<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 2, 1996
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
ISONICS CORPORATION
(Name of Small Business Issuer in Its Charter)
CALIFORNIA 2819 77-0338561
(STATE OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
---------------
4010 MOORPARK AVENUE, SUITE 119
SAN JOSE, CALIFORNIA 95117
(408) 260-0155
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL
PLACE OF BUSINESS)
---------------
JAMES E. ALEXANDER
CHIEF EXECUTIVE OFFICER
ISONICS CORPORATION
4010 MOORPARK AVENUE, SUITE 119
SAN JOSE, CALIFORNIA 95117
(408) 260-0155
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
---------------
COPIES TO:
C. KEVIN KELSO, ESQ. DANIEL I. DEWOLF, ESQ.
BRUCE F. MACKLER, ESQ. WILLIAM N. HADDAD, ESQ.
MARK PORTER, ESQ. CAMHY, KARLINSKY & STEIN
FENWICK & WEST LLP 1740 BROADWAY, 16TH FLOOR
TWO PALO ALTO SQUARE NEW YORK, NEW YORK 10019
PALO ALTO, CALIFORNIA (212) 977-6600
94306
(415) 494-0600
---------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock........... 977,500 $7.90 $7,722,250 $2,663
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Redeemable Warrants to
purchase Common
Stock(3)(5)........... 977,500 $0.10 $97,750 $34
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Common Stock issuable
upon exercise of
Redeemable Warrants... 977,500 $11.85 11,583,375 $3,995
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Representatives'
Warrants.............. 85,000 $.001 $85 --
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Common Stock issuable
upon exercise of
Representatives'
Warrants(5)........... 85,000 $9.48 $805,800 $278
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Redeemable Warrants
issuable upon exercise
of Representatives'
Warrants.............. 85,000 $0.12 $10,200 $4
- -------------------------------------------------------------------------------------
Common Stock issuable
upon exercise of
Redeemable Warrants
issuable upon exercise
of Representatives'
Warrants(5)........... 85,000 $11.85 $1,007,250 $348
- -------------------------------------------------------------------------------------
Total.................. 3,272,500 $21,226,710 $7,322
</TABLE>
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(1) Estimated solely for purpose of determining the registration fee pursuant
to Rule 457 under the Securities Act.
(2) Includes 127,500 shares of Common Stock issuable upon exercise of the
Representatives' Over-Allotment Option.
(3) Includes 127,500 Redeemable Warrants issuable upon exercise of the
Representatives' Over-Allotment Option
(4) No registration fee required pursuant to Rule 457 under the Securities
Act.
(5) Pursuant to rule 416 of the Securities Act, there are also being
registered hereby such additional indeterminate number of Shares of Common
Stock as may become issuable pursuant to the anti-dilution provisions of
the Redeemable Warrants and the Representatives' Warrants.
---------------
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 COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE 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 OCTOBER 2, 1996
850,000 SHARES AND 850,000 WARRANTS
[LOGO OF ISONICS CORPORATION]
This Prospectus relates to the offering of 850,000 shares (the "Shares") of
common stock, no par value (the "Common Stock"), and 850,000 warrants to
purchase one share of Common Stock (the "Warrants") by Isonics Corporation, a
California corporation ("Isonics" or the "Company"). The Shares and the
Warrants are sometimes referred to collectively as the "Securities." All of the
Securities offered hereby are being sold by the Company. Until the completion
of this offering, the Shares and Warrants may only be purchased together on the
basis of one Share and one Warrant (sometimes referred to as a "Unit"). Each
Warrant initially entitles the holder thereof to purchase one share of Common
Stock at a price of $ per share, which is 150% of the initial public
offering price per Share offered hereby, subject to adjustment under certain
circumstances. The Warrants are exercisable at any time, unless previously
redeemed, from the date of this Prospectus through the fifth anniversary of the
date of this Prospectus, subject to certain conditions. The Company may redeem
the Warrants, in whole or in part, at any time upon at least 30 days prior
written notice to the registered holders thereof, at a price of $0.05 per
Warrant, if the closing price of the Common Stock as reported on the Nasdaq
SmallCap Market equals or exceeds 200% of the initial public offering price per
Share for at least 20 consecutive trading days within a period of 30
consecutive trading days ending immediately before the notice of redemption.
Prior to this offering, there has been no public market for the Common Stock
or Warrants, and there is no assurance that such a market will develop or be
maintained following the offering. It is currently estimated that the initial
public offering price will be between $5.90 and $7.90 per Share and $0.10 per
Warrant. See "Underwriting" for the factors considered in determining the pubic
offering price. The Company has applied for listing of the Common Stock and
Warrants on the Nasdaq SmallCap Market ("Nasdaq SCM") under the symbols "ISNX"
and "ISNXW," respectively. It is anticipated that the Shares and Warrants will
trade separately immediately after this offering.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK, IMMEDIATE AND SUBSTANTIAL DILUTION AND RESTRICTIONS ON SECONDARY TRADING
IN SOME STATES FOR A PERIOD OF TIME AFTER THIS OFFERING. SEE "RISK FACTORS"
COMMENCING ON PAGE 5 AND "DILUTION" ON PAGE 15.
