbrances or liens thereon, (vii) that execution of this License Agreement and the Development Agreement is duly authorized and does not breach any agreement with any third person or entity, or any applicable law or regulation, (viii) the Existing Patent Rights cover all of the patents, patent applications and patent rights (for PP29, AFP and the vaccine) referenced in the "Patent Overview" dated August 17, 1994 provided by Licensor to Licensee, and (ix) that the Existing Patent Rights are for all uses of their invention for the arrest and therapy of human/animal retroviral infections. 4.2 THE ANTI-SERUM. Owner and Licenser further represent and warrant -------------- that: (i) the Anti-Serum referred to in the Abstract is exclusively subject to, and has been manufactured under, the Existing Patent Rights; (ii) the claims relating to the Existing Patent Rights cover in all respects the rights to manufacture (produce), market and sell the Anti-Serum for the arrest and therapy of human/animal retroviral therapy and that no other party could manufacture (produce), market or sell the Anti-Serum for indications covered in the Patent Rights including, without limitation, HIV reactive alpha fetoprotein or cross reactive alpha fetoprotein for other retroviruses, or a significantly similar pharmaceutical agent for the same indications in the countries of the Territory covered by the Existing Patent Rights during the term of this Agreement without first seeking a license from Holmedco to do so; (iii) the Existing Patent Rights, Know-How and Background Information will allow the Licensee to make (produce), use and sell the Anti-Serum and no other party, including without limitation, the University, owns any interest in any Intellectual Property used to create the Anti-Serum, and (iv) they have no knowledge as of the date of this Agreement of any material information, not heretofore disclosed to Holmedco, relating to the safety or efficacy of the Anti-Serum. 4.3 PATENT COUNSEL OPINION. Within sixty (60) days of the signing of ---------------------- this Agreement, Licensor shall deliver to Holmedco an opinion of Licensor's U.S. patent counsel, addressed to Holmedco, that (i) there are no lawful grounds of objection to the grant of the patent applications listed in Exhibit A; (ii) that the U.S. patent applications listed in Exhibit A ("U.S. Patent Applications") sufficiently cover the rights to manufacture (produce), market and sell the Anti-Serum in the U.S., (iii) the U.S. Patent Applications, when granted, will preclude any other party from making (producing), using or selling the Anti-Serum for indications covered in the Patent Rights including, without limitation, HIV reactive alpha fetoprotein or cross reactive alpha fetoprotein for other retroviruses, or a significantly similar pharmaceutical agent for the same indications in the U.S. without first seeking a license from Holmedco, (iv) that the AFP Anti-Serum/Vaccine foreign patents or patent applications for a particular country referenced in Exhibit A comprise a complete counterpart of the AFP Anti-Serum/Vaccine U.S. Application, (v) that the PP-29 foreign patents or patent applications for a particular country referenced in Exhibit A comprise a complete counterpart of the PP-29 U.S. Application, and (vi) that the Modified PP-29 foreign patents or patent applications for a particular country referenced in Exhibit A comprise a complete counterpart of the Modified PP-29 U.S. Application. 4.4 COVENANT AGAINST GRANTING INTERESTS TO THIRD PARTIES. During the ---------------------------------------------------- tenn of this Agreement, neither Edenland nor Owner will grant interest in the Patent Rights, Know-How or Background Technology to any other person or entity. 4.5 COOPERATION WITH DUE DILIGENCE INVESTIGATION. Subject to -------------------------------------------- Holmedco's payment of all reasonable out-of-pocket expenses in accordance with Section 2.3 above, Owner and Licensor shall cooperate in all respects with any due diligence review conducted in connection with any proposed financing of Holmedco. 5. IMPROVEMENTS ------------ Holmedco and Owner and Licensor shall disclose to each other all Improvements developed or discovered by any Party, including without limitation any developmental results generated under this Agreement by Holmedco during the term of this Agreement, immediately upon the development or discovery of such Improvements or the generation of such developmental results. All Owner and Licensor Improvements shall be part of the rights licensed hereunder with no additional costs to Holmedco. Holmedco hereby grants and agrees to grant, assign, transfer and convey irrevocably to Owner all ownership interest in and to all such Improvements developed or discovered by Holmedco during the tenn of this Agreement; provided, that to the extent Owner or Licensor is remunerated by third parties in respect of such Improvements made by Holmedco or its sublicensees, Holmedco shall be the Party receiving such remuneration. Nothing in this Agreement shall in any way affect the full and absolute ownership of Owner with regard to the Patent Rights, Know-How and Background Technology of Edenland and Holmedco acknowledges that Owner has the full right, title and interest in the ownership of the said Patent Right, Know-How and Background Technology subject to the assigned portions granted to Edenland. 6. REGULATORY AFFAIRS ------------------ 6.1 OVERSIGHT OF REGULATION MATTERS. Holmedco shall be responsible ------------------------------- for regulatory activities necessary for the development of the Products, in each country in the Territory. Within a reasonable period after Holmedco obtains financing of at least $10,000,000 U.S., Holmedco and Owner shall interview prospective FDA consultants and shall engage the topchoice consultant as soon as possible. 6.2 LICENSOR AND OWNER SUPPORT OF REGULATING ACTIVITIES. Licensor --------------------------------------------------- and Owner shall support, where it is possible, the regulatory activities of Holmedco in all relevant countries in the Territory. At all times during the term of this Agreement, the Licensor and Owner and Holmedco shall each promptly after learning thereof notify the other in writing of any serious or unexpected adverse reactions or side effects with respect to the Products. 6.3 IND APPLICATIONS AND NDA'S. Holmedco shall file all new IND -------------------------- applications and NDA's in its own name. Upon the termination of this agreement the ownership of Holmedco's IND applications and grants shall become the property of Licensor. During and after the term of this Agreement, the NDA's concerning the Products shall remain the property of Holmedco. The Parties shall make joint announcements of all rND and NDA approvals on the Products. Owner and Edenland will get full credit in all publications for the invention, and will be kept fully involved in the development, of any Product. 6.4 REPORTING OF ADVERSE REACTIONS. Holmedco and Licensor shall ------------------------------ comply in each country of the Territory with a common adverse reaction reporting system to be agreed between the Parties and, if required, the more stringent of the adverse reaction reporting requirements of: (a) the U.S. Food and Drug Administration; or (b) the Food and Drug Law of the relevant country. 7. INTELLECTUAL PROPERTY --------------------- 7.1 OWNERSHIP. Owner shall have and retain ownership of and title to --------- all intellectual property rights in all inventions and discoveries (except for inventions and discoveries which are independently developed by Holmedco and not derived from or based on the Patent Rights and Know-How or other intellectual property of Owner or the Licensor) relating to the Products, Licensed Processes or Improvements, including without limitation patents and other intellectual property relating to the Products, Licensed Processes or Improvements, which are made, conceived, reduced to practice or generated by the Parties or their respective affiliates, including employees, agents and other representatives or contractors, in the course of work performed under this Agreement and/or any other agreements between the Parties relating to the Products or the Licensed Processes; provided, however, Holmedco shall be the sole owner of all trademarks or service marks arising from marketing and sale of the Products or any services related thereto and shall have sole discretion for the naming of any Products or related services. The Parties acknowledge that Holmedco reserves certain rights under Section 5 above in the Improvements and under Section 9.3 below in the Know-How, Background Technology and Improvements (excluding Patent Rights). 7.2 PATENT PROSECUTION FOR EXISTING PATENT RIGHTS. Subject only to --------------------------------------------- the assignments between Owner and Edenland, Owner shall have the exclusive right and obligation to prepare, file, prosecute and maintain all patent applications and patents relating to the Products, Licensed Processes, Know-How, Background Technology or Improvements. New patent applications (to be paid for by Licensee) shall be filed in such countries as shall be mutually agreed upon in good faith by Edenland and Holmedco; Licensor and Owner shall be free to file patent applications and prosecute patents in countries not agreed to with Licensee at Licensor's or Owner's sole expense (it being understood by the Parties that the rights arising therefrom shall be considered Patent Rights under this Agreement). In determining where and when new patent applications shall be filed, Edenland and Holmedco shall consider (i) the size and profitability to Holmedco of market segments that will be covered by the Patent Rights in a particular country, (ii) the degree to which such protection sufficiently precludes Holmedco's competitors from making, using or selling a product similar to the Product to be covered by the Patent Rights in such country, (iii) Holmedco's international plans for marketing and distributing the Product, and (iv) the general commercial standards in the pharmaceutical industry for determining in which countries to seek patent protection. Edenland agrees to keep Holmedco fully informed at all levels of the patent application process and, if reasonably requested by Holmedco, to withdraw or cease prosecuting a patent application in a particular country unless Licensor or Owner is willing to continue such patent prosecution at its sole expense. If Licensor has not, within ninety (90) days after the written request of Holmedco, prepared and filed a patent application in a country where Edenland and Holmedco have agreed that an application shall be filed, then Holmedco shall be entitled to prepare, file, prosecute and maintain such patent applications and patents and Licensor and Owner shall cooperate fully with Holmedco in connection therewith and execute all necessary documents. Holmedco shall provide reasonable assistance to Owner to facilitate the filing and maintenance of all such patent applications and patents, and shall execute all documents which Owner deems necessary or desirable therefore. Without prejudice to the above, all applications for patents shall be drafted by a patent attorney nominated by Holmedco. Prior to lodgment all patent applications shall be subject to review by patent agents nominated by Edenland. The reasonable expenses of the patent agents, as well as patent renewal and other maintenance fees, shall be discharged by the Licensee. 7.3 CERTAIN INTELLECTUAL PROPERTY. Subject to Section 7.1 above, ----------------------------- Edenland and Owner and Holmedco shall retain their rights to all intellectual property rights in its own logos or name and other intellectual property used in the development of the Products and Licensed Processes, except as otherwise provided herein. 7.4 THIRD PARTY INFRINGEMENT. ------------------------ (a) Each Party shall promptly report in writing to each other Party during the term of this Agreement any (i) known infringement or suspected infringement of any of the Patent Rights, or (ii) unauthorized use or misappropriation of Know-How or Background Technology by a third party of which it becomes aware, and shall provide each other Party with all available evidence support said infringement, suspected infringement or unauthorized use or misappropriation. (b) Except as provided in Section 7.4(d) below, Holmedco shall have the right to initiate an infringement or other appropriate suit anywhere in the world against any third party who at any time has infringed, or is suspected of infringing, any of the Patent Rights or of using without proper authorization all or any portion of the Know-How or Background Technology. Holmedco shall give Edenland sufficient advance notice of its intent to file said suit and the reasons therefore, and shall provide Edenland with an opportunity to make suggestions and comments regarding such suit. Holmedco shall keep Edenland promptly informed, and shall from time to time consult with Edenland regarding the status of any such suit and shall provide Edenland with copies of all documents filed in, and all written communications relating to, such suit. (c) Holmedco shall have the sole and exclusive right to select counsel for any suit referred to in subsection (b) above and shall pay all expenses of the suit, including without limitation attorneys' fees and court costs but shall be entitled to receive and retain any damages, royalties, settlement fees or other consideration (collectively, "Infringement Proceeds"); provided, however, Holmedco shall remit to Edenland such portion of the Infringement Proceeds as Holmedco and Edenland may agree upon in light of Edenland's royalty rights under this Agreement or, if they cannot agree on an amount, such amount as determined by the arbitrator under Section 11 below. If necessary, Edenland shall be joined as a party to the suit but shall be under no obligation to participate except to the extent that such participation is required as the result of being a named party to the suit. Edenland shall offer reasonable assistance to Holmedco in connection therewith at no charge to Holmedco except for reimbursement of reasonable out-of-pocket expenses, including salaries of Edenland personnel, incurred in rendering such assistance. Edenland shall have the right to participate and be represented in any such suit by its own counsel at its own expense. Holmedco shall not settle any such suit involving rights of Edenland without obtaining the prior written consent of Edenland which consent shall not be unreasonably withheld. (d) In the event that Holmedco elects not to initiate an infringement or other appropriate suit pursuant to subsection (b) above, Holmedco shall promptly advise Edenland of its intent not to initiate such suit, and Edenland shall have the right, at the expense of Edenland, of initiating an infringement or other appropriate suit against any third party who at any time has infringed, or is suspected of infringing, any of the Patent Rights or of using without proper authorization all or any portion of the Know-How or Background Technology. In exercising its rights pursuant to this subsection (d), Edenland shall have the sole and exclusive right to select counsel and shall pay all expenses of the suit, including without limitation attorneys' fees and court costs, and shall be entitled to receive and retain the Infringement Proceeds; provided, however, Edenland shall remit to Holmedco such portion of the Infringement Proceeds as Holmedco and Edenland may agree upon in light of Holmedco's exclusive license rights under this Agreement or, if they cannot agree on an amount, such amount as determined by the arbitrator under Section 11 below. If necessary, Holmedco shall be joined as a party to the suit but shall be under no obligation to participate except to the extent that such participation is required as a result of being named party to the suit. At Edenland's request, Holmedco shall offer reasonable assistance to Edenland in connection therewith at no charge to Edenland except for reimbursement of reasonable out-of-pocket expenses, including salaries of Holmedco's personnel, incurred in rendering such assistance. Holmedco shall have the right to participate and be represented in any such suit by its own counsel at its own expense. 8. EXCHANGE AND USE OF DATA ------------------------ 8.1 DEVELOPMENT DATA. Each Party and its Affiliates shall provide ---------------- the other Parties with access to and (upon request) copies of all information and data generated by it in connection with the development of the Products or Combination Products, including without limitation all information and data regarding Improvements and all information and data filed with the U.S. FDA and all other applicable regulatory agencies in the Territory, and each Party shall have the unrestricted right free of charge to utilize the information and data or any portion thereof for any purpose under this Agreement in its sole discretion. 8.2 STUDIES. Each Party shall make available to the other Parties ------- all information and data relating to the unpublished or not-yet-published studies on the Products or Licensed Processes at least four weeks prior to any use of such information or data for marketing purposes. If data becomes available which is required to be utilized immediately in order to maintain commercial and scientific advantage a waiver from this Section must be obtained in writing prior to the use of the said data. 8.3 IMPROVEMENTS. All parties shall have the unrestricted right to ------------ use all information and data generated by the other relating to the Products or Licensed Processes as set forth under Section 5 at no cost within the Territory. 8.4 PUBLICATIONS. No Party shall submit for written or oral ------------ publication any proprietary data or other proprietary information in violation of Section 8.5 below. To ensure compliance with the provisions of this Section 8.4, the Party proposing to submit such publication shall provide the other Parties a reasonable opportunity to review the proposed submission prior to its publication. Notwithstanding the above, the Owner has made all Parties to this Agreement aware of both a substantial autobiography contract with Transworld Publishers and a BBC Documentary concerning his research work in relation to HIV. In the course of completing the above two contracts, the Owner will keep all Parties informed of developments; however, Owner is not in a position, due to his signed contract's with the Publishers and the BBC, to allow the other parties to this License Agreement the opportunity to review the autobiography or film prior to either publication. Access for filming and interviews will be required during patient testing at test sites. No proprietary information will be disclosed by Owner. The Owner is at present in negotiations concerning film rights to the above autobiography. 8.5 CONFIDENTIAL INFORMATION. During the term of this Agreement and ------------------------ for five (5) years thereafter, no Party shall, without the specific written consent of all parties, disclose to any other person (except disclosures required by law and disclosures to Affiliates and third persons workings as outside contractors to such Party under confidentiality obligations consistent with those set forth in this Section 8.5) any confidential information or trade secret concerning the Products or Licensed Processes (including the Know-How and Background Technology) or another Party's business that is subject to, or obtained or developed in the course of performing, this Agreement unless such information: (a) was or becomes public through no fault of the receiving Party; (b) was, at the time of receipt, already in the receiving Party's possession as evidenced by written records; or (c) was obtained from a third party legally entitled to use and disclose the same. Upon termination of this Agreement, each Party shall forthwith return to the appropriate other Party all physical manifestations of any confidential information or trade secrets in its possession or control which are owned or assigned by such other Party except as otherwise provided in Section 9.3 below. 9. TERM AND TERMINATION -------------------- 9.1 TERM. This Agreement shall remain in effect, unless sooner ---- terminated as set forth in Section 9.2 below, until the later of (a) the expiration of the last to expire Patent Right and (b) ten (10) years from the date of the first commercial sale of the Products by Holmedco hereunder. 