----------
THESE SECURITIES 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 COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share................................. $ $ $
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Per Warrant............................... $ $ $
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Total (3)................................. $ $ $
</TABLE>
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(1) Does not include additional compensation payable to the representatives
(the "Representatives") of the several Underwriters (the "Underwriters"),
in the form of a non-accountable expense allowance. In addition, see
"Underwriting" for information relating to indemnification and contribution
arrangements with the Underwriters and other compensation payable to the
Representatives.
(2) Before deducting estimated expenses of the offering payable by the Company
of $500,000, excluding the non-accountable expense allowance payable to the
Representatives.
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to an additional 127,500 Shares and 127,500 Warrants upon the same terms
and conditions as set forth above, solely to cover over-allotments. To the
extent that the option is exercised, the Underwriter will offer the
additional Shares and Warrants at the Price to Public shown above. If such
over-allotment option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
The Securities are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters, and subject to
approval of certain legal matters by their counsel and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
this offering and to reject any order in whole or in part. It is expected that
delivery of the Securities will be made at the clearing offices of Pryor,
McClendon, Counts & Co., Inc., on or about , 1996.
PRYOR, MCCLENDON, COUNTS & CO., INC. NATIONAL SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
[PICTURES]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OR WARRANTS OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP
MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. The Securities offered hereby involve a high degree of risk.
See "Risk Factors." Except where otherwise indicated, all share and per share
data in this Prospectus (including data with respect to options and warrants to
purchase shares) have been adjusted to reflect (i) a 1-for-6.89 reverse split
of the outstanding Common Stock, and (ii) the conversion into Common Stock of
all outstanding shares of preferred stock of the Company, which will occur
before the closing of this offering. See "Description of Capital Stock." In
addition, unless otherwise indicated, all information in this Prospectus
assumes that the Underwriters' over-allotment option will not be exercised.
THE COMPANY
Isonics is an advanced materials and technology company which develops and
commercializes products based on enriched stable isotopes and high purity
materials. Stable isotopes can be thought of as ultra-ultra pure materials.
This high degree of purification accomplished on the sub-atomic level provides
enhanced performance properties compared to normal purity materials. Stable
isotopes have commercial uses in several areas, including energy; medical,
research, diagnostics and drug development; product tagging and stewardship;
semiconductors; and optical materials. Isonics has successfully developed and
commercialized two stable isotope products and intends to promote the emergence
and growth of new stable isotope applications.
The Company's principal product to date is isotopically depleted zinc ("DZ").
DZ, in different chemical forms, is used to prevent corrosion in nuclear power
plants. Corrosion is a cause of high radiation fields in such plants which can
result in radiation exposure to workers. DZ also reduces environmental cracking
in certain kinds of nuclear reactors which, if not controlled, can require
extremely costly repairs or can result in premature shutdown and de-
commissioning of the facility. The Company believes that it provides
substantially all of the DZ used in nuclear power plants worldwide.
The application of DZ was developed by General Electric Company ("GE"), where
the founders of the Company were previously employed. Before May 1996, all
sales of DZ by the Company were made to GE, which in turn resold the product to
end users. In addition to sales to GE, in May 1996 Isonics commenced direct
sales to end users, and for the three months ended July 31, 1996, approximately
10% of net revenues were from sales made directly to end users.
New applications for stable isotopes are continually being developed by the
Company and by third parties. The Company believes that many new applications
have the potential to create new markets. One opportunity is to supply stable
isotope labeled compounds for the diagnostic breath test ("DBT") market. DBTs
provide early diagnosis of conditions that could otherwise lead to expensive
procedures such as endoscopies and biopsies. DBTs under development by third
parties which utilize stable isotopes in their application include tests to
diagnose peptic ulcers, fat malabsorption and liver function. A urea DBT
relating to peptic ulcers has recently been approved by the U.S. Food and Drug
Administration (the "FDA"), and the Company believes that other companies have
applied to the FDA or comparable agencies in foreign countries for approval of
these tests, which must be obtained before any products can be sold. Certain
DBTs are currently marketed in certain European countries.
The Company holds an option, subject to satisfaction of certain conditions,
to acquire an exclusive license to two Yale University patents which cover
semiconductor devices made of isotopically pure silicon, germanium, gallium
arsenide and most isotopically pure compound semiconductors. The patents claim
that isotopic purity provides improved device speed and improved thermal
conductivity, two properties which are of great importance to the semiconductor
industry. According to the Semiconductor Industry Association, sales in 1995 of
silicon wafers and other semiconductor substrates were approximately $6
billion. The Company is collaborating with Yale to evaluate these isotopically
engineered semiconductor applications. The Company believes that if evaluations
demonstrate the commercial feasibility of one or more products, demand could
emerge in certain segments of the semiconductor market. There can be no
assurance, however, that these evaluations will demonstrate the commercial
feasibility of any products, that the Company will be able to commercialize any
such products or that a market will emerge for any such products.