9.2 TERMINATION. ------------ (a) This Agreement shall automatically terminate with regard to a specific Product if that Product is permanently and completely withdrawn from all markets in the Territory for serious adverse health or safety reasons. (b) Licensor may terminate this Agreement immediately upon written notice if, at any time, Holmedco shall be involved in financial difficulties as exclusively evidenced by the filing in any court pursuant to any statute of the United States or of any individual state or foreign country a petition in bankruptcy or insolvency or for reorganization or for an arrangement or for the appointment of a receiver or trustee of the Licensee or of its assets; or if Holmedco proposes a written agreement of composition for extension of its debts; or if Holmedco shall be served with an involuntary petition against it, filed in any insolvency proceeding, and such petition shall not be dismissed within sixty (60) days after the filing thereof; or if Holmedco shall propose or be a party to any dissolution or liquidation, or if Holmedco shall make an assignment for the benefit of its creditors. (c) In the event either of Edenland or Owner materially breaches any term or provision of this Agreement, Holmedco may and, in the event Holmedco materially breaches any term or provision of this Agreement, either of Edenland or Owner may, terminate this Agreement thirty (30) days after giving the breaching Party written notice of such breach, unless: (i) the breaching Party cures the breach within such 30-day period; or (ii) if a cure cannot reasonably be effected within such 30-day period, the breaching Party commences the cure of such breach within such 30-day period and diligently prosecutes such cure to completion. This thirty (30) day cure period shall not apply to a breach by Holmedco to meet the terms of Section 3.1 of this Agreement; provided, however, no arbitration or legal recourse shall be available to Holmedco or Edenland as a result of Holmedco's inability to meet the conditions under Section 3.1 or this Agreement. 9.3 RIGHTS AND DUTIES UPON TERMINATION. The following Sections shall ---------------------------------- survive termination of this Agreement: Sections 5, 7.1, 7.3, 9.3, 10, 11, and 13.1 through 13.10, inclusive. Further, upon termination of this Agreement by Edenland or Owner pursuant to Sections 9.2(b) or 9.2(c) or Section 12 below, Holmedco shall return to each of Edenland and Owner all of its respective Intellectual Property received by Holmedco, as well as all information generated by any Party in the course of its performance hereunder, including any Patent Rights, Know-How, Improvements, development studies and other information generated or developed in the course of performance of this Agreement (except for information which if independently developed by Holmedco and not derived from or based on the Patent Rights, Know-How or other Intellectual Property of either of Licensor or Owner and except for any trademarks or service marks relating to the Products or services related thereto which shall be owned solely by Holmedco). Upon such termination and return of Intellectual Property and other information, Holmedco shall have no further rights to or interest in the Patent Rights, Know-How, Improvements, the Products, the Licensed Processes, or the IND's granted. If this Agreement expires naturally within the complete Territory in accordance with its tenn as provided in Section 9.1, Holmedco is hereby granted a non-exclusive perpetual license to use the Know-How, Background Technology and Improvements (excluding Patent Rights). 10. INDEMNIFICATION --------------- 10.1 BREACH OF REPRESENTATION, WARRANTY OR COVENANT; ACTS AND -------------------------------------------------------- OMISSIONS: INFRINGEMENT. Edenland and Owner shall indemnify Holmedco and ----------------------- its Affiliates and Holmedco shall indemnify Edenland and Owner against any and all claims, suits, actions or threats of action, liabilities, settlement amounts, damages, expenses or costs of any kind whatsoever, including without limitation reasonable attorneys' fees and costs (collectively "Damages"), which result from or arise out of (a) any inaccuracy of a representation, or breach of a warranty, made by the indemnifying Party under this Agreement, (b) the indemnifying Party's failure to perform any covenant which it is required to perform under this Agreement, and (c) intentional or grossly negligent actions or omissions, misconduct or wrongdoing by the indemnifying Party, its Affiliates or their agents in its performance under this Agreement. In addition, Edenland and Owner shall indemnify Holmedco and its Affiliates from any and all third party claims arising from the Patent Rights, Know-How, and Background Technology, including without limitation, any claims that they infringe upon any rights of third persons. The indemnification provisions of this Section 10.1 shall also cover the indemnified Party's directors, officers, employees and other agents that may suffer any Damages. Owner and Licensor agree that the indemnification provisions of this Section 10.1 shall not apply to any failure by Holmedco to make the payments under Section 2.2 hereof and that Owner's and Licensor's exclusive remedy for such failure shall be the right to terminate this Agreement in accordance with Section 9.2(c). 10.2 THIRD PARTY CLAIMS. Upon receiving notice of any claim or suit ------------------ under Section 10 above, the indemnified Party shall immediately notify the indemnifying Party and shall allow the indemnifying Party and/or its insurer the opportunity to assume direction and control of the defense of such claim, including without limitation the settlement thereof at the sole option of the indemnifying Party or its insurer. The indemnified Party agrees to co-operate with the indemnifying Party in the conduct of any negotiations, dispute resolution or litigation of any such claim or suit; and the indemnifying Party shall inform the indemnified Party of the progress of the claim or suit at such time and in such manner as is reasonable under the circumstances. Notwithstanding anything to the contrary herein, Edenland or Owner, if it is the indemnified Party, shall at all times have the right to assume the loss and expense of any litigation relating to the Products or Licensed Processes and thereby control the contest and defense thereof. 10.3 INSURANCE. To the extent each party may have such insurance, for --------- the applicable term and of this Agreement, each Party agrees to make the other Party a named insured under its product liability insurance and clinical trial/malpractice insurance. 11. ARBITRATION ----------- The parties to any dispute or controversy arising out of, in connection with or relating to this Agreement, its negotiation, performance or breach, shall attempt to resolve any such dispute in an amicable manner, failing which the Parties shall submit the same to arbitration. The arbitration panel shall consist of one arbitrator and shall be formed in accordance with the Rules for Commercial Arbitration of the American Arbitration Association then obtaining (the "Rules"). The arbitration shall be held in the State of Washington pursuant to the Rules, and the award shall be rendered in such form that judgment may be entered thereon in the highest court of any forum, state, federal or foreign, having jurisdiction. In making its award, the arbitrator shall be guided, in descending order of priority, by the terms of this Agreement, the usages of the trade in the business in which Edenland, Owner and Holmedco are engaged and what is just and equitable under the circumstances. The cost of such arbitration shall be borne by the party against which an award is rendered in the arbitration proceeding or as the arbitrator may determine. Notwithstanding anything to the contrary contained herein, either party may apply to a court of competent jurisdiction for equitable relief for any breach or threatened breach of this Agreement, including but not limited to restraining orders and affirmative injunctive relief, and for ancillary orders in aid of the arbitrator. 12. FORCE MAJEURE ------------- Neither Party shall be liable for failure to perform any activities hereunder if such failure is due to a cause beyond the reasonable control of such Party, including without limitation, strikes, lockouts or other labor disturbances, riots, floods, fires, accidents, wards, embargoes, delays of carriers, inability to obtain materials from sources of supply, acts, or injunctions (each a "Force Majeure Event"). Upon the occurrence of any Force Majeure Event, the Party whose performance is affected shall immediately given written notice of such Force Majeure Event to the other Party, and shall thereafter exert all reasonable efforts to overcome such Force Majeure Event and resume performance of this Agreement. If, despite such efforts the Party is unable to perform six (6) months following notification given hereunder, then the other Party may terminate this Agreement. 13. MISCELLANEOUS ------------- 13.1 ASSIGNMENT. Except as provided above, no Party may assign this ---------- Agreement except upon prior written consent of the Owner. Notwithstanding the foregoing, any Party may assign its rights and obligations to an Affiliate upon 30 days prior written notice of such assignment to the other parties, although no such assignment shall relieve the Party of its primary responsibility for performance hereunder. Licensor shall not be permitted to make any, complete or partial, assignment of this Agreement for the benefit of Licensor's creditors. 13.2 WAIVER. The failure of any Party hereto at any time to acquire ------ performance by another Party of any provision of this Agreement shall not affect the right of such Party to require future performance of that provision. Any waiver by any Party of any breach of any provision of this Agreement must be in writing to be effective and shall not be construed as a waiver of any continuing or succeeding breach of such provision, a waiver of the provision itself, or a waiver of any right under this Agreement. 13.3 GOVERNING LAW. This Agreement shall be governed by and construed ------------- in accordance with the laws of the State of Washington, U.S.A. 13.4 ENTIRE AGREEMENT. This Agreement and any other written ---------------- agreements between the Parties signed on or after the date hereof and relating to the subject matter hereof constitute the entire understanding of the Parties hereto and supersede all previous agreements between the Parties with respect to the matters contained herein. No modifications of this Agreement shall be binding upon any Party unless approved in writing by an authorized representative of each of the Parties. 13.5 PARTIAL INVALIDITY. In case any one or more of the provisions ------------------ contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision or provisions had never been contained herein unless the deletion of such provision or provisions would result in such a material change as to cause completion of the transaction contemplated herein to be impossible. 13.6 EFFECTIVENESS. This Agreement shall become effective immediately ------------- upon execution and delivery by the Parties. 13.7 EXECUTION IN COUNTERPARTS. This Agreement may be executed in one ------------------------- or more counterparts, all of which shall be considered one and the same agreement, and shall become a binding agreement when one or more counterparts have been signed by each of the parties and delivered to the other party. 13.8 BUY-OUT. In the event Holmedco is acquired by merger, asset ------- acquisition or stock acquisition, Holmedco shall take all steps necessary to ensure the acquirer assumes the obligations of Licensee under the license agreement. In the event Edenland is acquired by merger, asset acquisition or stock acquisition, Edenland shall take all steps necessary to ensure the acquirer assumes the obligations of Edenland under the license agreement. 13.9 SET-OFF. In the event any Party is owed any sums which are not ------- paid when due under this Agreement, the Development Agreement or any other agreement or note between the parties, such Party may set-off such amounts against any payments due the other Party hereunder. 13.10 NOTICES. Except as otherwise provided herein, any notice or -------- other communications sent or delivered hereunder shall be in writing and shall be effective if hand-delivered or if sent by certified or registered mail or postage prepaid or by international courier service: To Edenland: Edenland Inc. ----------- Baybush, Straffan County Kildare, Ireland Attention: Mr. Leo J. Prendergast Telephone: 353-1-6272636 Telecopier: 353-1-6272703 To Owner: Patrick T. Prendergast -------- Baybush, Straffan County Kildare, Ireland Telephone: 353-1-6272636 Telecopier: 353-1-6272703 To Holmedco: Holmedco Pharmaceuticals Corporation ----------- 3807 NW 127th Circle Vancouver WA 98686 Attention: Richard B. Hollis, Chairman and CEO Telephone: 206-573-2489 Telecopier: 206-573-2489 or to such address as any Party shall hereafter designate by notice to the other Parties. A notice shall be deemed to have been given on the date of receipt by the Party. 13.11 INTELLECTUAL PROPERTY OF OWNER'S SPOUSE. The Parties --------------------------------------- acknowledge that Owner's spouse is also a microbiologist. The Parties further acknowledge and agree that nothing in this Agreement is intended to confer to any Party an interest in any of the intellectual property rights of Owner's spouse that relate to her cancer research projects or any other project unrelated to the development of the Products. IN WITNESS WHEREOF, the Parties have caused this License Agreement to be signed by their duly authorized representatives as of the day and year first above written. "LICENSEE" "LICENSOR" HOLMEDCO PHARMACEUTICALS EDENLAND INC. CORPORATION BY: /s/ Richard B. Hollis BY: /s/ Leo Prendergast ------------------------------ ------------------------------ ITS: Chairman & CEO ITS: Secretary/Director ------------------------------ ------------------------------ Only for Purposes of Section 3.11 of this Agreement "OWNER" "HOLLIS" /s/ Patrick T. Prendergast /s/ Richard B. Hollis ------------------------------------ ----------------------------------- PATRICK T. PRENDERGAST EXHIBIT A --------- PATENTS AND PATENT APPLICATION ------------------------------ =================================================================== PATENT NO. COUNTRY STATUS APPLICATION NO. ------------------------------------------------------------------- 1. AFP ANTI-SERUM/VACCINE ------------------------------------------------------------------- Aripo Pending AP/P/91-00309 ------------------------------------------------------------------- Australia Pending 81268/91 ------------------------------------------------------------------- Bolivia Pending Not Yet Assigned ------------------------------------------------------------------- Canada Pending 2,047,61B ------------------------------------------------------------------- Europe Pending 91 112 320.6-2116 ------------------------------------------------------------------- Honduras Pending Not Yet Assigned ------------------------------------------------------------------- Ireland Pending 1427/90 ------------------------------------------------------------------- Ireland Pending 940256 ------------------------------------------------------------------- Oapi Pending PV.60045 ------------------------------------------------------------------- U.S. Pending 08/007,128 (CIP of 07/734,567) ------------------------------------------------------------------- U.S. Pending 07/734,567 ------------------------------------------------------------------- 2. PP-29 ------------------------------------------------------------------- Australia Accepted 636,574 ------------------------------------------------------------------- Canada Pending 609,342 ------------------------------------------------------------------- Europe Pending 89 115 606.9-2107 ------------------------------------------------------------------- Ireland Pending 2585/88 ------------------------------------------------------------------- Israel Pending 91415 ------------------------------------------------------------------- Japan Pending 220158/89 ------------------------------------------------------------------- Oapi Pending PV 59631 ------------------------------------------------------------------- Philippines Pending 39145 ------------------------------------------------------------------- South Africa Patented 89/06450 ------------------------------------------------------------------- South Korea Pending 12173/89 ------------------------------------------------------------------- U.S. Pending 08/026,196 ------------------------------------------------------------------- 3. MODIFIED PP-29 ------------------------------------------------------------------- Aripo Pending AP/P/91-00316 ------------------------------------------------------------------- Australia Pending 79204/91 ------------------------------------------------------------------- Bolivia Pending Not Yet Assigned ------------------------------------------------------------------- Canada Pending 462,621 ------------------------------------------------------------------- Europe Pending 91 110263.0-2107 ------------------------------------------------------------------- Honduras Pending Not Yet Assigned ------------------------------------------------------------------- Ireland Pending 2244/90 ------------------------------------------------------------------- Oapi Pending PV.60024 ------------------------------------------------------------------- Philippines Pending 42669 ------------------------------------------------------------------- U.S. Allowed 07/719,017 =================================================================== AMENDMENT NO. 1 TO LICENSE AGREEMENT This Amendment is made as of this 5th day of February 1995, by and between EDENLAND, lNC, a Delaware corporation ("Edenland" or "Licensor"), PATRICK T. PRENDERGAST, an individual ("Owner"), and HOLLIS-EDEN, INC, a Delaware corporation (formerly Holmedco Pharmaceuticals Corporation) (the "Hollis-Eden"). W I T N E S S E T H: -------------------- WHEREAS, Licensor, Owner and Hollis-Eden are parties to that certain License Agreement dated August 25, 1994 ("Agreement"). WHEREAS, Licensor, Owner and Hollis-Eden desire to amend the Agreement in the manner set forth herein. NOW, THEREFORE, in consideration of the premises, the provisions and the respective agreements hereinafter set forth, the parties hereby agree as follows: 1. In consideration of Licensor entering into this Amendment, Hollis-Eden shall issue Licensor a five year Warrant to purchase up to 100,000 shares of Hollis-Eden's Common Stock (after the reverse stock split contemplated by Hollis-Eden to reduce the total outstanding shares of Hollis-Eden's Common Stock from 15,000,000 to 9,000,000) at an exercise price of $6.00 per share. Licensor shall also be granted the same SEC registration rights (to give Licensor more flexibility in its ability to sell any shares purchased after exercise of such Warrant) granted to the investors in Hollis-Eden's first round of equity financing. 2. Subsection (c) of Section 2.2 is hereby deleted and replaced with the following subsection (c): "(c) Payment to Licensor of U.S. $572.000 as provided in Section 3.1." 3. The first sentence (including the proviso) of Section 3. 1 of the Agreement is hereby deleted in its entirety and replaced with the following first sentence: "Licensing fee of U.S. Five Hundred Seventy Two Thousand Dollars ($572,000) to be paid as follows: One Hundred Fifty Thousand Dollars ($150,000) due on February 15, 1995 and payable no later than February 28, 1995, Three Hundred Thousand ($300,000) due and payable on February 28, 1995 and the remaining One Hundred Twenty Two Thousand Dollars ($122,000) due on March 15, 1995 and payable no later than March 31, 1995. 4. The parties agree that the Anti-Serum shall cease to be a Product subject to the License Agreement if Hollis-Eden has not contributed at least U.S. $3,000,000 to the development of the Anti-Serum in accordance with the terms and conditions of Section 5.2 of the Development Agreement, as amended by Amendment No. 1 to such agreement. 