The Company was formed in March 1992 and incorporated in California in March
1993 under the name A&R Materials, Inc. In September 1996, the Company changed
its name to Isonics Corporation. The Company's principal executive offices are
located at 4010 Moorpark Avenue, Suite 119, San Jose, California, 95117. Its
telephone number is (408) 260-0155.
3
<PAGE>
RISK FACTORS
The Securities offered hereby involve a high degree of risk. This Prospectus
contains forward-looking statements, including those discussed under
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Use of Proceeds." These forward-looking statements
involve a number of risks and uncertainties, including, but not limited to,
those discussed under "Risk Factors." The Company's actual results may differ
significantly from the results discussed in the forward-looking statements. See
"Risk Factors."
THE OFFERING
<TABLE>
<C> <S>
Securities offered............ 850,000 shares of Common Stock and 850,000
Warrants to purchase one share of Common Stock
per Warrant. The Common Stock and Warrants are
being offered hereby as Units but will be
separately tradeable immediately following the
offering. See "Description of Capital Stock."
Common Stock to be outstanding
after this offering.......... 2,765,576 Shares(1)
Use of proceeds............... For repayment of debt, research and
development, capital expenditures and other
general corporate purposes.
Nasdaq SCM Symbols............ Common Stock--ISNX
Warrants--ISNXW
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
APRIL 30, JULY 31,
------------- -------------
1995 1996 1995 1996
----- ------ ------ ------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues...................................... $ 738 $5,567 $1,190 $1,564
Operating income (loss)........................... (343) 522 138 85
Net income (loss)................................. (143) 281 83 43
Net income (loss) per share(2).................... (.06) .12 .04 .02
Shares used in computing per share information(2). 2,201 2,343 2,342 2,344
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1996
----------------------
ACTUAL AS ADJUSTED(3)
------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 147 $3,563
Working capital (deficiency)............................ (134) 3,232
Total assets............................................ 2,138 5,554
Long-term debt, less current portion.................... 177 177
Total shareholders' equity.............................. 213 4,754
</TABLE>
- -------
(1) Based on shares outstanding as of October 1, 1996. Includes 100,780 shares
of Common Stock issuable upon conversion of outstanding preferred stock,
which will occur upon the closing of this offering. Does not include
272,134 shares of Common Stock issuable at a weighted average exercise
price of $1.56 per share upon exercise of options granted under the
Company's employee benefit plan as of October 1, 1996, 275,000 additional
shares of Common Stock reserved for future grants under the Company's
employee benefit plans, and 390,943 shares of Common Stock issuable upon
the exercise of outstanding warrants at a weighted average exercise price
of $1.73 per share, and options to purchase 40,000 shares of Common Stock
at an exercise price equal to 110% of the initial public offering price of
the Shares. See "Capitalization--Recent Financing
Transactions,""Management--Employment and Consulting Agreements,"
"Management--Employee Benefit Plans," "Management--Directors Compensation"
and notes 8 and 11 of Notes to the Company's financial statements appearing
at the end of this Prospectus (the "Financial Statements").
(2) For an explanation of the determination of the number of shares used in per
share calculations, see note 1 of Notes to the Financial Statements.
(3) Adjusted to reflect the repayment of the Placement Notes with the proceeds
from this offering, issuance of warrants issued in the Placement to acquire
390,943 shares of Common Stock, the sale of 850,000 Shares and 850,000
Warrants by the Company hereby at an assumed initial public offering price
of $6.90 per Share and $0.10 per Warrant and the issuance of
Representatives' Warrants to purchase 170,000 shares of Common Stock at a
weighted average exercise price of $9.38, and after deducting the estimated
underwriting discounts and commissions and offering expenses and the
application of the net proceeds therefrom. See "Capitalization" and "Use of
Proceeds."
4
<PAGE>
RISK FACTORS
An investment in the Securities offered hereby involves a high degree of
risk. In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
Securities offered hereby. This Prospectus contains forward-looking statements
that involve risks and uncertainties. The Company's actual results could
differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed below and elsewhere in the Prospectus.
Relationship With Certain Suppliers and Raw Materials. The Company depends
upon a single processor, located in Russia, for one process involved in the
manufacturing of its products, and upon a single supplier or a limited number
of suppliers and processors for certain other manufacturing processes.
Although the Company does have written agreements with certain of its
suppliers and processors; the Company does not have any written agreements
with other suppliers and processors. Although the Company seeks to reduce its
dependence on its sole and limited suppliers, disruption or termination of any
of the sources could occur, and such disruptions could have at least a
temporary material adverse effect on the Company's business, financial
condition and results of operations. Moreover, a prolonged inability to obtain
alternative sources for processing could materially adversely affect the
Company's relations with its customers. See "Risk Factors--Expansion of the
Company's Product Offerings" and "Business--Manufacturing and Supply."
Operations in Russia. The processing of the Company's products is dependent
upon an isotope enrichment plant, located in Russia. The Company recently
signed an agreement under which the processor has agreed to exclusively supply
the Company with zinc, cadmium, silicon, and carbon isotopes over the next
three years. Under the agreement, the Company negotiates with the plant
annually regarding the price and certain other terms of the products to be
supplied in the upcoming year, and the next such negotiation is expected to
occur in November 1996. Moreover, such agreement provides that disputes
arising thereunder are to be resolved by arbitration conducted in Europe under
international commercial arbitration rules, and, accordingly, the
enforceability of the agreement might be subject to a greater degree of
uncertainty than if the agreement was with a U.S. company and disputes were
resolved in the United States. Operations in Russia entail certain risks. In
recent years, the former republics of the Soviet Union have experienced
political, social and economic change as constituent republics sought
independence from the former central government in Moscow, and certain of the
republics including Russia have attempted to transition from a centrally
controlled economy toward market-based economies. These changes have involved,
in certain cases, armed conflict in certain republics. There can be no
assurance that political or economic instability in these republics will not
continue or worsen. The supply of stable isotopes could be directly affected
by political, economic and military conditions in Russia. Accordingly, the
operations of the Company could be materially adversely affected if
hostilities in Russia should occur, if trade between Russia and the United
States were interrupted or curtailed, if political conditions in Russia
disrupt transportation or processing concerning the Company's goods, if laws
or governmental policies concerning foreign ownership or business operations
in Russia change substantially, or if tariffs are introduced or freight rates
change significantly. There can also be no assurance that the Company's
relationship with its processor in Russia will be successfully maintained,
even apart from these political, economic or military factors. Disruption or
termination of the Company's supply sources could have a material adverse
effect on the Company's business, financial conditions and results of
operation. The Company does not maintain political risk insurance.
Additionally, Russian courts lack experience in commercial dispute resolution,
and many of the procedural remedies for enforcement found in western
jurisdictions are not available in Russia. Difficulties may be encountered in
enforcing judgments of foreign courts or of arbitrators, in the case of the
Company's agreements with suppliers or processors, or in otherwise protecting
the Company's rights with its Russian suppliers and transporters. There can be
no assurance that this difficulty in enforcing the rights will not have a
material adverse effect on the Company. See "Business--Manufacturing and
Supply."
Customer Concentration. Historically, substantially all of the Company's net
revenues in any particular period have been attributable to a limited number
of customers. Net revenues from three customers accounted
5
<PAGE>
for approximately 66%, 20% and 10%, respectively, of the Company's net
revenues for the three months ended July 31, 1996. In fiscal 1996 two
customers accounted for approximately 88% and 11%, respectively, of net
revenues. In fiscal 1995 three customers accounted for approximately 59%, 26%
and 11% of net revenues. The Company expects that if it continues to increase
sales of depleted zinc products to end users and if it develops and sells
products in the medical and research and electronic materials industries,
concentration of net revenues from a limited number of customers will be
reduced. None of the Company's customers have entered into long-term
agreements to purchase the Company's products. If completed sales orders are
not replaced on a timely basis by new orders from customers, the Company's net
revenues could be materially and adversely affected. The Company's net
revenues also could be adversely affected by a number of factors including the
loss of a significant customer, reductions in orders from any significant
customer compared to historical buying levels or otherwise, or the
cancellation of a significant order from a customer. Any of these factors,
many of which are outside the Company's control, could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Limited Operating History; History of Operating Losses. The Company was
incorporated in March 1993 and has had only a limited operating history upon
which evaluation of its prospects can be made. The Company had net losses of
$171,000 and $143,000, respectively, for the years ended April 30, 1994 and
1995, and had net income of $281,000 and $43,000 for the fiscal year ended
April 30, 1996 and the three months ended July 31, 1996, respectively. At July
31, 1996, the Company had negative working capital of $134,000 and retained
earnings of $10,000. In addition, the Company expects that it will incur a net
loss for the fiscal year ended July 31, 1997, largely as a result of expected
significant increases in expenses associated with anticipated growth in
research and development, marketing and sales efforts and capital
expenditures. The Company's limited operating history makes the prediction of
future operating results difficult. The Company does not believe that prior
growth rates are necessarily indicative of future operating results. Future
operating results will depend on many factors, including demand for the
Company's products, the level of product and price competition, the ability of
the Company to develop and market new products, the Company's ability to
control costs, general economic conditions and other factors. There can be no
assurance that the Company will achieve or sustain profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Number of DZ Customers. Patents have been granted to GE with respect to a
method for inhibiting deposition of radioactive cobalt in a water-cooled
nuclear reactor through the use of DZ. The nuclear power facilities that have
purchased DZ to date directly from the Company have received correspondence
from GE indicating that such customers may practice the method of utilizing DZ
in such facilities and may purchase DZ from entities other than GE, such as
the Company. In addition, certain nuclear power facilities are located in
countries where GE does not have similar patents. Similarly, certain third
party entities other than nuclear power plants, such as certain entities that
construct nuclear power facilities or equipment, have licenses from GE which
the Company believes may allow them to purchase DZ from the Company. Other
facilities or third party entities may not be granted such licenses, and the
Company's ability to sell DZ to such customers may be limited by applicable
patent law and/or such customers' agreements with GE. GE may in the future
grant licenses to additional end users entitling them to purchase DZ from
third parties such as the Company, and GE may continue to purchase DZ directly
from the Company, although there can be no assurance that this will be the
case. Nevertheless, it is possible that the Company's sales of DZ may be
limited to only those entities described above that can purchase DZ from the
Company without infringing on GE's intellectual property rights.