5. Except as specifically set forth herein, the Agreement shall remain unaffected and shall remain in full force and effect. This Amendment shall be deemed part of, and construed in accordance with, the Agreement. IN WITNESS WHEREOF, the parties have executed this Amendment and caused the same to be duly delivered on their behalf on the day and year hereinabove first set forth. "Hollis-Eden" "Edenland" or "Licensor" HOLLIS-EDEN, INC EDENLAND, INC. By: /s/ Richard B. Hollis By: /s/ Leo Prendergast --------------------------------- -------------------------------- Its: CEO Its: Director --------------------------------- ------------------------------- "Owner" /s/ Patrick T. Prendergast ------------------------------------ PATRICK T. PRENDERGAST AMENDMENT NO. 2 TO LICENSE AGREEMENT This Amendment is made as of this 28th day of February 1995, by and between EDENLAND, INC., a Delaware corporation ("Edenland" or "Licensor"), PATRICK T. PRENDERGAST, an individual ("Owner"), and HOLLIS-EDEN, INC., a Delaware corporation (formerly Holmedco Pharmaceuticals Corporation) ("Hollis-Eden"). W I T N E S S E T H: ------------------- WHEREAS, Licensor, Owner and Hollis-Eden are parties to that certain License Agreement dated August 25, 1994, as amended by that certain Amendment No. 1 to License Agreement dated February 5, 1995 ("Agreement"); WHEREAS, Licensor, Owner and Hollis-Eden desire to amend the Agreement in the manner set forth herein; NOW, THEREFORE, in consideration of the premises, the provisions and the respective agreements hereinafter set forth, the parties hereby agree as follows: 1. It is a condition precedent to the effectiveness of this Amendment that the payment per Section 2.2(b) which became payable on February 1, 1995 be transmitted to Licensor's account no later than February 28, 1995. Failure to make this payment shall invalidate this Amendment which facilitates an extension, as outlined in Section 3, to the termination of the Agreement. 2. In consideration of Licensor entering into this Amendment, Hollis-Eden shall immediately issue to Licensor One Hundred Thousand (100,000) shares of Hollis-Eden's Common Stock. 3. The first sentence (including the proviso) of Section 3.1 of the Agreement . is hereby deleted in its entirety and replaced with the following first sentence: "Licensing fee of U.S. Five Hundred Seventy Two Thousand Dollars ($572,000) payable on or before March 17, 1995." 4. Except as specifically set forth herein, the Agreement shall remain unaffected and shall remain in full force and effect. This Amendment shall be deemed part of, and construed in accordance with, the Agreement. IN WITNESS WHEREOF, the parties have executed this Amendment and caused the same to be duly delivered on their behalf on the day and year hereinabove first set forth. "Hollis-Eden" "Edenland" or "Licensor" HOLLIS-EDEN, INC. EDENLAND, INC. By: /s/ Richard B. Hollis By: /s/ Leo Prendergast --------------------------------- -------------------------------- Its: CEO Its: Director -------------------------------- ------------------------------- "Owner" /s/ Patrick T. Prendergast ------------------------------------ PATRICK T. PRENDERGAST AMENDMENT NO. 3 TO LICENSE AGREEMENT This Amendment is made to be effective as of the 17th day of March 1995, by and between EDENLAND, INC., a Delaware corporation ("Edenland" or "Licensor"), PATRICK T. PRENDERGAST, an individual ("Owner"), and HOLLIS-EDEN, INC., a Delaware corporation (formerly Holmedco Pharmaceuticals Corporation) ("Hollis-Eden"). W I T N E S S E T H: -------------------- WHEREAS, Licensor, Owner and Hollis-Eden are parties to that certain License Agreement dated August 25, 1994, as amended by that certain Amendment No. 1 to License Agreement dated February 5, 1995 and that certain Amendment No. 2 to License Agreement dated February 28, 1995 (as amended, the "Agreement"); WHEREAS, Licensor, Owner and Hollis-Eden desire to amend the Agreement in the manner set forth herein; NOW, THEREFORE, in consideration of the premises, the provisions and the respective agreements hereinafter set forth, the parties hereby agree as follows: 1. It is a condition precedent to the effectiveness of this Amendment that the U.S. $125,000 payment per Section 3.1 of the Agreement, as amended below, be transmitted to the account of Licensor no later than March 27th, 1995. Failure to make this payment shall invalidate this Amendment. The parties providing the said funding shall confirm in writing to Licensor their agreement to wire transfer said funds not later than March 26th 1995. 2. The first sentence of Section 3.1 of the Agreement is hereby deleted in its entirety and replaced with the following first sentence: "Licensing fee of U.S. Five Hundred Seventy Two Thousand Dollars ($572,000) payable as follows: U.S. $125,000 on or before March 27th, 1995 and the remaining U.S. $447,000 is due and payable as per Section 3 of Amendment No. 3 to the Colthurst, License Agreement dated 17th, March, 1995." 3. Hollis-Eden shall make any necessary payments, commencing as soon as working capital is available to Hollis-Eden but not later than August 1995, due per clause 7.2 of the Edenland License Agreement in order to protect the World Patent Rights granted to Hollis-Eden per the said Agreement. These payments shall be in the order of $5,000 per month and shall not be deductible from the fees payable under Section 2 above. 4. Except as specifically set forth herein, the Agreement shall remain unaffected and shall remain in full force and effect. The conditions of this Amendment shall become part of the original Agreement and its Terms. IN WITNESS WHEREOF, the parties have executed this Amendment and caused the same to be duly delivered on their behalf on the day and year hereinabove first set forth. "Hollis-Eden" "Edenland" or "Licensor" By /s/ Richard B. Hollis By /s/ Leo Prendergast ---------------------------------- --------------------------------- Its CEO Its Director ---------------------------------- -------------------------------- "Owner" /s/ Patrick T. Prendergast ------------------------------------ PATRICK T. PRENDERGAST PAGE 1 OF 1 AMENDMENT NO. 4 TO LICENSE AGREEMENT This Amendment is made to be effective as of the day of August, 1995, by and between EDENLAND, INC., a Delaware corporation ("Edenland" or "Licensor"), PATRICK T. PRENDERGAST, an individual ("Owner"), and HOLLIS- EDEN, INC., a Delaware corporation (formerly Holmedco Pharmaceuticals Corporation)("Hollis-Eden"). W I T N E S S E T H: -------------------- WHEREAS, Licensor, Owner and Hollis-Eden desire to amend the Agreement in the manner set forth herein; NOW, THEREFORE, in consideration of the premises, the provisions and the respective agreements hereinafter set forth, the parties hereby agree as follows: 1. Section 3.1 of the Edenland Agreement is hereby replaced with the following: "The Licensing Fee requirements of the Edenland Agreement shall be satisfied by payment of the fees due per Section 3.1 Amendment No. 5 of the Colthurst Agreement." 2. Except as specifically set forth herein, the Agreement shall remain unaffected and shall remain in full force and effect. The conditions of this Amendment shall become part of the original Agreement and its Terms. IN WITNESS WHEREOF, the parties have executed this Amendment and caused the same to be duly delivered on their behalf on the day and year hereinabove first set forth. "Hollis-Eden" "Edenland" or "Licensor" By: /s/ Richard B. Hollis By: /s/ Leo Prendergast --------------------------------- -------------------------------- Its: CEO Its: Director --------------------------------- ------------------------------- "Owner" /s/ Patrick T. Prendergast ------------------------------------ PATRICK T. PRENDERGAST EX-10 12 Exhibit 10.9 RESEARCH, DEVELOPMENT AND OPTION AGREEMENT THIS RESEARCH, DEVELOPMENT AND OPTION AGREEMENT ("Agreement") is made this 25th day of August, 1994, by and among EDENLAND INC., a corporation organized and existing under the laws of the State of Delaware ("Developer"), PATRICK T. PRENDERGAST, an individual ("Chief Scientist"), HOLMEDCO PHARMACEUTICALS CORPORATION, a corporation organized and existing under the laws of the State of Delaware ("Funder"), and, only for purposes of Section 3.3 of this Agreement, RICHARD B. HOLLIS ("Hollis"). Capitalized terms shall have the meanings given them in Section 1 of this Agreement. R E C I T A L S --------------- A. The Chief Scientist has made certain novel discoveries which have led to the development of a non-HIV based Anti-Serum capable of binding the HIV virus and removing it from the blood stream. B. The Chief Scientist has assigned, for the duration of this Agreement and through Developer's affiliated companies, to Developer all his rights to the Patent Rights, Know-How and Background Technology upon which the Anti-Serum is based. C. Developer, in turn, pursuant to this Agreement and on the conditions outlined herein, together with a License Agreement of even date, grants an exclusive, worldwide license to Funder to commercialize and exploit the Patent Rights, Know-How and the Background Technology and to practice the Licensed Process in the Territory in accordance with the terms and conditions of the License Agreement. D. Funder desires to fund the further research and development of the Anti-Serum by the Developer on the terms and conditions set forth in this Agreement. E. Funder further desires to acquire an exclusive option to fund the research and development of any New Products conceived or developed by Developer and to make such New Products and the Patent Rights, Know-How and Background Technology relating to such New Products subject to the License Agreement. NOW, THEREFORE, the parties hereto agree as follows: 1. CERTAIN DEFINITIONS ------------------- For purposes of this Agreement the following definitions shall be applicable: 1.1. "ABSTRACT" shall mean that certain official abstract prepared for the 9th Mediterranean Congress of Chemotherapy entitled "Clinical Trial for the Safety and Effectiveness of HIV Reactive, Immunoaffinity Purified Anti-Human Alpha Fetoprotein in Patients with HIV Infections," as attached in Appendix B. 1.2. "AFFILIATE" means (a) any company owned or controlled to the extent of at least fifty percent (50%) of its issued and voting capital stock by a party to this Agreement and any other company so owned or controlled (directly or indirectly) by any such company or the owner of any such company, or (b) any partnership, joint venture or other entity directly or indirectly controlled by, controlling, or under common control of, to the extent fifty percent (50%) or more of voting power (or otherwise having power to control its general activities), a party to this Agreement, but in each case only for so long as such ownership or control shall continue. 1.3. "ANTI-SERUM" means the anti-serum derived from the Existing Patent Rights, Know-How and Background Technology which is referenced in the Abstract and any other product for human and/or animal therapeutic or prophylactic use, now or hereafter developed by Developer, which is derived (or capable of being derived) from or incorporates any of the Existing Patent Rights, Know-How or Background Technology upon which the anti-serum is based. 1.4. "BACKGROUND TECHNOLOGY" shall have the meaning given that term in the License Agreement. 1.5. "DAMAGES" shall have the meaning given that term in Section 8 below. 1.6. "DETERMINATION OF PRODUCT REJECTION" means a good faith and reasonable determination by two out of three independent FDA consultants, one each appointed by Funder and Developer and the third appointed by mutual consent of Funder and Developer, that the Subject Product will not be able to meet the FDA requirements for Product Approval. 1.7. "DEVELOPMENT COSTS" means Developer's costs and expenses related to the development, research (including process research and patents) and testing of any Subject Product or any New Product, in each case determined according to the categories and criteria set forth pursuant to Appendix A attached hereto and made a part hereof. 1.8. "DEVELOPMENT PLAN" means (a) the preclinical, clinical and process development program and budget of estimated Development Costs through to a stage of development that demonstrates the toxicity and safety profile and also indicates potential efficacy in Phase II (U.S. FDA) patient studies for the Anti-Serum to be agreed upon by Developer and Funder as soon as practicable after the execution of this Agreement, together with such further modifications as shall be mutually agreed upon between Funder and Developer, and (b) any subsequent Development Plans (comparable in scope and content to the plan for the Anti-Serum) for any New Product as agreed upon between Funder and Developer pursuant to Section 4.1 hereof. 1.9. "EXISTING PATENT RIGHTS" shall have the meaning given that term in the License Agreement. 1.10. "FDA" means the United States Food and Drug Administration, or any state governmental agency in the United States that may also have jurisdiction over the drug approval process in conjunction with the United States Food and Drug Administration or any governmental agency performing similar functions in any country within the Territory; provided, if the governmental agency is outside the United States, it shall only be considered an "FDA" for purposes of this definition if the approval by such agency will allow Funder to exploit and commercialize a sizeable and profitable market segment. 1.11. "INTELLECTUAL PROPERTY" means any invention, modification, discovery, design, development, improvement, process, software program, work of authorship, documentation, formula, data, technique, know-how, secret or other intellectual property whatsoever or any interest therein (whether or not patentable or registrable under copyright or similar statutes or subject to analogous protection) that relates to any Subject Product being developed by Developer under this Agreement, BUT EXCLUDING any (i) trademarks or (ii) the ------------- manuscript currently being completed on the life of the Chief Scientist or any film, documentary or copyright relating to such manuscript or any future additions of a similar manuscript. 1.12. "KNOW-HOW" shall have the meaning given that term in the License Agreement. 1.13. "LICENSE AGREEMENT" means the License Agreement of even date herewith among the parties. 1.14. "LICENSED PROCESS" shall have the meaning given that term in the License Agreement. 1.15. "NEW PRODUCT" means any new pharmaceutical or medical product or process conceived or developed by Developer, Chief Scientist or any of their Affiliates, or any person acting under the direction of Developer, Chief Scientist or any of their Affiliates, whether conceived or developed prior to or during the term of this Agreement. 1.16. "OFF BUDGET PROJECTS" shall have the meaning given that term in Section 5.3 below. 1.17. "OPTION" shall have the meaning given that term in Section 4.1 below. 1.18. "PLA" means a Product License Application or such other application as shall be required to obtain Product Approval. 1.19. "PLA SUBMISSION" means the submission to the FDA by Funder of a PLA which has been prepared in good faith by Funder in a reasonable manner to comply with FDA requirements necessary to obtain Product Approval. 1.20. "PATENT RIGHTS" shall have the meaning given that term in the License Agreement. 1.21. "PRODUCT APPROVAL" means final FDA approval to market commercially the specified product for use by humans or animals. 1.22. "SUBJECT PRODUCT" means the Anti-Serum and any New Product for which Funder has exercised its Option under Section 4.1 or its option under Section 5.5. The Anti-Serum shall be the initial Subject Product. 1.23. "TERRITORY" means the world. 1.24. "THIRD PARTY LICENSE" shall have the meaning given that term in Section 5.5. 1.25. "UNIVERSITY" means Louisiana State University. 2. DEVELOPER AND CHIEF SCIENTIST REPRESENTATIONS AND ------------------------------------------------- WARRANTIES. Developer and Chief Scientist, jointly and ---------- severally, hereby represent and warrant to Funder as follows: 2.1. CORPORATE POWER AND AUTHORITY; DUE ---------------------------------- AUTHORIZATION; BINDING OBLIGATION. Developer has the corporate --------------------------------- power and authority to execute and deliver this Agreement and the License Agreement and perform its obligations hereunder and thereunder, and the execution, delivery and performance of this Agreement and the License Agreement have been duly and validly authorized by Developer, and upon execution and delivery by Funder, this Agreement and the License Agreement will constitute valid and binding agreements of Developer and Chief Scientist enforceable against them in accordance with their respective terms. 2.2. INCORPORATION OF REPRESENTATIONS AND ------------------------------------ WARRANTIES IN LICENSE AGREEMENT. The representations and ------------------------------- warranties set forth in Sections 4.1 and 4.2 of the License Agreement are incorporated by this reference as if made herein. 3. FUNDER AND HOLLIS REPRESENTATIONS AND WARRANTIES. ------------------------------------------------ Funder hereby represents and warrants to Developer as follows in Sections 3.1, 3.2 and 3.3, and Hollis hereby represents and warrants to Developer as follows in Section 3.3: 3.1. CORPORATE POWER AND AUTHORITY; DUE ---------------------------------- AUTHORIZATION; BINDING OBLIGATION. Funder has the corporate power --------------------------------- and authority to execute and deliver this Agreement and the License Agreement and perform its obligations hereunder and thereunder, and their execution, delivery and performance have been duly and validly authorized by Funder, and upon execution and delivery by Developer and Chief Scientist, this Agreement and the License Agreement will constitute valid and binding agreements of Funder enforceable against it in accordance with their respective terms. 3.2. NO BREACH OF THIRD PARTY AGREEMENTS; NO --------------------------------------- CONSENTS REQUIRED. Neither the execution and delivery of this ----------------- Agreement or the License Agreement, nor consummation of the transactions contemplated hereunder or thereunder, requires Funder to obtain any permits, authorizations or consents from any governmental body (except for health approvals or governmental registrations necessary to sell the products contemplated therein) or from any other person, firm or corporation, and such execution, delivery and consummation will not result in the breach of or give rise to any termination of any agreement or contract to which Funder may be a party. 3.3. NO UNDISCLOSED PRINCIPALS OR OTHER PARTIES. ------------------------------------------ In connection with the negotiation, execution and delivery of this Agreement or the License Agreement, Funder and Hollis have not acted, and are not acting, on behalf of any third party or pursuant to any written agreement with any third party. 4. FUNDER OPTIONS; FIRST OFFER. ---------------------------- 4.1. NEW PRODUCTS. Developer hereby grants to ------------ Funder the exclusive option (the "Option") during the term of this Agreement to acquire exclusive worldwide rights to any and all of Developer's New Products and to the Patent Rights, Know-How and Background Technology from which such New Product is derived, all of which rights may be exercised and used in accordance with the License Agreement. The Option may be exercised in accordance with this Section 4.1. At such time as Developer identifies any New Product, Developer shall give Funder, on a confidential basis, a summary of available material Know-How (reasonably necessary for Funder to make a reasonable scientific and technical evaluation for the purpose of exercising the Option hereunder) regarding such New Product. Developer shall promptly prepare and submit to Funder a reasonable Development Plan including a reasonable budget of estimated Development Costs through to a stage of development that demonstrates the toxicity and safety profile and also indicates potential efficacy for such New Product in Phase II patient studies. Such Development Plan shall be consistent in scope and content with the Anti-Serum Development Plan and, together with such modifications as shall be mutually agreeable, shall be reasonably agreed upon by the parties as soon as reasonably practicable after delivery of the Know-How for the New Product to Funder. Any disputes concerning the content of the Development Plan shall be submitted to arbitration in accordance with the provisions of Section 11.8 below. At any time during the six (6) month period following agreement of the content of the Development Plan by Developer and Funder, Funder shall notify Developer whether Funder wishes to exercise its Option hereunder with respect to such New Product; provided, however, the exercise period shall be one (1) year if the New Product is presented to Funder prior to obtaining the funding contemplated under Section 10. Upon exercise of the Option, (i) the New Product shall be automatically included within the definition of "Product" under the License Agreement, (ii) the Patent Rights, Know-How and Background Technology from which the New Product was derived shall also become subject to the License Agreement, and (iii) the New Product shall become a Subject Product for purposes of this Agreement. If Funder, within said six (6) month period (or one (l) year period if the New Product is presented to Funder prior to obtaining the Funding contemplated under Section 10) shall decline to exercise its Option or shall fail to respond to Developer, Developer may develop such New Product itself subject to the limitations under Section 4.2. 