Future Additional Capital Requirements. The Company's capital requirements
will depend on numerous factors, including the level of future capital
expenditures, the level of resources devoted to research and development and
marketing of its products, market acceptance and demand for its products, and
other factors. The Company believes the net proceeds of this offering,
together with cash on hand and cash expected to be generated from operations,
will provide adequate funding for the Company's anticipated operations for at
least the next twelve months. Nevertheless, the Company may be required to
raise additional funds through public or private debt or equity financings,
collaborative relationships, bank facilities or other arrangements. There can
be no assurance that the Company will not require additional funding sooner
than expected or that such additional
6
<PAGE>
funding, if needed, will be available on terms attractive to the Company, if
at all. Any additional equity financing may be dilutive to shareholders, and
debt financing, if available, may involve restrictive covenants. See "--
Expansion of the Company's Product Offerings," "Use of Proceeds," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Competition. The markets for the Company's products are highly competitive,
and the Company expects that competition will continue and increase as markets
grow and new opportunities are realized. Some of the Company's current
competitors, and many of the Company's potential competitors, have
significantly greater financial, marketing, product development, testing and
other resources than the Company. As a result, they may have the capacity to
respond more quickly to changes in customer requirements or to devote greater
resources to the development, testing, marketing and sale of their products
than the Company. Some of the Company's competitors may form partnerships or
alliances with larger companies, with the resulting entity possessing more
market strength than the Company. New competitors will likely emerge, and some
new competitors may gain significant market share. There can be no assurance
that the Company will be able to compete successfully against current and
future competitors, or that competitive pressures will not have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business--Competition." Increased competition could result in
price reductions, reduced transaction size, fewer customer orders and reduced
gross margins, any of which could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company's competition varies greatly depending on which product or
industry is considered. At present, the Company believes it supplies
substantially all of the DZ used in nuclear power plants worldwide, but
believes that other entities or persons may begin producing DZ. Several such
possible producers have adequate technical and financial resources to become
viable competitors of the Company in the near future. In particular, GE, which
to date has been the Company's largest customer, has indicated that it may
seek to sell DZ to end users independently of the Company or may seek
alternative sources of DZ other than the Company. The Company has several
larger and numerous smaller competitors in the area of stable isotope labeled
compounds and supplying materials for diagnostic breath test products. Due to
the early stage of the electronic and optical materials opportunities, the
Company has not identified material competitors in these markets. However, if
viable commercial markets emerge for such products, the Company anticipates
that substantial competition will emerge.
Expansion of the Company's Product Offerings. The Company's future success
will depend in part on its ability to enhance its current product offerings on
a timely basis. The expansion of the Company into new products and processes
will require significant future capital commitments. Substantial development
work must be undertaken before such products are ready for commercial
introduction. There can be no assurance that the Company will successfully
develop new products or that it will be able to improve or expand its initial
products to keep pace with the demands of the marketplace. Moreover, there can
be no assurance that commercial markets will emerge for the potential products
that the Company is developing and considering developing. In addition, other
products or technologies currently exist, and will be developed in the future,
that compete directly with the Company's current products and products that
the Company may develop in the future.
The Company has entered into an agreement with Yale University through which
the Company has the right, subject to satisfaction of certain conditions, to
acquire an exclusive license for two U.S. patents entitled Isotopically
Enriched Semiconductor Devices. The Company's right to exercise its option is
dependent upon the attainment of certain milestones, which the Company
believes it will achieve before expiration of the option term in March 1997.
There can be no assurance, however, that the Company will satisfy the
conditions to allow it to exercise the option or will enter into a license
agreement with Yale University. If the Company did not satisfy such conditions
before March 1997 and Yale did not agree to extend the option period, the
Company could lose its ability to acquire rights to the technology underlying
the potential isotopically pure semiconductor products described in the
Prospectus. See "Business--Products--Isotopically Pure Semiconductors."
Dependence on Key Personnel. The Company's future success will depend in
significant part upon the continued service of its key technical, sales and
senior management personnel, including James E. Alexander,
7
<PAGE>
the Company's President and Chief Executive Officer, and Boris Rubizhevsky,
the Company's Senior Vice President, Isotope Production and Supply. The
Company maintains $1 million of key man life insurance on the lives of Messrs.
Alexander and Rubizhevsky. The loss of the services of one or more of the
Company's executive officers or other key technical personnel could have a
material adverse effect on the Company's business, financial condition or
results of operations. In addition, the Company's future operating results
depend, in part, upon its ability to attract and retain qualified personnel
for its operations. The failure to attract or retain such persons could
materially adversely affect the Company's business, financial condition and
results of operations.
Reliance on Strategic Collaborations and Relationships. The Company's
strategy for the development, processing and marketing of certain of its
products includes entering into various collaborations with corporate
partners, processors, suppliers and others. The Company has developed
strategic relationships, including cooperative research and development
projects, with certain third parties. There can be no assurance that existing
collaborative arrangements will continue, or that the Company will be able to
negotiate other successful collaborative arrangements in the future. The loss
of any of these relationships could adversely affect the Company's business,
financial condition and results of operations. If the Company is not able to
maintain or establish such arrangements, it would likely face increased
capital requirements to undertake such activities at its own expense, and
could also encounter significant delays in development, processing, marketing
or sale of products into certain markets. See "Business--Manufacturing and
Supply."
Third Party Reimbursement of Healthcare Costs. Some of the Company's
potential products, such as DBT products, are expected to compete in the
medical diagnostics and healthcare markets. Demand for such products, and the
prices at which such products can be sold, may depend in large part upon the
extent to which purchasers will be reimbursed by governmental agencies and
insurance companies for use of such products. Future federal or state
legislation could result in a substantial restructuring of the healthcare
delivery system. While the Company cannot predict whether any legislative or
regulatory proposals will be adopted or the effect such proposals may have on
its business, uncertainty regarding such proposals, as well as the adoption of
such proposals, could have a material adverse effect on the Company's ability
to develop and sell products that compete in these markets. Such reforms, if
adopted, and ongoing changes in the healthcare industry, could adversely
affect the pricing of therapeutic or diagnostic products in the United States
or the amount of reimbursement available from governmental agencies or third
party insurers, and consequently could have a material adverse effect on the
Company. In both domestic and foreign markets, sales of such products, if any,
will depend in part on the availability of reimbursement from third party
payers, such as government and private insurance plans and other
organizations.
Product and Other Liability; Minimal Insurance Coverage. The Company's
business exposes it to potentially substantial product, environmental,
occupational and other liability risks which are inherent in research and
development, preclinical study, clinical trials, manufacturing, marketing,
distribution and use, of the Company's current and potential products,
including, but not limited to, products for pharmaceutical, medical device and
nuclear energy markets. The Company currently does not have product liability
insurance, but may seek such coverage as it deems prudent in light of future
operations. There can be no assurance that insurance coverage will be
available at an acceptable cost, if at all, or that a product liability or
other claim would not materially and adversely affect the business, financial
condition and results of operations of the Company even if such insurance was
obtained.
Management of Growth. The Company has experienced a period of rapid growth
and expansion, which has placed and continues to place, a significant strain
on its resources. To accommodate this growth, the Company will be required to
implement a variety of new and upgraded operational and financial systems,
procedures and controls, including the improvement of its other internal
management systems. There can be no assurance that such efforts can be
accomplished successfully. In addition, this growth, as well as the Company's
market diversification and product development activities, will necessitate an
increase in the number of the Company's employees. During fiscal 1997, the
Company added a General Manager of Diagnostics and a Chief Financial Officer
as well as other support personnel. If the Company sustains its growth in the
future, the
8
<PAGE>
Company will need to continue to implement and improve its operational and
management information systems and to hire, train, motivate and manage its
employees. The Company's ability to successfully assimilate new operations and
new personnel involved with any future expansion will have a material effect
on the Company's future business, financial condition and results of
operations. There can be no assurance that the Company will be able to manage
these changes successfully or that the Company's systems, procedures and
controls will be adequate to support the Company's operations. Any failure to
improve the Company's operational and management systems or to hire, train,
motivate or manage employees could have a material adverse effect on the
Company's business, financial condition and results of operations.
Factors Affecting Operating Results; Fluctuations in Quarterly Results. The
Company's operating results could be materially adversely affected by a number
of factors, including failure of its suppliers to process a sufficient volume
of products in a timely manner; introduction of new products by competitors;
adequacy of the Company's suppliers manufacturing capacity; changes in pricing
policies of the Company, its customers, competitors or suppliers; economic
conditions in the markets that the Company serves; the need to increase
expenditures for research and development; failure to introduce new or
improved products on a timely basis; and the rescheduling or cancellation of
orders by its customers. The Company's quarterly operating results have varied
in the past and may in the future vary significantly, depending on factors
such as the size and timing of customer orders, pricing and other competitive
conditions and the timing of new product announcements and releases by the
Company and its competitors. The Company operates with little order backlog.
Moreover, a significant portion of the Company's total revenues have been, and
the Company believes will continue to be, derived from a limited number of
orders in any particular quarter, and the timing of such orders and their
fulfillment has caused, and is likely to continue to cause, material
fluctuations in the Company's operating results, particularly on a quarterly
basis. As a result, a lost or delayed sale could have a significant impact on
the Company's operating results for a particular period. It is likely that in
some future quarter, the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Common Stock and Warrants would likely be materially adversely
affected. In addition, as a result of repayment of certain Placement Notes
issued in a recent private placement transaction, the Company is likely to
record an extraordinary charge to operations for the quarter in which the
offering is completed, which charge is likely to have a material effect on the
Company's reported earnings for that quarter. See "Capitalization--Recent
Financing Transactions."