4.2. LIMITATION ON MARKETING OF NEW PRODUCTS. --------------------------------------- Notwithstanding any provisions of Section 4.1 to the contrary, Developer shall not market, directly or through any arrangement or contract with any third party, any New Product for which Funder has declined to exercise its Option under Section 4.1 unless (i) such New Product shall not directly compete with any then existing Subject Product, and (ii) such New Product is not --- based upon or derived from any Patent Rights, Know-How or Background Technology then under license to Funder under the License Agreement or any other agreement with Funder. 4.3. COVENANT OF CHIEF SCIENTIST. Chief Scientist --------------------------- hereby covenants and agrees for the benefit of Funder that the exclusive commercializati on and exploitation rights to all New Products he develops or conceives shall be held by Developer during the term of this Agreement except with ------ respect to New Products (i) that Funder declines to develop pursuant to its Option under Section 4.1 and (ii) that Funder does not exercise its option under Section 5.5. Chief Scientist shall execute all such documents and take all other actions necessary to effect such covenant. 5. RESEARCH AND DEVELOPMENT. ------------------------- 5.1. DEVELOPER DEVELOPMENT EFFORTS. Developer ----------------------------- shall use its best efforts to carry out the Development Plan for each Subject Product in accordance with each such Development Plan and within all agreed upon timetables therein. Any material change in any Development Plan shall require the prior mutual agreement of Developer and Funder. Developer and Funder recognize that changes or modifications in each Development Plan (including estimated budgets) will, in all likelihood, be required, and each agrees to negotiate in good faith and in a reasonable manner to reach agreement for any such changes or modifications. Developer shall be solely responsible for the conduct of all phases of each Development Plan, including but not limited to clinical trials specified therein. Developer agrees that each person performing work under the Development Plan will have executed a confidentiality and developments agreement, in a form satisfactory to Funder, to ensure that all Intellectual Property arising from the development of the Subject Product shall vest in Developer for license under the License Agreement and that the Know-How relating to such New Product remains confidential and is not used in violation of this Agreement or the License Agreement. 5.2. FUNDING OF ANTI-SERUM DEVELOPMENT COSTS. --------------------------------------- Subject to Funder's development termination right under Section 5.5 below, Funder agrees to pay Developer for its Development Costs for the Anti-Serum, provided such Development Costs shall in no event be greater than the total estimated Development Costs contained in the Anti-Serum Development Plan. Payment of $3,000,000 in Development Costs for the Anti-Serum shall be made in U.S. dollars from a location in the U.S. and in accordance with the following schedule: (a) $1,500,000 on February 28, 1995, or at such earlier time as Funder has secured the funding described in Section 10 of this Agreement. (b) $1,000,000 upon completion of the first phase of the Development Plan as identified therein (such phase not to be confused with FDA regulatory phases). (c) $500,000 upon completion of the second phase of the Development Plan and commencement of the third phase. The parties understand that any Development Costs incurred by Developer prior to payment of the amount due under subsection (a) above shall be reimbursed from the $3,000,000 in Development Costs to be paid under this Section 5.2. Further, funder agrees to make the scheduled payments in subsection (b) and (c) above on the last day that such payments may be made even if the payment condition has not been satisfied if Developer has in good faith made progress on the Development Plan through such date. The parties acknowledge that the research and development costs of the Anti-Serum may overlap with the development of a vaccine based upon the Anti-Serum. The parties will in good faith discuss the development of the vaccine under this Agreement. 5.3. OFF BUDGET PROJECTS. It is contemplated by -------------------- the parties that Developer and Chief Scientist may have certain projects ("Off Budget Projects") not covered by a Development Plan for a Subject Product that Developer and Chief Scientist believe would aid their research on a Subject Product or potential New Product. These projects might include a preliminary in-vitro experiment to determine if a foundation exists for a New Product. Until such time as Funder's commitment under Section 5.8 terminates, Funder agrees to provide up to a maximum of $250,000 per year to fund Off-Budget Projects. 5.4. FUNDING OF DEVELOPMENT COSTS OF OTHER SUBJECT --------------------------------------------- PRODUCTS. Subject to Funder's development termination right -------- under Section 5.5 below, Funder agrees to pay Developer for its Development Costs (determined in accordance with Appendix A) for each Subject Product, provided such Development Costs shall in no event be greater than the total estimated Development Costs (excluding the Anti-Serum for which the Development Costs will be paid as provided in Section 5.2 above) contained in the appropriate Development Plan as agreed upon between Developer and Funder. Based on the estimated annual budgets in the Development Plan for each Subject Product (excluding the Anti-Serum for which the Development Costs will be paid as provided in Section 5.2 above), Funder shall make quarterly payments, payable in U.S. dollars from a U.S. location on the first day of each quarter, for estimated Development Costs to be incurred by Developer for the ensuing quarter. Within thirty (30) days after the end of each calendar quarter Developer shall prepare and send to Funder (i) an invoice of actual Development Costs incurred by Developer during the preceding calendar quarter and (ii) a reconciliation with the estimated quarterly payment made by Funder at the beginning of such quarter. In the event Funder's estimated payments for such quarter shall be greater than the actual invoiced amount, such overpayment shall be applied by Funder against subsequent quarterly payments of estimated Development Costs due to Developer or, at Funder's option, Developer shall remit such overpayment to Funder. In the event the actual Development Costs for any quarter shall be greater than Funder's estimated quarterly payment for such quarter, subject to the first sentence of this Section 5.4, Funder shall make appropriate payment to Developer within thirty (30) days of the receipt of Developer's invoice. 5.5. FUNDER'S RIGHT TO TERMINATE OBLIGATION TO PAY --------------------------------------------- DEVELOPMENT COSTS. At any time after payment of the $3,000,000 of ----------------- Development Costs for the Anti-Serum as provided in Section 5.3 above, and provided Funder has made a Determination of Product Rejection, Funder shall have the right to terminate its obligation to pay any further Development Costs of the Anti-Serum by delivering a written notice to Developer. Further, by delivering written notice to Developer, Funder shall have the right to terminate its obligation to pay further Development Costs on any other Subject Product at such time as Funder has made a Determination of Product Rejection for such Subject Product. Upon any such termination, Developer may continue the development of the Subject Product by itself or by licensing or sublicensing the commercialization rights to a third party ("Third Party License"); provided, Developer shall keep Funder fully apprised of the negotiations of any proposed Third Party License; provided, further, before Developer enters into the Third Party License, Developer shall allow Funder fourteen (14) calendar days (or thirty (30) days if Developer has not kept Funder fully apprised of the negotiations for such Third Party License) the first right to enter into a license with Developer on the identical terms as proposed in the Third Party License. If Funder does not exercise such option, Developer shall have the right to enter into the Third Party License (but on no more favorable terms than offered to Funder) but shall reimburse --- Funder for all Development Costs paid by Funder for such product. Developer shall make the reimbursement by paying directly to Funder fifty percent (50%) of license fees, royalties and other payments due Developer under the Third Party License (until the total amount to be reimbursed is paid to Funder). If Developer obtains Product Approval itself for such Subject Product, Developer shall notify in writing Funder of the Product Approval, whereupon Funder shall have the option, exercisable within three months of receiving notice of Product Approval from Developer, to pay all Development Costs for the Subject Product incurred after Funder stopped paying such costs and thereby continue to have (i) the Subject Product be considered a Product under the License Agreement, and (ii) the Patent Rights, Know-How and Background Technology from which the Subject Product was derived subject to the License Agreement. 5.6. DISCLOSURE OF KNOW-HOW. Developer shall ----------------------- disclose to Funder within 30 days after the date of execution of this Agreement and thereafter on at least a quarterly basis all Know-How on each Subject Product not previously disclosed to Funder. All Know-How disclosed to Funder shall be subject to the provisions of Section 7 hereof. 5.7. AUDIT OF DEVELOPMENT COSTS. Developer shall -------------------------- keep full and accurate books and records of its Development Costs and determination thereof. Developer shall permit Funder, at Funder's expense, by independent certified public accountants employed by Funder solely for this purpose and reasonably acceptable to Developer, to examine such books and records (as they relate to Development Costs) at any reasonable time, but not later than three (3) years following the invoice to Funder of such Development Costs. 5.8. COMMITMENT TO R & D FUNDS. Subject to the -------------------------- limitations set forth herein, commencing February 28, 1995, Funder agrees to commit at least thirty percent (30%) of its research and development budget, but at least a minimum of $2,000,000 (not based on a percentage of Funder's research and development budget), for any given calendar year to pay Development Costs for Subject Products. Funder's commitment under this Section 5.8 shall be limited in the following ways: (a) The Subject Products, together with New Products, each of which New Products Funder reasonably and in good faith determines represents a promising pharmaceutical agent with significant commercial value, shall be sufficient to allow Funder to make such commitment. (b) The maximum amount of research and development funds which Funder shall be required to commit for any given year shall be $10,000,000. (c) The maximum amount of research and development funds which Funder shall be required to commit during the term of this Agreement shall be $50,000,000 unless otherwise agreed to by Developer and Funder. In making a decision to increase the maximum amount, Funder shall give consideration to the success of the Anti-Serum and any other Subject Products and Developer's history of meeting the Development Plans for Subject Products. Further, in good faith both Funder and Developer will consider reestablishing research and development funds up to a maximum of another $50,000,000. (d) Funder's obligation under this Section 5.8 shall terminate twenty-four months after the death or permanent incapacity of the Chief Scientist. (e) All payments toward the Anti-Serum Development Costs made by Funder during 1994, if any, shall be applied toward Funder's commitment for 1995. In the event that the maximum commitment under subsection (c) above is reached and Funder does not commit additional funds to Developer under this Section 5.8, the exercise period for Funder's Option under Section 4.1 shall be reduced to three (3) months. 6. REGULATORY MATTERS. ------------------ 6.1. COMPLIANCE. Developer and the Chief Scientist ----------- each agree that its and his conduct in performing their respective obligations under this Agreement shall conform in all material respects to all applicable laws and regulations of the US. and foreign governments (and political subdivisions thereof). 7. PROPRIETARY RIGHTS AND CONFIDENTIAL INFORMATION. ----------------------------------------------- 7.1. PROPRIETARY RIGHTS. Except as expressly ------------------ provided to the contrary herein or in the License Agreement, all proprietary rights, title, and interest with respect to New Products and Subject Products shall be and remain solely in Developer. 7.2. CONFIDENTIAL INFORMATION. Funder and its ------------------------ Affiliates shall keep confidential and not use, except as provided herein and in the License Agreement, any and all Know-How supplied in writing (or if orally, as confirmed in writing) by Developer during the term of this Agreement and for five (5) years after termination or expiration hereof; provided, however, that the foregoing obligations of confidentiality and non-use shall not apply to the extent that any Know-How is demonstrated by written records to be (a) already known to Funder or its Affiliates at the time of disclosure hereunder (provided Funder and its Affiliates comply with any restrictions imposed by third parties) or is hereafter developed by Funder or its Affiliates in the course of work entirely independent of any disclosure hereunder; or (b) publicly known prior to or after disclosure hereunder other than through acts or omissions of Funder or its Affiliates; or (c) disclosed in good faith to Funder or its Affiliates under a reasonable claim of right of which Funder is not aware of any dispute (provided Funder and its Affiliates comply with any restrictions imposed by third parties). This does not prevent disclosure to third parties by Funder under a secrecy agreement with essentially the same confidentiality provisions provided herein in connection with the exercise of its rights under the License Agreement (to the extent permitted therein). In addition, disclosure may be made (i) to governmental agencies to the extent required or desirable to secure governmental approval for marketing of any Subject Product (provided Funder shall seek to limit disclosure and to obtain confidential treatment by such agencies) and (ii) to pre-clinical and clinical investigators where necessary or desirable for their information to the extent normal and usual in the custom of the trade and under a secrecy agreement with essentially the same confidentiality provisions contained herein. All Know-How heretofore disclosed in writing by Developer shall be deemed to have been disclosed under this Agreement and shall be subject to the provisions of this Section 7.2. 8. INDEMNIFICATION. Each party (the "Indemnifying Party") --------------- shall indemnify and hold the other (the "Indemnified Party") harmless against and from all liability, demands, claims, causes of action, assessments, losses, fines, penalties, costs and damages and expenses, including reasonable attorneys' fees (collectively "Damages") sustained or incurred by the Indemnified Party as a result of, arising out of or by virtue of (x) any inaccuracy in a representation or breach of a warranty made by the Indemnifying Party, (y) the failure of the Indemnifying Party to comply with, or the breach by the Indemnifying Party of, any of the covenants of this Agreement to be performed by the Indemnifying Party and (z) any act or omission (including, without limitation, resulting from clinical trials) of the Indemnifying Party or its agents or employees related to the obligations of the Indemnifying Party under this Agreement (but not under the License Agreement); provided, however, that the foregoing shall not apply to third party claims (i) if the claim is found to be based upon the negligence, recklessness or willful action or inaction of the Indemnified Party, or (ii) if the Indemnified Party fails to give the Indemnifying Party prompt notice of any claim it receives and such failure materially prejudices the Indemnifying Party, or (iii) solely to the extent of indemnification for legal fees and disbursements of counsel of the Indemnified Party, unless the Indemnifying Party is given the opportunity to control defense of such action, or (iv) unless the Indemnifying Party is given the opportunity to approve any settlement, which approval shall not be unreasonably withheld; and provided further that, except in the event of a material conflict of interest, the Indemnifying Party shall not be liable for attorney's fees of the Indemnified Party after assuming control of the defense or settlement. The indemnification provisions of this Section 8 shall also cover the Indemnified Party's directors, officers, employees and other agents that may suffer any Damages. 9. TERM AND TERMINATION. --------------------- 9.1. TERM. This Agreement shall be effective as of ----- the date first set forth above and shall remain in effect until termination or expiration of the License Agreement or other termination pursuant to Sections 9.2 hereof. 9.2. TERMINATION. ------------ (a) In the event either of Developer or Chief Scientist materially breaches any term or provision of this Agreement, Funder may and, in the event Funder materially breaches any term or provision of this Agreement, either of Developer or Chief Scientist may, terminate this Agreement thirty (30) days after giving the breaching party written notice of such breach, unless: (i) the breaching party cures the breach within such 30-day period; or (ii) if a cure cannot reasonably be effected within such 30-day period, the breaching party commences the cure of such breach within such 30-day period and diligently prosecutes such cure to completion. This thirty (30) day notice shall not apply to a breach by the Funder of the failure to meet the terms of Section 5.2(a) of this Agreement. (b) This Agreement shall terminate concurrently with the termination of the License Agreement; provided, however, the termination of this Agreement shall not cause the termination of the License Agreement. (c) Upon termination of this Agreement, Funder, Developer and Chief Scientist will have no further rights or obligations under this Agreement, and Funder will immediately return to Developer all Know-How (unless such Know-How is subject to the non-exclusive, perpetual license granted to Funder under Section 9.3 of the License Agreement); provided, however, Sections 7.2, 8, 11.2 and 11.5 through 11.13, inclusive, shall survive termination. 10. CONDITIONS TO FUNDER'S OBLIGATIONS. It shall be a ---------------------------------- condition precedent to Funder's payment obligations under this Agreement that Funder completes by February 28, 1995 an equity funding of its securities in an amount satisfactory to Funder to perform its obligations under this Agreement. 11. MISCELLANEOUS. ------------- 11.1. FORCE MAJEURE. No party shall be liable ------------- for failure to perform any obligations hereunder if such failure is due to a cause beyond the reasonable control of such party, including without limitation, strikes, lockouts or other labor disturbances, riots, floods, fires, accidents, wards, embargoes, delays of carriers, inability to obtain materials from sources of supply, acts, or injunctions (each a "Force Majeure Event"). Upon the occurrence of any Force Majeure Event, the party whose performance is affected shall immediately given written notice of such Force Majeure Event to the other, and shall thereafter exert all reasonable efforts to overcome such Force Majeure Event and resume performance of this Agreement. If, despite such efforts, the party whose performance is affected is unable to perform six (6) months following notification given hereunder, then the other may terminate this Agreement. 11.2. ASSIGNMENT. Neither Funder nor Developer ---------- may assign this Agreement without the prior consent of the other; provided, however, (a) Developer or Funder may assign this Agreement to any entity which acquires substantially all of its assets or business, and (b) Funder may assign this Agreement, in whole or in part, to any Affiliate of Funder. No assignment shall relieve a party of all of its responsibility for performance under this Agreement. 11.3. ASSUMPTION OF LIABILITIES UPON BUY-OUT. --------------------------------------- In the event Funder or Developer is acquired by merger, asset acquisition or stock acquisition, Funder or Developer, as the case may be, shall take all steps necessary to ensure the acquirer assumes its respective obligations under this Agreement and the License Agreement. 11.4. DEVELOPER STATUS. For the purpose of ---------------- carrying out this Agreement Developer and Funder shall act as independent contractors and not as partners, joint venturers, or agents of the other and shall not bind nor attempt to bind the other to any contract or obligation. 11.5. NOTICES. Except as otherwise provided ------- herein, any notice or other communications sent or delivered hereunder shall be in writing and shall be effective if hand-delivered or if sent by certified or registered mail or postage prepaid or by international courier service: To Developer: Edenland, Inc. ------------ Baybush, Straffan County Kildare, Ireland Attention: Mr. Leo J. Prendergast Telephone: 353-1-6272636 To Chief Scientist: Patrick T. Prendergast ------------------- Baybush, Straffan County Kildare, Ireland Telephone: 353-1-6272636 Telecopier: 353-1-6272703 To Funder: Holmedco Pharmaceuticals Corporation --------- 3807 NW 127th Circle Vancouver WA 98686 Attention: Richard B. Hollis, Chairman and CEO Telephone: 206-573-2489 Telecopier: 206-573-2489 or to such address as any Party shall hereafter designate by notice to the other Parties. A notice shall be deemed to have been given on the date of receipt by the Party. 11.6. ENTIRE AGREEMENT. This Agreement ---------------- together with the License Agreement (as well as any other documents referred to herein or therein) set forth the entire agreement and understanding among the parties hereto as to the subject matter hereof and has priority over all documents, verbal consents or understandings made between Funder and Developer and Chief Scientist before the conclusion of this Agreement with respect to the subject matter hereof; none of the terms of this Agreement shall be amended or modified except in writing signed by the parties hereto. 11.7. WAIVERS. A waiver by any party of any -------- term or condition of this Agreement in any one instance or a number of instances shall not be deemed or construed to be a waiver of such term or condition for any similar instance or instances in the future or of any subsequent breach hereof. 11.8. ARBITRATION. The parties to any dispute ------------ or controversy arising out of, in connection with or relating to this Agreement, its negotiation, performance or breach, shall attempt to resolve any such dispute in an amicable manner, failing which the parties shall submit the same to binding arbitration. The arbitration panel shall consist of one arbitrator and shall be formed in accordance with the Rules for Commercial Arbitration of the American Arbitration Association then obtaining (the "Rules"). The arbitration shall be held in the State of Washington pursuant to the Rules, and the award shall be rendered in such form that judgment may be entered thereon in the highest court of any forum, state, federal or foreign, having jurisdiction. The Funder shall pay reasonable expenses to accommodate the attendance by Chief Scientist and an Edenland representative at such arbitration. In making its award, the arbitrator shall be guided, in descending order of priority, by the terms of this Agreement, the usages of the trade in the business in which Developer, Chief Scientist and Funder are engaged and what is just and equitable under the circumstances. The cost of such arbitration shall be borne by the party against which an award is rendered in the arbitration proceeding or as the arbitrator may determine. Notwithstanding anything to the contrary contained herein, any party may apply to a court of competent jurisdiction for equitable relief for any breach or threatened breach of this Agreement, including but not limited to restraining orders and affirmative injunctive relief, and for ancillary orders in aid of the arbitrator. 11.9. APPLICABLE LAW. This Agreement shall be -------------- governed by and construed in accordance with the laws of the State of Washington without regard to the conflicts of laws provisions hereof. 11.10. REMEDIES. The rights and remedies of a --------- party set forth herein with respect to failure of the other to comply with the terms of this Agreement (including, without imitation, rights of termination of this Agreement) are not exclusive, the exercise thereof shall not constitute an election of remedies and the aggrieved party shall in all events be entitled to seek whatever additional remedies may be available in law or in equity; provided, however, no arbitration or legal recourse shall be available to either party should termination of this Agreement occur as the result of Funder's inability to timely meet the funding condition under Section 10 of this Agreement. 11.11. HEADINGS. Headings in this Agreement are -------- included herein for ease of reference only and shall have no legal effect. 11.12. SEVERABILITY. If any provision of this ------------- Agreement shall be held illegal or unenforceable, that provision shall be limited or eliminated to the minimum extent necessary so that this Agreement shall otherwise remain in full force and effect and enforceable. 11.13. SET-OFF. In the event any party is owed -------- any sums which are not paid when due under this Agreement, the License Agreement or agreement or note between the parties, such party may set-off such amounts against any payments such party owes to the other party hereunder. Any party exercising its set-off rights hereunder shall notify the other party promptly after such exercise. A party may not, however, set-off any --- amounts that are in dispute between the parties. Such disputed amounts shall be placed into escrow with a third party escrow company, reasonably acceptable to the parties, until the dispute is resolved. If the dispute is resolved favorably to the party seeking the set-off, such party may effect the set-off upon release of the escrowed funds. 11.14. FURTHER ASSURANCES. The parties hereto ------------------- shall execute and deliver or cause to be executed and delivered such further instruments, documents and conveyances and shall take such other action as may be reasonably required to more effectively carry out the terms and provisions of this Agreement. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above by their duly authorized officers. "FUNDER" "DEVELOPER" HOLMEDCO PHARMACEUTICALS EDENLAND INC. CORPORATION By: /s/ Richard B. Hollis By: /s/ Leo Prendergast ------------------------ ------------------------- Its: Chairman & CEO Its: Secretary/Director -------------------------- ------------------------- Only for Purposes of Section 3.3 of this Agreement "CHIEF SCIENTIST" "HOLLIS" /s/ Patrick T. Prendergast /s/ Richard B. Hollis ---------------------------- ------------------------------- PATRICK T. PRENDERGAST APPENDIX A DEVELOPMENT COSTS ----------------- 1. Direct Labor Salaries and Benefits-Compensation ---------------------------------- cost per hour for actual hours worked on approved Funder projects (supported by time cards). Examples include: Clinical Research Associates Technical Writers Data Entry Research Scientists (e.g. Toxicologist, Pathologist) Regulatory Affairs (e.g. Protocol Writing, Validation, Clinical Auditing, FDA Meetings) 2. Clinical Grants-Hospital expenses for approved --------------- studies paid to investigators. (Supported by approved agreements and expense reimbursements.) 3. Outside Laboratory Testing for approved Funder -------------------------- projects (supported by contracts and invoices). Examples include: Primate study Primate retreatment study 4. Drug Expenses-Actual cost of drug distributed to ------------- investigators for use in studies. 5. Scientific Consultants-payments for time and ---------------------- expenses for work done on approved Funder projects (supported by invoices). Examples include: Research Grants Outside Analytical Support 6. Scientific Panels-payments for time and expenses ----------------- for work on approved Funder projects (supported by invoices). Examples include: Infectious Disease Panel Advisory Panel 7. Other Direct Expenses-directly identifiable to an --------------------- approved task (supported by invoices or receipts). Examples include: Travel Supplies, printing and duplicating Testing Postage, freight Routine patent maintenance fees and routine ordinary expenses for outside professional services for preparation of filing of patent applications (uncontested) reasonably allocated to Subject Products. Insurance Project Management/Secretarial APPENDIX B ABSTRACT -------- ------------------------------------------------------------- 9 Congresso Mediterraneo di Chemioterapia ------------------------------------------------------------ 9th Mediterranean Congress of Chemotherapy ------------------------------------------------------------ 9me Congres Mediterraneen de Chimiotherapie ------------------------------------------------------------ [LOGO OF MEDITERRANEAN SOCIETY OF CHEMOTHERAPY] Milano (Italy) June 12-17, 1994 Please return completed abstract to: Organizing Secretariat 9th Mediterranean Congress of Chemotherapy O.I.C. Incentive OFFICIAL ABSTRACT Viale Majno, 21 20122 MILANO (Italy) CLINICAL TRIAL FOR THE SAFETY AND EFFECTIVENESS OF HIV REACTIVE, IMMUNOAFFINITY PURIFIED ANTI HUMAN ALPHA FETOPROTEIN IN PATIENTS WITH HIV INFECTIONS. FRANK B. GELDER1,2 AND PATRICK PRENDERGAST1,3. Department of --------------- Surgery, Louisiana State University Medical Center, Shreveport, LA, USA; 2Gelco Diagnostics Inc., Shreveport, LA, USA; 3Edenland Holdings, Ltd., Baybush, Straffin, Ireland. Functional and immunochemical similarities between human alpha fetoprotein and external HIV glycoproteins, coat peptides and glycopeptides have been demonstrated. Both alpha fetoprotein and specific HIV products reduce prostaglandin synthesis in macrophages with a concomitant increase in arachidonic acid and leukotriene production. An enzyme-linked immunoessay with polyclonal immunoaffinity purified goat anti human alpha fetoprotein (IP-X-AFP) identified epitopes on HIV-1MN viral lysate and GP160 but not GP120 glycoproteins suggesting phylogenetic mimicry. IP-X-AFP inhibited syncytia formation, prevented HIV-1 laboratory strains MN, RF, and 3B replication in C8166-45 cells, and inhibited replication of HIV-1BAL in fresh macrophage cultures in a dose dependent manner. Thirteen seropositive HIV patients were treated with IP-X-AFP (30 mg per day by IV infusion) on days 0, 2, 4, 6, and 8 with no overt toxic reactions. However, chills and fever (101 degrees F) of short duration (<3 hour) consistent with a mild systemic Arthus reaction was observed in one patient. Laboratory measurements including viral load by TCID50, and lymphocytes sub-population quantification (CD3, CD4, and CD8) were obtained before IP-X-AFP and post- administration at 1, 6, 12, and 22 hours and at 4, 7, 14, 28, 42, 90, and 120 days. The mean viral load in the 13 pateints was reduced from a pre-treatment value of 1811 to 577 at day 120. All 13 patients obtained a one log or greater reduction in viral load following therapy. Four of the 13 pateints obtained repeated viral load values of 0, 4 patients obtained low but stable viral load values, while 5 patients demonstrated a reduction then gradual increase in viral load to near pre- treatment values. A sharp increase in viral load was observed between IP-X-AFP administration and day 21 post administration, presumable representing lysis of infected lymphocytes with virus release. At 120 days CD4 counts increased above pre-treatment values an average of 25% in all patients. In addition, all cases of hairy leukoplakia (n=3) clinically improved. These results demonstrate that IP-X-AFP may be of significant clinical value in the treatment of HIV infections by reducing viral load and allowing immunological recovery. AMENDMENT NO. 1 TO RESEARCH, DEVELOPMENT AND OPTION AGREEMENT This Amendment is made as of this 5th day of February 1995, by and between EDENLAND INC., a Delaware corporation ("Developer"), PATRICK T. PRENDERGAST, an individual ("Chief Scientist"), and HOLLIS-EDEN, INC., a Delaware corporation (formerly Holmedco Pharmaceuticals Corporation) (the "Funder"). W I T N E S S E T H: -------------------- WHEREAS, Developer, Chief Scientist and Funder are parties to that certain Research, Development and Option Agreement dated August 25, 1994 ("Agreement"). WHEREAS, Developer, Chief Scientist and Funder desire to amend the Agreement in the manner set forth herein. NOW, THEREFORE, in consideration of the premises, the provisions and the respective agreements hereinafter set forth, the parties hereby agree as follows: 1. Section 5.2 of the Agreement is hereby deleted and replaced with the following Section 5.2: "5.2. Development of Anti-Serum; Funding ---------------------------------- of Anti-Serum Development Costs. Developer agrees to ------------------------------- obtain an open IND for the Anti-Serum with the United States Food and Drug Administration and to commence a twenty patient, phase I investigational new drug study (the "Phase I Study") under the guidelines and regulations of that regulatory agency. Funder agrees to pay Developer for the Phase I Study as follows: (a) U.S. $250,000 due March 31, 1995 and payable no later than April 30, 1995. (b) U.S. $2,750,000 in stages mutually agreed by Funder and Developer and in accordance with the funding available to Funder over the eighteen (18) months following March 31, 1995. Funder shall pay any additional Development Costs on the Anti-Serum beyond the amounts set forth in subsections (a) and (b) above only if Funder, in its sole discretion, determines that the results of the Phase I Study demonstrated sufficient efficacy to warrant advancement of the Anti-Serum to phase II studies (the "Efficacy Determination"). If Funder makes the Efficacy Determination, Funder shall pay the future Development Costs for the Anti-Serum in accordance with the Development Plan for the Anti-Serum, subject to Funder's termination right under Section 5.5. If Funder does not make the Efficacy Determination, Funder's obligation to pay any further Development Costs for the Anti-Serum shall terminate. Developer shall keep Funder fully informed of its progress on the Phase I Study and agrees to provide written notice to Funder of its completion. Any amounts payable to Developer under subsections (a) and (b) above shall be regardless of the actual costs of the Phase I Study incurred by Developer. The parties agree that the research and development costs of the Anti-Serum may overlap with the development of the vaccine. The parties will in good faith discuss the development of the vaccine under this Agreement. 2. The following sentence shall be added to the end of Section 5.3: "Funder's payment obligation under this Section 5.3 shall not commence until Funder raises U.S. $10,000,000 in aggregate seed financing. " 3. Except as specifically set forth herein, the Agreement shall remain unaffected and shall remain in full force and effect. This Amendment shall be deemed part of, and construed in accordance with, the Agreement. IN WITNESS WHEREOF, the parties have executed this Amendment and caused the same to be duly delivered on their behalf on the day and year hereinabove first set forth. "Funder" "Developer" HOLLIS-EDEN, INC. EDENLAND INC. By: /s/ Richard B. Hollis By: /s/ Leo Prendergast ---------------------------- ---------------------------- Its: CEO Its: Director --------------------------- --------------------------- "Chief Scientist" /s/ Patrick T. Prendergast ---------------------------------- PATRICK T. PRENDERGAST AMENDMENT NO. 2 TO RESEARCH, DEVELOPMENT AND OPTION AGREEMENT This Amendment is made to be effective as of the 17th day of March 1995, by and between EDENLAND, INC., a Delaware corporation ("Developer"), PATRICK T. PRENDERGAST, an individual ("Chief Scientist"), and HOLLIS-EDEN, INC., a Delaware corporation (formerly Holmedco Pharmaceuticals Corporation) ("the Funder"). W I T N E S S E T H: -------------------- WHEREAS, Developer, Chief Scientist and Funder are parties to that certain Research, Development and Option Agreement dated August 25, 1994, as amended by that certain Amendment No. 1 to Research, Development and Option Agreement dated February 5, 1995 (as amended, the "Agreement"); WHEREAS, Developer, Chief Scientist and Funder desire to amend the Agreement in the manner set forth herein; NOW, THEREFORE, in consideration of the premises, the provisions and the respective agreements hereinafter set forth, the parties hereby agree as follows: 1. It is a condition precedent to the effectiveness of this Amendment that the U.S. $125,000 payment per Section 3.1 of the License Agreement (as defined in the Agreement) be transmitted to the account of Developer no later than March 27th, 1995. Failure to make that payment shall invalidate this Amendment. 2. As per Amendment No. 1 to the Research, Development and Option Agreement Section 1 thereof, relating to 5.2(a) of the original agreement, Section 5.2(a) is hereby amended as follows: "Funder agrees to pay Developer for the Phase I study $250,000 in accordance with the funding available to Funder but not later than 28th, April 1996. Amendment No. 1 to this Agreement shall remain in force except for the above alteration to 5.2(a). 3. The first sentence of Section 5.8 is hereby deleted in its entirety and replaced with the following first sentence: "Subject to the limitations set forth herein, commencing April 28th, 1996, Funder agrees to commit at least thirty percent (30%) of its research and development budget, but at least a minimum of $2,000,000 (not based on a percentage of Funder's research and development budget), for any given calendar year to pay Development Costs for Subject Products." 4. Subsection (e) of Section 5.8 is hereby deleted in its entirety. 