No Prior Market; Stock Price Volatility. Prior to this offering, there has
been no public market for the Company's securities. Consequently, the initial
public offering price will be determined by negotiations among the Company and
the Representatives of the Underwriters. There can be no assurance that an
active public market for the Common Stock and Warrants will develop or be
sustained after the offering or that the market price of the Common Stock and
Warrants will not decline below the initial public offering price. The trading
price of the Company's securities could be subject to wide fluctuations in
response to quarter to quarter variations in operating results, announcements
of technological innovations or new products by the Company or its
competitors, changes in earnings estimates by analysts, or other events or
factors. In addition, the stock market has experienced wide price and volume
fluctuations, which have at times been unrelated to the operating performance
of the companies whose securities are traded. These broad market fluctuations
may adversely affect the market price of the Common Stock and Warrants.
Representatives' Warrants. At the consummation of this offering, the Company
will sell to the Representatives for nominal consideration the
Representatives' Warrants to purchase up to 85,000 shares of Common Stock and
85,000 Warrants, representing 10% of the Shares and 10% of the Warrants,
respectively, offered hereby. The Representatives' Warrants will be
exercisable for a period of five years after the date of this Prospectus. Each
Representatives' Warrant will entitle the holder to purchase one share of
Common Stock at a price of $ per share, which is 120% of the initial public
offering price of the Shares (the initial public offering price of the Shares
referred to as the "IPO Price Per Share"), and, upon payment of $ , which is
120% of the initial public offering price of the Warrants, to acquire one
Warrant at an exercise price equal to 150% of the IPO Price Per Share. As long
as the Representatives' Warrants or other outstanding warrants remain
9
<PAGE>
unexercised, the Company's ability to obtain additional capital might be
adversely affected. Moreover, the Representatives and other holders of
outstanding warrants may be expected to exercise such warrants at a time when
the Company would, in all likelihood, be able to obtain needed capital by a
new offering of its securities on terms more favorable than those provided by
the warrants. Holders of the Representatives' Warrants and holders of other
warrants have certain registration rights with respect to shares of Common
Stock underlying those warrants.
Protection of Intellectual Property. The Company does not currently hold any
patents, and has not filed any patent applications, regarding DZ or its other
actual or potential products. The Company relies primarily on a combination of
trade secrets, confidentiality procedures and contractual provisions to
protect its technology. Despite the Company's efforts, unauthorized parties
may attempt to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's technology and
products is difficult. In addition, the laws of many countries do not protect
the Company's information, technology and intellectual property that it
regards as proprietary to as great an extent as do the laws of the United
States. There can be no assurance that the Company's protective measures will
be adequate or that the Company's competitors will not independently develop
similar information, technology or intellectual property.
To date, the Company has not been notified of any claim that the Company's
products infringe the proprietary rights of third parties, but there can be no
assurance that third parties will not claim infringement by the Company with
respect to current or future products. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable to the Company or at all, which could have a material adverse
effect upon the Company's business, financial condition or results of
operations. See "Business--Patents and Proprietary Rights."
Risks Associated with International Sales. The Company may expand its sales
and marketing activities outside of the United States, which will require
management attention and financial resources. There can be no assurance that
such efforts will be successful. International operations are subject to a
number of risks, including longer receivable collection periods and greater
difficulty in accounts receivable collections, unexpected changes in
regulatory requirements, dependence on independent resellers, risks of foreign
currency fluctuations relative to the U.S. dollar, import and export
restrictions and tariffs, difficulties and costs of staffing and managing
foreign operations, potentially adverse tax consequences, political
instability, the burdens of complying with multiple, potential conflicting
laws and the impact of business cycles and economic instability outside the
United States.
Government Regulation. The Company's operations are subject to extensive
government regulations pertaining to product manufacture, marketing and
distribution, and environmental, worker safety, export control and other
matters. Certain of the Company's technology and products, especially those
having nuclear energy or military applications, are subject to substantial
controls, including requirements to obtain governmental approvals and licenses
on their use, distribution, dissemination and export. Furthermore, the
diagnostic and other medical products that the Company may develop in the
future are subject to stringent regulation by the FDA and its foreign
counterparts, and within the United States by certain state agencies.
Regulations by the FDA and its counterparts impose significant restrictions on
the development, testing, manufacture, marketing, distribution and export of
such products, including in most cases the need for prior approval from such
government agencies to manufacture, test and distribute such products.