5. Except as specifically set forth herein, the Agreement shall remain unaffected and shall remain in full force and effect. The conditions of this Amendment shall become part of the original Agreement and its Terms. This Amendment shall be deemed part of, and construed in accordance with, the Agreement. IN WITNESS WHEREOF, the parties have executed this Amendment and caused the same to be duly delivered on their behalf on the day and year hereinabove first set forth. "Funder" "Developer" HOLLIS-EDEN, INC. EDENLAND, INC. By /s/ Richard B. Hollis By /s/ Leo Prendergast ------------------------- --------------------------------- Its CEO Its Director ------------------------ -------------------------------- "Chief Scientist" /s/ Patrick T. Prendergast ------------------------------- PATRICK T. PRENDERGAST PAGE 1 OF 2 AMENDMENT NO. 3 TO RESEARCH, DEVELOPMENT AND OPTION AGREEMENT This Amendment is made to be effective as of the day of August 1995, by and between EDENLAND INC., a Delaware corporation ("Developer"), PATRICK T. PRENDERGAST, an individual ("Chief Scientist"), and HOLLIS-EDEN, INC., a Delaware corporation (formerly Holmedco Pharmaceuticals Corporation) (the "Funder"). W I T N E S S E T H: -------------------- WHEREAS, Developer, Chief Scientist and Funder are parties to that certain Research, Development and Option Agreement dated August 25, 1994, as amended by that certain Amendment No. 1 to Research, Development and Option Agreement dated February 5, 1995 and Amendment No. 2 dated 17th, March, 1995 (as amended, the "Research, Development and Option Agreement"). WHEREAS, Developer, Chief Scientist and Funder desire to amend the Agreement in the manner set forth herein. NOW, THEREFORE, in consideration of the premises, the provisions and the respective agreements hereinafter set forth, the parties hereby agree as follows: 1. The payments due per Amendment No. 1 and No. 2 to the Research, Development and Option Agreement relating to 5.2 is hereby unended as follows: "The Funder agrees to pay Developer for the Phase I study from funding available to Funder. However, the payments due per Section 5.2(a) and 5.2(b) of the Research, Development and Option Agreement shall become payable from funds realized by way of equity sale, sublicense, partnership agreements, loans, Private Placements, Public Offerings which take place following April 28th, 1996 but not later than 24 months from the date of payments due per section 2.2 of the Edenland Agreement" 2. Except as specifically set forth herein, the Agreement shall remain unaffected and shall remain in full force and effect. The conditions of this Amendment shall become part of the original Agreement and its Terms. This Amendment shall be deemed part of, and construed in accordance with, the Agreement. PAGE 2 OF 2 IN WITNESS WHEREOF, the parties have executed this Amendment and caused the same to be duly delivered on their behalf on the day and year hereinabove first set forth. "Funder" "Developer" HOLLIS-EDEN, INC. EDENLAND INC. By: /s/ Richard B. Hollis By: /s/ Leo Prendergast ---------------------------- ---------------------------- Its: CEO Its: Director --------------------------- --------------------------- "Chief Scientist" /s/ Patrick T. Prendergast ----------------------------------- PATRICK T. PRENDERGAST AMENDMENT NO. 4 TO RESEARCH, DEVELOPMENT AND OPTION AGREEMENT This Amendment is made to be effective as of the 31st day of October 1996, by and between EDENLAND INC., a Delaware Corporation ("Developer"), PATRICK T. PRENDERGAST, an individual ("Chief Scientist"), and HOLLIS-EDEN INC., a Delaware Corporation (formerly Holmedco Pharmaceuticals Corporation)(the "Funder"). W I T N E S S E T H ------------------- WHEREAS, Developer, Chief Scientist and Funder are parties to that certain Research, Development and Option Agreement dated August 25, 1994, as amended by that certain Amendment No. 1 to Research, Development and Option Agreement dated February 5th, 1995, Amendment No. 2 dated 17th, March, 1995 and Amendment No. 3 dated 17th, March 1995 (as amended, the "Research, Development and Option Agreement"). WHEREAS, Developer, Chief Scientist and Funder desire to amend the Agreement in the manner set forth herein. NOW, THEREFORE, in consideration of the premises, the provisions and the respective agreements hereinafter set forth, the parties hereby agree as follows: A. This Agreement is hereby amended as follows, upon the understanding that Hollis-Eden closes its proposed merger with Initial Capital Acquisition Corporation ("IAC"), a Delaware corporation on or before May 15th, 1997. If the Initial Acquisition Corporation Merger with Hollis-Eden does not become effective on or before May 15th, 1997 then this amendment No. 4 shall become null and void and the present agreement as amended by amendments No. 1, No. 2, and No. 3 only, prior to this within Amendment, shall be the full and true Agreement between the parties. B. Section 5.2 of the Agreement is further amended in its entirety provide as follows: "5.2 DEVELOPMENT OF ANTI-SERUM; FUNDING OF ------------------------------------- ANTI-SERUM DEVELOPMENT PLAN. Developer --------------------------- agrees to obtain an open IND for the Anti- Serum with the United States Food and Drug Administration and to commence a twenty patient, Phase I investigational new drug study (the "Phase I Study") under the guidelines and regulations of that regulatory agency. Funder shall pay the Developer US$3,000,000 to pay for the Development Costs of the Anti-Serum and the Phase I study as follows: (i) Provided that Funder closes its proposed merger with Initial Capital Acquisition Corp., a Delaware corporation (the "IAC Merger"), on or before May, 15th, 1997, Funder shall pay Developer US$1,500,000 at the closing of the merger by wire transferring these funds to Edenland Inc.'s U.S. designated Anti-Serum Research account. Funder may retain a maximum of US$200,000 of this initial payment towards unpaid IAC expenses, however this US$200,000 must be repaid as part of the 22% allocation of Capital Funding as outlined herein. The Developer shall provide to Funder on a regular 12 week rota from receipt of the above funds, a full and detailed audited analysis of expenditure, prepared by a fully certified Auditing firm of Accountants together with copies of supporting invoices from outside suppliers. The Developer shall keep full and accurate books and records of its Development Costs which shall be made available to Funder pursuant to Section 5.7 of the Research, Development and Option Agreement. The remaining US$1,500,000 shall be paid to Developer from the next funds available to Funder by allocating to Developer 22% of the proceeds of all Capital Funding Events (as defined herein) after the IAC Merger. The term "Capital Funding Events" shall mean all funds received by joint venture agreements, loans, private placements, the exercise of warrants or stock options, or other similar transactions. (ii) If the funds realizable pursuant to the IAC Merger are not in place on or before May 15th, 1997, the entire US$3,000,000 shall be due and payable to Developer from Capital Funding Events occurring after October 1, 1996, provided that the remaining payment shall be due and payable no later then April 28th, 1998. (b) Funder shall pay additional Development Costs on the Anti-Serum beyond the US$3,000,000 set forth in subsection (a) above, as per Section 5.5. (c) Developer shall keep Funder fully informed of its progress on the Development of the Anti-Serum to a stage of development that demonstrates the toxicity and safety profile and also indicates potential patient efficacy of the Anti-Serum. Developer agrees to provide written notice to Funder of all results and prepare a report of these results similar in format to the Parexel report on the Houston study within six months of completion of the study. The amounts payable to Developer under subsection (a) above shall be allocated by Developer to fund the Development Costs of the Anti-Serum, however, any funds per section (a) above, not allocated upon completion of research to a stage of Development as outlined herein shall be utilized by Developer towards the Development Costs of animal studies of certain AFP derived synthetic peptides for an additional therapeutic indication. (d) The parties agree that the research and development costs of the Anti-Serum may overlap with the development of the vaccine. Both Funder and Developer realize that changes or modifications in the Development Plan will in all likelihood be experienced as a natural progression of research and development. C. The following provisions are added at the end of Section 5.8 of the Agreement: "Funder's payment obligation under this Section 5.8 shall not commence until Funder raise US$10,000,000 in the aggregate from Capital Funding Events, as defined per Section 5.2 of this agreement, occurring after August 25th, 1994. This payment is separate from, and in addition to, that referred to in Section 5.2 for Anti-Serum Development Cost, however, all payments per section 5.2 shall be deductible from payments due per this section. Hollis-Eden Inc. may not license any technology or product from any source outside the control of Edenland, Inc. without the prior written consent of the Developer, until such time as payments under this Section 5.8 have exceeded US$3,000,000. D. As per section 5.3 and Amendment No. 1 to the Research Development and Option Agreement Section 5.3 of the within Agreement is hereby amended as follows; 5.3 OFF BUDGET PROJECTS. It is contemplated ------------------- by the parties that Developer and Chief Scientist may have certain projects ("Off Budget Projects") not covered by a Development Plan for a Subject Product that Developer and Chief Scientist believe would aid their research on Subject Product or potential New Product. These projects might include a preliminary in-vitro experiment to determine if a foundation exists for a New Product. All such projects will be discussed in full with the Chief Executive Officer of Hollis-Eden Inc. prior to draw-down of Funds but, funding shall not be contingent on approval of the projects by the Chief Executive Officer of Hollis-Eden, Inc. The Developer shall provide to Funder a full and detailed audited analysis of expenditure, prepared by a fully certified Auditing firm of accountants together with copies of supporting invoices from outside suppliers, each quarter following draw-down of funds. Until such time as Funder's commitment under Section 5.8 terminates, Funder agrees to provide up to a maximum of $250,000 per year to fund Off Budget Projects. Funder's payment obligation under this Section 5.3 shall commence when Funder raises U.S.$10,000,000 in aggregate from Capital Funding Events, as defined in Section 5.2, occurring after August 1994. E. Section 10 of the Agreement is deleted in its entirety. F. Except as specifically set forth herein, the Agreement shall remain unaffected and shall remain in full force and affect. The conditions of this Amendment shall become part of the original Agreement and its Terms. This Amendment shall be deemed part of, and construed in accordance with the Agreement. IN WITNESS WHEREOF, the parties have executed this Amendment and caused the same to be duly delivered on their behalf on the day and year hereinafter first set forth. "Funder" "Developer" HOLLIS-EDEN INC. EDENLAND, INC. By: /s/ Richard B. Hollis By: /s/ Leo Prendergast --------------------------- --------------------------- Its: Chairman/CEO Its: Secretary/Director ------------------------- -------------------------- Date: 1st Nov. 96 Date: 1st Nov. 96 ----------------------- ----------------------- "Chief Scientist" /s/ Patrick T. Prendergast Date: 1st Nov. 1996 -------------------------------- -------------------------- PATRICK T. PRENDERGAST EX-10 13 Exhibit 10.10 HOLLIS-EDEN, INC. 3807 N.E. 127th Circle Vancouver, Washington 98686 PLACEMENT AGENT AGREEMENT ------------------------- Laidlaw Equities, Inc. January 26, 1996 100 Wilshire Boulevard Suite 1620 Santa Monica, California 90401 Re: Private Placement ----------------- Gentlemen: Hollis-Eden, Inc., a Delaware corporation (the "Company"), desires to engage Laidlaw Equities, Inc. (the "Placement Agent" and also referred to herein as "you") on an exclusive basis in connection with a private offering on a "best efforts" basis, of 1,200,000 shares of common stock, $.0001 par value per share (the "Shares" and individually a "Share"). The purchase price of each Share shall be $.85 and shall be paid in cash upon subscription. The Company is offering the Shares solely to "Accredited Investors" as defined in Rule 501 of Regulation D as promulgated by the Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Private Placement Memorandum and Exhibits thereto (hereinafter collectively referred to as "Offering Documents") to be prepared by counsel to the Company and relating to the offering of the Shares. For purposes of this Agreement, the offering will be referred to as the "Offering" and the references below to the Company also include its subsidiaries unless the context indicates otherwise. The Company and the Placement Agent both regard the proceeds of the Offering as being in the nature of a "bridge" financing as the Company believes it requires additional capital of up to $10,000,000 to $15,000,000 (the "Additional Capital") in order to pursue development and commercialization of the Company's initial proprietary therapeutic pharmaceutical agents for the treatment of immune disorders, including those arising from the Human Immunodeficiency Virus and Acquired Immune Deficiency Syndrome. In the event that the Offering is completed the Company and the Placement Agent intend immediately thereafter to utilize best efforts to secure the Additional Capital upon the terms set forth in paragraphs 7.(f),(g) and (h) below. In connection with this Agreement, the Company and the Placement Agent each are making certain representations, warranties and, covenants hereunder for the benefit of the other. 1. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. --------------------------------------------------------- The Company represents and warrants to the Placement Agent as follows: (a) The Offering Documents have been prepared by the Company and copies of such Offering Documents and any amendments thereto have been delivered by the Company to the Placement Agent for distribution to potential Purchasers. The Offering Documents will not be amended or supplemented and no amendment or supplement thereto will be made without your prior consent unless necessary to conform to the representations and warranties contained in this Agreement. (b) The Offering Documents conform in all material respects with the requirements of Section 4(2) of the Securities Act of 1933, as amended and with the requirements of all other published rules and regulations (including Section 401(f) of Regulation S-K) of the SEC currently in effect relating to "private offerings" of the type contemplated by the Company. The Offering Documents, on the date of their issuance will be and at the Offering Closing Date will be, accurate in all material respects and will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing at such dates, not misleading and will be, as of each Closing Date accurate in all material respects and will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing at each Closing Date, not misleading. (c) The Company is, and at each Closing Date will be, a corporation duly organized, validly existing and in good standing under the laws of Delaware. The Company has, and at the Closing will have, full power and authority to conduct all the activities conducted by it, to own or lease all the assets owned or leased by it and to conduct its business as described in the Offering Documents. The Company is, and at each Closing Date will be, duly licensed or qualified to do business and in good standing as a foreign corporation in all jurisdictions in which the nature of the activities conducted by it or the character of the assets owned or leased by it makes such licensing or qualification necessary and where the failure to be so licensed or qualified could have a Material Adverse Effect (as hereinafter defined). The Company has no material subsidiaries. Complete and correct copies of the certificate of incorporation and of the by-laws of the Company and all amendments thereto have been delivered to the Placement Agent. (d) The outstanding shares of Common Stock have been, and the Shares to be issued and sold by the Company upon such issuance will be, when paid for by the Purchasers as provided herein and the Warrant Shares, upon issuance will be, when paid for pursuant to the terms of the Placement Agent Warrants, respectively, duly authorized, validly issued, fully paid and nonassessable and will not be subject to any preemptive or similar right. The description of the Common Stock in the Offering Documents will be, and at each Closing Date will be, complete and accurate in all material respects. All prior sales by the Company of the Company's securities have been made in compliance with or under an exemption from registration under the Securities Act and applicable state securities laws. Except as set forth in the Offering Documents, the Company does not have outstanding, and at each Closing Date will not have outstanding, any options to purchase, or any rights or warrants to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or sell any of shares of Common Stock or any such warrants, convertible securities or obligations. (e) The financial statements of the Company (including the related notes and supporting schedules) included in the Offering Documents fairly present the financial condition of the Company, at the dates and for the periods indicated, and have been prepared in conformity with generally accepted accounting principles as applied in the United States on a consistent basis throughout the periods involved, except as otherwise stated therein and with respect to interim statements except for normal year-end adjustments. (f) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (g) Subsequent to the respective dates as of which information is given in the Offering Documents and prior to each Closing Date, except as set forth in or contemplated by the Offering Documents, (i) there has not been and will not have been any change in the capitalization of the Company, or any material adverse change in the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company (except for any change in capitalization resulting from a pending dispute between the Company and Business Concepts, Inc. regarding the issuance of up to 1,200,000 shares of Common Stock) (ii) the Company has not and will not have paid or declared any dividends or other distributions of any kind on any class of its capital stock. The Company does not anticipate any material adverse changes in the Company's business, prospects or financial condition within the next twelve months. (h) The Company is not an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. (i) Except as set forth in the Offering Documents or elsewhere herein there are no actions, suits, proceedings, claims, hearings or any investigations pending or, to the Company's knowledge, threatened against or affecting the Company or any of its respective officers in their capacity as such, before or by any federal or state court, commission (including but not limited to the Food and Drug Administration), regulatory body, administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding might adversely affect the Company or its business, properties, business prospects, conditions (financial or otherwise) or results of operations taken as a whole (a "Material Adverse Effect"). (j) Except as disclosed in the Offering Documents, the Company has, and at each Closing Date will have, (i) all material governmental licenses, permits, consents, orders, approvals and other authorizations necessary to carry on its business as contemplated in the Offering Documents, (ii) complied in all material respects with all laws, regulations and orders applicable to it or its business. The Company is not, and at each Closing Date will not be, in violation of any provision of its certificate of incorporation or by-laws. (k) No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required for the consummation by the Company of the transactions on its part herein contemplated. (l) The Company has full corporate power and authority to enter into this Agreement. This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company and is enforceable against the Company in accordance with the terms hereof. The performance of this Agreement and the consummation of the transactions contemplated hereby will not result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of the Company pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or give any other party a right to terminate any of its obligations under, or result in the acceleration of any obligation under, the certificate of incorporation or by-laws of the Company, any contract, license or other agreement to which the Company is a party or by which the Company or any of its properties is bound or affected, or violate or conflict with any judgment, ruling, decree, order, statute, rule or regulation of any court or other governmental agency or body applicable to the business or properties of the Company. (m) The Company has good and marketable title to all properties and assets described in the Offering Documents as owned by it, free and clear of all liens, charges, encumbrances or restrictions, except such as are described in the Offering Documents or are not material to the business of the Company. (n) No statement, representation, warranty or covenant made by the Company in this Agreement or made in any certificate or document required by this Agreement to be delivered to the Placement Agent was or will be, when made, inaccurate, untrue or incorrect in any material respect. (o) The Company is not involved in any material labor dispute nor, to the knowledge of the Company, is any such dispute threatened. (p) The Company owns, or is licensed or otherwise has the full exclusive right to use, all material trademarks and trade names which are used in or necessary for the conduct of its business except as may be described in the Offering Documents. No claims have been asserted by any person to the use of any such trademarks or trade names or challenging or questioning the validity or effectiveness of any such trademark or trade name. The use, in connection with the business and operations of the Company of such trademarks and trade names does not, to the Company's knowledge, infringe on the rights of any person. (q) Neither the Company nor, to the Company's knowledge, any person acting on the Company's behalf has (i) used any corporate funds for unlawful contributions, gifts, entertainment, or other unlawful expenses relating to political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds; (iii) violated any provision of the Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any other unlawful bribe, rebate, payoff, influence payment or kickback. (r) No material relationship (as described in Item 404 of Regulation S-K), exists between or among the Company on the one hand, and any director or officer of the Company or any holder of 5% or more of any class of equity security of the Company or any affiliate of any such director, officer or stockholder of the Company on the other hand, except as described in the Offering Documents. (s) The Company has filed all income, franchise, sales and other tax returns required to be filed through the date hereof and has paid all taxes shown as due thereon, and since June 30, 1995 no tax deficiency has been determined adversely to the Company which has had (nor does the Company have any knowledge of any questions or disputes pending or threatened relating to a tax deficiency which, if determined adversely to the Company, might have) a Material Adverse Effect. (t) There are no contracts, agreements or understandings between the Company and any person (other than the Placement Agent), that would give rise to a valid claim against the Company or the Placement Agent for a brokerage commission, finder's fee or like payment in connection with the transactions contemplated by this Agreement except for the dispute referenced in paragraph (g)(i) above. (u) The Company causes to be maintained insurance covering the properties, operations, personnel and businesses of the Company in such amounts and against such losses and risks as are adequate in accordance with customary industry practice to protect the Company and its business. The Company has not received notice from any insurer or agent of such insurer that substantial capital improvements or other expenditures will have to be made in order to continue such insurance. All such insurance is outstanding and duly in force on the date hereof, and will be outstanding and duly in force on each Closing Date. (v) The Purchasers of Shares, and the Placement Agent Warrants when issued and consideration thereof has been received, will obtain valid and marketable title to the Shares and the Placement Agent Warrants, free of any adverse claim with respect thereto. The holders of Placement Agent Warrants, upon exercising of the Placement Agent Warrants, in accordance with the terms thereof, will receive shares of Common Stock which will be free of any adverse claim with respect thereto arising out of actions of or claims against the Company. (w) Neither the Company nor any of the officers or directors of the Company: (i) Has filed a registration statement which is the subject of any pending proceeding or examination under Section 8 of the Securities Act of 1933, as amended (the "Securities Act") or is the subject of any refusal order or stop order thereunder within five years prior to the date of this Agreement; (ii) Is subject to any pending proceeding under Rule 261 or any similar rule adopted under Section 3(b) of the Securities Act or to an order entered thereunder within five years prior to the date of this Agreement; (iii) Has been convicted within five years prior to the date of this Agreement of any felony or misdemeanor in connection with the purchase or sale of any security or involving the making of any false filing with the SEC; (iv) Is subject to any order, judgment or decree of any court of competent jurisdiction temporarily or preliminary restraining or enjoining, or is subject to any order, judgment or decree or any court of competent jurisdiction entered within five years prior to the date of this Agreement permanently restraining or enjoining such person from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security or involving the making of any false filing with the SEC; (v) Is subject to a United States Postal Service false representation order entered under Section 3005 of Title 39, United States Code, within five years prior to the date of this Agreement or is subject to a temporary restraining order or preliminary injunction entered under Section 3007 of Title 391 United States Code, with respect to conduct alleged to have violated Section 3005 of Title 391 United States Code; (vi) Is subject to an order of the SEC entered pursuant to Section 15(b), 15B(a) or 15B(c) of the Securities Exchange Act of 1934 (the "Exchange Act") or is subject to any order of the SEC entered pursuant to Section 203(3) or (f) of the Investment Advisers Act of 1940; (vii) Is suspended or expelled from membership in or suspended or barred from association with a member of an exchange registered as a national securities exchange pursuant to Section 6 of the Exchange Act, an association registered as a national securities association under Section 15A of the Exchange Act, or a Canadian securities exchange or association for any act or omission to act constituting conduct inconsistent with just and equitable principles of trade; or (viii) Is currently the subject of a Formal Order of Investigation issued by the SEC. (ix) Is or has been involved with any other legal proceeding enumerated within Item 401 (f) of Regulation S-K as promulgated by the SEC. 2. REPRESENTATIONS AND WARRANTIES OF THE PLACEMENT AGENT. You ----------------------------------------------------- represent and warrant to the Company that: (a) This Agreement has been duly authorized, executed and delivered by you and is a valid and binding agreement on your part in accordance with its terms. (b) You are a broker-dealer duly registered pursuant to the provisions of the Exchange Act and are a member in good standing of the National Association of Securities Dealers, Inc. ("NASD") and you are duly licensed as a broker-dealer under the applicable statutes and regulations of each state in which you propose to and do offer or sell the Shares. You agree to maintain all of the foregoing registrations in good standing throughout the term of the offer and sale of the Shares and you agree to comply with all statutes and other requirements applicable to you as a broker-dealer pursuant to those requirements. (c) Pursuant to your appointment: (i) You will limit your offering of the Shares to persons whom you have reasonable grounds to believe are "Accredited Investors" as defined in Rule 501 of Regulation D as promulgated by the SEC under the Securities Act. (ii) You will provide each offeree with a complete copy of the Offering Documents and all amendments and supplement(s) thereto during the course of the Offering and prior to sale. (iii) In the event you utilize any sales materials, reports or other analyses other than the Offering Documents, you will refrain from providing any such materials to any offeree of the Shares unless such specific materials are approved in advance and in writing by the Company and Offering Documents are also delivered to the Purchaser before such Purchaser acquires any Shares. (iv) Until the termination of this Agreement, if any event affecting the Company or you shall occur which, in the opinion of the Company's counsel, should be set forth in a supplement or amendment to the Offering Documents, you agree to distribute such supplement or amendment to all persons who have previously received a copy of the Offering Documents from you and further agree to include such supplement or amendment in all further deliveries of the Offering Documents. The Company will at its own expense prepare and furnish to you a reasonable number of copies of that supplement or amendment for such distribution. (v) You will not offer, offer to sell, offer for sale, or sell the Shares by means of any form of general solicitation or general advertising, including but not limited to the following: (A) Any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio; (B) Any seminar or meeting whose attendees have been invited by general solicitation or general advertising. (d) Information relating to you in the Offering Documents, or any amendment or supplement thereto, is true and correct, and there is no material information available to you which should be included in the Offering Documents in order to comply with applicable securities laws. (e) You will not offer the Shares for sale in any state until the Company's counsel has advised you that the Shares may be offered for sale in such state(s). (f) During the offering and sale of the Shares, you will comply with the requirements of Regulation D promulgated under the Securities Act and all applicable blue sky laws to the extent such compliance is within your control. You will retain in your permanent files copies of all Subscription Documents as completed by each purchaser to whom you sell Shares. 3. REGISTRATION RIGHTS FOR HOLDERS OF SHARES. ----------------------------------------- As promptly as may be practicable after shares of Common Stock of the Company commence to trade on the over-the-counter or any other securities market the Company shall use its good faith and its best efforts to: (i) file with the SEC a registration statement (the "Registration Statement") registering on the appropriate form the Shares and the Warrant Shares for resale; (ii) cause the Registration Statement to be declared effective by the SEC as soon as possible (the "Effective Date"); and, (iii) cause the Registration Statement to remain effective through the second anniversary of the Offering Closing Date or the first anniversary of the Effective Date, whichever is later (the "Demand Right"). In the event the Company secures "Additional Capital" through a "Combination" (as set forth in paragraph 7.(f) and paragraph 7.(g) hereof) the Demand Right shall become the obligation of the entity with which the Company combines except that the Company and such entity shall endeavor to have the Shares and Warrant Shares registered for resale upon the Combination or as soon thereafter as may be practicable. In the event that the Company seeks to obtain Additional Capital through a public underwritten offering of securities the Demand Right shall be subject to consent of the underwriter thereof, which consent shall not be unreasonably withheld. 4. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the ------------------------------------- representations and warranties herein contained, and subject to all the terms and conditions of this Agreement, the Company hereby employs you as its exclusive agent on a best efforts basis to solicit subscriptions for the Shares consistent with the suitability standards described in the Offering Documents and not inconsistent with the requirements of Regulation D and applicable requirements of the securities laws of any state in which the sale of Shares is being made. Such subscriptions shall be evidenced by execution by the subscriber and the Company of the Subscription Agreement which shall be attached as an exhibit to the Offering Documents. It is understood that no sale shall be regarded as effective unless and until accepted by the Company, and that the Company reserves the right to refuse to sell Shares, in whole or in part, to any person. The Offering shall extend until such date as the Placement Agent has notified the Company that at least 1,200,000 of the Shares have been sold and gross proceeds with respect thereto have been received into an escrow account established by the Company (the "Escrow") with an independent banking institution satisfactory to the Placement Agent, but in no event shall the Offering extend for a period longer than 30 days from the date following the day on which final Offering Documents are delivered to the Placement Agent unless the Company and the Placement Agent jointly decide to extend the Offering for a period of up to an additional 15 days the ("Offering Closing Date"). The Company shall deliver certificates evidencing the Shares (and if applicable under paragraph 5.(b)) the Placement Agent Warrants upon the Offering Closing Date. 5. COMPENSATION OF PLACEMENT AGENT. You will receive the ------------------------------- following compensation for acting as Placement Agent pursuant to the terms of this Agreement. (a) For each Share sold by you or another broker-dealer selected by you, the Company shall promptly pay to you a sales commission of $.0425 (5% of the gross proceeds received by the Company). Funds from the sale of Shares will be forwarded or caused to be forwarded directly to the Escrow or returned to the investor if the subscription is not accepted or if the Company has not received subscriptions for at least 1,200,000 shares before the Offering Closing Date. The Company through Escrow shall remit your cash compensation, including the expenses referenced in Section 6 below, no later than the Offering Closing Date. (b) In lieu of the cash compensation set forth in paragraph 5.(a) above the Placement Agent in its sole discretion may elect to receive from the Company, and in the event of such election the Company will issue to you for nominal consideration on the Offering Closing Date, warrants (the "Placement Agent Warrants"), substantially in the form attached hereto as Exhibit B, to purchase one share of common stock at $.935 for each Share sold in the Offering. The Placement Agent Warrants will expire seven years from the Offering Closing Date, will contain customary anti-dilution and other provisions, and will provide at the expense of the Company for one mandatory and "piggy back" registration rights. The Placement Agent Warrants will be issued in one or more certificates and registered in such names as the Placement Agent may request. The shares of Common Stock underlying the Placement Agent Warrants are referred to herein as the "Warrant Shares". 6. EXPENSES. The costs and expenses incurred by the Company and -------- by the Placement Agent in connection with the Offering shall be paid by the Company. The Company shall pay to the Placement Agent on the Offering Closing Date a non-accountable expense allowance equal to three percent of the gross proceeds from the sale of the Shares. 7. COVENANTS OF THE COMPANY. The Company covenants and agrees ------------------------ with the Placement Agent: (a) To deliver to the Placement Agent, at the expense of the Company, as many copies of the Offering Documents (including all amendments and supplements thereto) as the Placement Agent may reasonably request. (b) If, at any time prior to any Closing Date, any event shall occur as a result of which the Offering Documents, as then amended or supplemented, would include a statement of fact which is not true and accurate in all material respects, or omit any fact the omission of which would make misleading in any material respect any statement therein, or if for any other reason it shall be necessary to amend or supplement the Offering Documents, the Company will so amend or supplement the Offering Documents and will promptly notify the Placement Agent and will, at the expense of the Company, supply to the Placement Agent (and to any persons designated by the Placement Agent) such amendments or supplements to the Offering Documents as may be necessary so that the statements in the Offering Documents as so amended or supplemented will not, in the light of the circumstances existing at the time, be misleading. (c) To notify the Placement Agent promptly of any change having or which is likely to have a Material Adverse Effect relating to any of the Company's representations, warranties, covenants or agreements contained herein that occurs at any time prior to the payment of the Purchase Price to the Company on each Closing Date. (d) The Company will use the net proceeds received from the issuance of the Shares solely in the manner specified in the Offering Documents under "Use of Proceeds." (e) For three years after the Offering Closing Date, the Company shall send to the Placement Agent copies of all filings with the SEC (contemporaneously with such filing) and copies of all press releases. (f) For a period of six months commencing from the Offering Closing Date the Placement Agent shall have a preferential right, upon terms no less favorable than those which may be offered in good faith on a bona fide basis by others, to manage any public and private financings of the Company including but not limited to the right to purchase for the account of the Placement Agent or to sell for the account of the Company, or any subsidiary or affiliate of or successor to the Company (collectively referred to as the Company) any securities of the Company. In the event the Company receives in writing an agreement, letter of intent or other proposal which has been negotiated at arm's length with any third party with respect to obtaining the Additional Capital (a "Proposal"), the Company shall promptly deliver the Proposal to the Placement Agent who shall thereafter have fifteen business days in which to accept the terms set forth in the Proposal (an "Acceptance"). If the Placement Agent fails to deliver an Acceptance to the Company within such fifteen-day period the Placement Agent shall have no further claim or right with respect to the transaction(s) described within the Proposal. If the Proposal is thereafter modified or if the financing described within the Proposal is not completed within three months or such shorter period as may be established by the Proposal the Company shall adopt the same procedure as with respect to the Proposal before such modification or expiration. The Company agrees that any breach by the Company of the Placement Agent's rights of first refusal shall be enforceable by the Placement Agent through injunctive relief. The Company represents and warrants that no other person or entity has any rights to participate in any offer, sale or distribution of securities with respect to which the Placement Agent shall have the rights described above in this paragraph. (g) If the Company obtains Additional Capital by merging or otherwise combining the Company with another entity, introduced to the Company by the Placement Agent and having at least $10,000,000 in capital (after giving effect to the exercise of warrants and other options) (the "Combination"), then the Company covenants to pay the Placement Agent further compensation of not less than four percent (4%) of such capital except that in its sole discretion the Placement Agent may elect to receive in lieu of such compensation 1,200,000 warrants to purchase 1,200,000 shares of the Company's common stock at $.935 per share. These warrants shall have terms which are similar to those of the Placement Warrants and shall expire seven years from their date of issuance. The Company and the Placement Agent intend that the then shareholders of the Company will own not less than fifty percent of the outstanding shares of the resulting entity following completion of the Combination. (h) In the event that the Placement Agent and the Company seek to obtain the Additional Capital other than in the Combination, compensation to the Placement Agent for such services shall be determined and set forth in a separate agreement executed by the parties. Notwithstanding the foregoing, following termination of this Agreement or, if later, the Offering Closing Date and for a 36-month period thereafter (the "Non-Circumvention Period") the Company shall not solicit nor enter into any Financial Transaction (as defined below) with any individual, entity or other person solicited, introduced or to be solicited or introduced by the Placement Agent in connection with the Offering, the Combination or the Additional Capital (a "Laidlaw Introduction"). Each Laidlaw introduction shall be identified in writing to the Company. If during the Non-Circumvention Period the Company enters into a Financial Transaction with a Laidlaw Introduction, then the Company shall promptly pay to the Placement Agent a fee equal to not less than 10% of the aggregate cash value of the Financial Transaction (including the value of all related employment, consulting and other agreements entered into in connection with the Financial Transaction), unless the Company and the Placement Agent enter into or have entered into a written agreement setting forth other compensation arrangements in advance of such Financial Transaction. A "Financial Transaction" shall include without limitation, the selling of equity or debt securities by or on behalf of the Company, borrowing by or the arranging of loans or extensions of credit on behalf of the Company, the licensing, arranging for the manufacture of or selling of the Company's products or other property (whether tangible or intangible), selling the Company or any of its subsidiaries in whole or in part, merging with or acquiring all or part of another entity, entering into any joint venture or partnership and the like. 8. PLACEMENT AGENT CONDITIONS TO CLOSING. The obligations of the ------------------------------------- Placement Agent hereunder are subject to the accuracy when made and on each Closing Date of the representations and warranties of the Company contained herein, to the performance by the Company of its obligations hereunder, and to each of the following additional terms and conditions: (a) The Placement Agent shall not have discovered and disclosed to the Company on or prior to each Closing Date that the Offering Documents or any amendment or supplement thereto contains an untrue statement of a fact which, in the reasonable opinion of the Placement Agent, is material or omits to state a fact which, in the reasonable opinion of the Placement Agent, is material and is required to be stated therein or is necessary to make the statements therein in light of the circumstances under which they were made not misleading. (b) All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement, the certificates representing the Shares and all other legal matters relating to this Agreement and the transactions contemplated hereby shall be reasonably satisfactory in all material respects to counsel for the Placement Agent, and the Company shall have furnished to such counsel all documents and information that they may reasonably request to enable them to pass upon such matters. (c) All proceedings and legal matters incident to the Shares, including the authorization, form and validity of this Placement Agent Agreement, the Placement Agent Warrants, the Shares and the documents to be signed by each Purchaser or Placement Agent, shall be reasonably satisfactory in all material respects to counsel for the Placement Agent, and each such Purchaser and Placement Agent shall have furnished to such counsel all documents and information that they may reasonably request to enable them to pass upon such matters. (d) Brenman Key & Bromberg, P.C., as counsel to the Company, shall have furnished to the Placement Agent its written opinion (the "Opinion"), addressed to the Placement Agent and dated each Closing Date, substantially in the form of Exhibit A which shall be appended to this Agreement no later than January 5, 1996. (e) The Company shall have furnished to the Placement Agent a certificate, dated each Closing Date, of the Chairman of the Board, President or a Vice President of the Company stating that: (i) The representations, warranties and agreements of the Company contained herein are true and correct on and as of such Closing Date with the same effect as if made on such Closing Date; the Company has complied in all material respects with all its agreements contained herein to be performed on or prior to each Closing Date; and the conditions precedent to the obligations of the Placement Agent set forth herein have been fulfilled; and (ii) Such officers have reviewed, or have had reviewed on their behalf, the Offering Documents and (A) as of the date hereof, and as of such Closing Date, the Offering Documents did not, and will not, include any untrue statement of a material fact and did not, and will not, omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (B) since the date thereof no event has occurred which should have been set forth in a supplement or amendment to the Offering Documents. (f) Subsequent to the date of the execution of this Agreement, there shall not have occurred any of the following: (i) trading in securities generally on the New York Stock Exchange, the American Stock Exchange or in the United States over-the-counter markets shall have been suspended or limited or minimum prices shall have been established on any such exchange or such market by such exchange or by any other regulatory body or governmental authority having jurisdiction, (ii) a banking moratorium shall have been declared by the United States Federal, New York State or California State authority or authorities, (iii) the United States shall have become engaged in any war or there shall have been a declaration of a national emergency by the United States which makes it, in the reasonable judgment of the Placement Agent, after consultation with the Company, impracticable or inadvisable to proceed with the offering and distribution of the Shares in the manner contemplated herein, (iv) any material adverse change in United States or international financial, political or economic conditions which, in the reasonable judgment of the Placement Agent, after consultation with the Company, impracticable or inadvisable to proceed with the offering and distribution of the Shares in the manner contemplated herein, or (v) there shall have occurred any material event, otherwise than as set forth or contemplated in the Offering Documents, so as to make it, in any such case in the reasonable judgment of the Placement Agent, after consultation with the Company, impracticable or inadvisable to proceed with the offering and distribution of the Shares in the manner contemplated herein. (g) The Company shall have furnished to the Placement Agent such further information, reports, certificates and documents as the Placement Agent or its counsel may reasonably request. (h) The Company shall timely file with the SEC the required Notice(s) on Form D which contains the information required by Regulation D under the Securities Act and shall similarly file the required notice(s) with the California Department of Corporations and all other applicable jurisdictions. (i) The Company shall use its best efforts to establish an exemption of the Shares for sale under the blue sky laws of the state of California and such other states as you may reasonably request. 9. INDEMNIFICATION AND CONTRIBUTION. -------------------------------- (a) The Company agrees with the Placement Agent and for the benefit of the Placement Agent and its officers, employees and agents and each person, if any, who controls the Placement Agent within the meaning of the Securities Act (the Placement Agent, and its officers, employees and agents and such controlling person being called, collectively "Laidlaw Indemnified Persons"), to --------------------------- indemnify and hold harmless each such Laidlaw Indemnified Person from and against any and all losses, costs, claims, damages, expenses, demands and liabilities (including, without limitation, any legal fees and other expenses incurred in connection with any suit, action or proceeding or claim asserted) caused by (i) any breach or alleged breach of the representations, warranties and covenants contained herein of the Company, (ii) any untrue statement or alleged untrue statement of a material fact contained in the Offering Documents (each as amended or supplemented), or (iii) any omission or alleged omission to state in the Offering Documents (each as amended or supplemented), a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information furnished in writing by or on behalf of any such Laidlaw Indemnified Person to the Company for use therein or otherwise arising out of the transactions contemplated by this Agreement. (b) The Placement Agent agrees with the Company and for the benefit of the Company and its officers, employees and agents and each person, if any, who controls the Company within the meaning of the Securities Act (the Company, and its officers, employees and agents and such controlling persons being called, collectively "Company Indemnified Persons"), to indemnify and ------------------------------ hold harmless each such Company Indemnified Person from and against any and all losses, costs, claims, damages, expenses, demands and liabilities (all of which are collectively referred to hereafter as "Claims" and which Claims include, without limitation, any legal fees and other expenses incurred in connection with any suit, action or proceeding or claim asserted) caused by any material breach or alleged material breach of the representations, warranties and covenants contained herein of the Placement Agent, except insofar as such are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information furnished in writing by or on behalf of any such Company Indemnified Person to the Placement Agent for use therein. Notwithstanding anything set forth herein or elsewhere in this Section 9 no Laidlaw Indemnified Person shall have any liability to a Company Indemnified Person unless such liability arises from Claims which are the direct result of misconduct or negligence of the Placement Agent or other Laidlaw Indemnified Person and provided that the amount of such liability shall not exceed the amount which may be received by the Placement Agent pursuant to paragraph 5.(a) of this Agreement. (c) If any action, proceeding (including any governmental investigation), claim or demand shall be brought or asserted against a Laidlaw Indemnified Person or a Company Indemnified Person (an "Indemnified Person") in respect of which indemnity may be sought pursuant to the preceding paragraphs, such Indemnified Person shall promptly notify the Company or the Placement Agent as indemnitor (the "Indemnitor") in writing, and the Indemnitor, upon request of such Indemnified Person shall retain counsel reasonably satisfactory to such Indemnified Person to represent such Indemnified Person and any others the Indemnitor may designate in such proceeding and shall pay the fees and expenses of such counsel related to such proceeding. In any such proceeding, any Indemnified Person unless (i) the Indemnitor and the Indemnified Person shall have mutually agreed to the contrary, (ii) the Indemnitor has failed within a reasonable time to retain counsel reasonably satisfactory to the Indemnified Person or (iii) the named parties in any such proceeding (including any impleaded parties) include the Indemnitor, on the one hand, and the Indemnified Person, on the other hand, and representation of all parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the Indemnitor shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons and that all such fees and expenses shall be reimbursed as they are incurred. Any such firm shall be designated in writing by the Placement Agent or the Company as the case may be. The Indemnitor shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there shall be a final judgment for the plaintiff, the Indemnitor agrees to indemnify any Indemnified Person from and against any loss or liability by reason of such settlement or judgment. The Indemnitor shall not, without the written consent of the Indemnified Person, effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Person is, or could have been a party and indemnity could have been sought hereunder by such Indemnified Person, unless such settlement includes an unconditional release of such Indemnified Person from all liability or claims that are the subject matter of such proceeding. (d) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in the foregoing paragraphs of this Section is applicable in accordance with its terms but for any reason is held to be unavailable from the Indemnitor, the Indemnitor, on the one hand, and the Indemnified Persons, on the other hand, will contribute to the total losses, claims, liabilities, expenses and damages (including any investigative, legal and other expenses reasonably incurred in connection with, any amount paid in settlement of any action, suit or proceeding or any claim asserted) to which any one or more of the Indemnified Persons may be subject in such proportion as shall be appropriate to reflect the relative benefits received by the Company, on the one hand, and the Placement Agent on the other. The relative benefits received by the Company, on the one hand, and the Placement Agent on the other, shall be deemed to be in the same proportion as the total net proceeds from the Offering (before deducting expenses) received by the Company bear to the total compensation which may be received by the Placement Agent pursuant to paragraph 5.(a) of this Agreement. If, but only if, the allocation provided by the foregoing sentence is not permitted by applicable law, the allocation of contribution shall be made in such proportion as is appropriate to reflect not only the relative benefits referred to in the foregoing sentence but also the relative fault of the Indemnitor, on the one hand, and the Indemnified Persons, on the other, with respect to the statements, actions or omissions which resulted in such loss, claim, liability, expense or damage, or action in respect thereof, as well as any other relevant equitable considerations with respect to the Offering. Such relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied or violations of laws or this Agreement committed by the Indemnitor on the one hand or the Indemnified Persons on the other hand, the intent of the parties and their relative knowledge, access to information an opportunity to correct or prevent such statement, action omission or violation. The Indemnitor and the Indemnified Persons agree that it would not be just and equitable if contributions pursuant to this Section were to be allocated by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by the Indemnitor as a result of the loss, claim, liability, expense or damage, or action in respect thereof, referred to above in this Section shall be deemed to include, for purpose of this Section 9, any legal or other expenses reasonably incurred by the Indemnified Person in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 9, the Placement Agent shall not be required to contribute any amount in excess of the compensation which may be received by it pursuant to paragraph 5.(a) of this Agreement and no person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Any party entitled to contribution, promptly after receipt of notice of commencement of any action against such party in respect of which a claim for contribution may be made hereunder, will notify any such party or parties from whom contribution may be sought, but the omission so to notify will not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have hereunder. No party will be liable for contribution with respect to any action or claim settled without its written consent (which consent will not be unreasonably withheld). 10. NOTICES. All notices hereunder shall be in writing and be ------- delivered at, transmitted via telecopier or mailed first class postage prepaid to the following addresses and shall be deemed received on delivery if delivered in person or via telecopier and two (2) days after the date of the mailing if mailed: To the Company: Hollis-Eden, Inc. 3807 N.E. 127th Circle Vancouver, Washington 98686 Attention: Richard Hollis President and Chief Executive Officer Copy to: Donna Key, Esq. A. Thomas Tenenbaum, Esq. Brenman Key & Bromberg, P.C. Mellon Financial Center 1775 Sherman Street, Suite 1001 Denver, Colorado 80203-4313 To the Placement Agent: Laidlaw Equities, Inc. 100 Wilshire Boulevard Suite 1620 Santa Monica, California 90401 Attention: Christopher A. Marlett, Managing Director Copy to: Aaron A. Grunfeld, Esq. Resch Polster Alpert & Berger L.L.P. 10390 Santa Monica Boulevard Fourth Floor Los Angeles, California 90025 11. TERMINATION. In addition to the termination dates which may ----------- be described in the Offering Documents: (a) The Placement Agent shall have the right to terminate this Agreement by giving notice as specified in Section 10 above: (i) If the Company shall have failed, refused or been unable to perform any of its material obligations; (ii) If any other material condition hereunder which is required to be fulfilled by the Company (including without limitation the provisions of paragraph 8.(d) above), is not fulfilled; or (iii) If there has occurred a material event adversely affecting the Company or the marketability of the Shares over which you have no control. (b) The Company shall have the right to terminate this Agreement by giving notice as specified in Section 10 above: (i) If the Placement Agent shall have failed, refused or been unable to perform any of its material obligations hereunder; and (ii) If any other material condition hereunder which is required to be fulfilled by the Placement Agent is not fulfilled. Either party may terminate this Agreement if at least 1,200,000 Shares have not been subscribed for by the close of business on the Offering Closing Date. In the event of termination by the Placement Agent pursuant to paragraph 11.(a) the Company will promptly reimburse you for all out-of-pocket expenses reasonably incurred in connection with the Offering including without limitation travel costs and fees, and disbursements of your counsel. Except for such expenses, and the indemnity and contribution agreements contained in Section 9 or as otherwise set forth in Section 12, no party hereto shall be under any liability to any other in respect of this Agreement. 12. SURVIVAL. The indemnity and contribution agreements, and the -------- representations, warranties and covenants contained in this Agreement shall remain operative and in full force and effect regardless of (i) any investigation made by any party hereto, (ii) acceptance of any of the Shares, the Placement Agent Warrants or the Warrant Shares, and payment therefor, or any termination of this Agreement, except that representations, warranties and covenants of the Company shall expire on the third anniversary of the date on which this Agreement terminates. 13. MISCELLANEOUS. This Agreement shall inure to the benefit of ------------- and be binding upon the Company and you and the respective heirs, executors, administrators, successors, and assigns of each such party. Except as set forth in Section 14 nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person (including any purchaser of a Share) any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. 14. GOVERNING LAW: LEGAL FEES. This Agreement shall be construed ------------------------- in accordance with the laws of the state of California without giving effect to choice of law or conflict of laws principles. In the event of any suit or action to enforce any provision of this Agreement the venue of any such action shall be in the appropriate state or federal court located in Los Angeles County and the prevailing party (deemed to mean the party who recovers a greater relief in the action on this Agreement) shall be awarded all costs and expenses incurred including without limitation all filing fees, reasonable attorneys' fees and deposition and court costs. 15. BOUND VOLUMES. The Company shall supply to the Placement ------------- Agent and its counsel at the Company's cost a total of five bound volumes each containing a full and comprehensive set of documents relating to the Offering. The Company shall deliver these bound volumes within a reasonable period after the Closing Date, not to exceed three months thereafter. 16. HEADINGS AND COUNTERPARTS. Titles and headings to sections ------------------------- herein are inserted for the convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. This Agreement may be executed in one or more counterparts and all so executed shall each be deemed an original but all such counterparts shall together constitute one and the same instrument. If the foregoing correctly sets forth the agreement between you and the Company, please indicate your acceptance thereof in the space provided for that purpose. Accepted by: HOLLIS-EDEN, INC. LAIDLAW EQUITIES, INC. A Delaware Corporation By: /s/ Richard B. Hollis By: ------------------------------ --------------------------- Richard B. Hollis John Thommasini President and Chief President Executive Officer By: By: /s/ Christopher A. Marlett ----------------------------- ------------------------------ Patrick T. Prendergast, Ph.D. Christopher A. Marlett Managing Director EX-23 14 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 a part of this Registration Statement of our report dated February 15, 1996, for the periods stated herein, 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 December 19, 1996 EX-23 15 Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this 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 December 18, 1996 -----END PRIVACY-ENHANCED MESSAGE-----