Regulatory approvals for commercial distribution of medical and diagnostic
products generally require substantial preclinical and human clinical testing
to demonstrate their safety and effectiveness. There can be no assurance that
clinical data from such studies will demonstrate the safety or efficacy of any
product that the Company may in the future develop or of products utilizing
components that the Company may desire to supply, nor could there be any
assurance that the FDA or its foreign counterparts will approve the commercial
distribution of any such products in a timely manner, if at all. Likewise, to
the extent that other foreign or domestic government approvals or permits are
required for the manufacture, export, import, distribution and marketing of
the Company's products and operations, there can be no assurance that the
Company will be able to obtain or maintain such approvals or permits or meet
applicable requirements or standards, or that such approvals or permits will
not contain restrictions or limitations that materially affect the
10
<PAGE>
sale and distribution of the Company's products. The Company's failure to
obtain such approvals in a timely manner, or its failure to comply with
applicable foreign or domestic laws, regulations or policies, including those
applicable to its operations and products, or changes in such laws, regulations
or policies, may have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Government
Regulation."
Control by Existing Shareholders. Upon completion of this offering, the
directors, executive officers and principal shareholders of the Company and
their affiliates will, in the aggregate, assuming the exercise in full of all
options and warrants then outstanding, beneficially own approximately 45.5% of
the Company's outstanding Common Stock (approximately 43.0% if the
Underwriters' over-allotment option is exercised in full). As a result, these
shareholders, acting together, will possess significant influence as
shareholders of the Company, including concerning election of the Company's
Board of Directors and the approval of significant corporate transactions. Such
control could delay, defer or prevent a change in control of the Company,
impede a merger, consolidation, takeover or other business combination
involving the Company, or discourage a potential acquirer from making a tender
offer or otherwise attempting to obtain control of the Company. See
"Management" and "Principal Shareholders."
Effect of Certain Charter Provisions. The Company's Board of Directors has
the authority to issue up to 10,000,000 shares of Preferred Stock and to
determine the rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
shareholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock could
adversely affect the voting power of holders of Common Stock and the likelihood
that such holders will receive dividend payments and payments upon liquidation.
Additionally, issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. The Company has no current
plans to issue shares of Preferred Stock.
Limits on Secondary Trading; Possible Illiquidity of Trading Market. The
Company has applied to have the Common Stock and Warrants listed on the Nasdaq
SmallCap Market, which may be a significantly less liquid market than the
Nasdaq National Market. Moreover, if the Company should be unable to maintain
the standards for continued quotation on the Nasdaq SmallCap Market, the Common
Stock and Warrants could be subject to removal from the Nasdaq SmallCap Market.
Trading, if any, in the Common Stock and Warrants would therefore be conducted
in the over-the-counter market on an electronic bulletin board established for
securities that do not meet the Nasdaq SmallCap Market listing requirements,
commonly referred to as the "pink sheets." As a result, an investor would find
it more difficult to dispose of, or to obtain accurate quotations as to the
price of, the Common Stock or Warrants. In addition, depending on several
factors including the future market price of the Common Stock and Warrants, the
Common Stock and Warrants could become subject to the so-called "penny stock"
rules that impose additional sales practices and market making requirements on
broker-dealers who sell and/or make a market in such securities, which could
affect the ability or willingness of broker-dealers to sell or make a market in
the Common Stock and Warrants and the ability of purchasers of the Common Stock
and Warrants to sell their securities in the secondary market.
Underwriting History. Pryor, McClendon, Counts & Co., Inc., one of the
Representatives, has not previously acted as a managing underwriter of a public
offering of equity securities, although it has participated as an underwriter
in several public offerings of equity securities and has substantial experience
as an underwriter in public offerings of debt securities, including municipal
bonds. Prospective purchasers of the Securities offered hereby should consider
such Representative's limited experience in offerings such as this in
evaluating an investment in the Securities. See "Underwriting."
Shares Eligible for Future Sale. Sales of a substantial number of shares of
Common Stock in the public market following this offering could adversely
affect the market price for the Company's Common Stock or Warrants. However,
the number of shares of Common Stock that can be traded in the public market is
limited by restrictions under the Securities Act of 1933, as amended (the
"Securities Act"). In addition, holders of substantially all of the outstanding
shares of Common Stock and options and warrants to acquire Common Stock have
entered into lock-up agreements pursuant to which they have agreed not to sell
or otherwise dispose of any
11
<PAGE>
of their shares for a period of 12 months after the initial closing date of
this offering. As a result of these restrictions, based on shares outstanding
as of October 1, 1996, on the date of this Prospectus, no shares other than
the 850,000 Shares and 850,000 Warrants offered hereby will be eligible for
public sale, and approximately 1,915,576 currently outstanding shares will be
eligible for public sale 12 months after the initial closing date of this
offering. Additional shares of Common Stock issuable upon the exercise of
certain outstanding options and warrants will become eligible for public sale
as a result of registration rights agreements with the Company. See
"Description of Capital Stock--Registration Rights." In addition, the Company
intends to register on a registration statement on Form S-8, shortly after the
effective date of this offering, a total of approximately 547,134 shares of
Common Stock reserved for issuance under certain outstanding options and
future options to be granted under the Company's employee benefit plans. See
"Shares Eligible for Future Sale."
Immediate and Substantial Dilution. Investors participating in this offering
will incur immediate, substantial dilution of $5.35 per share. To the extent
options or warrants to purchase Common Stock are exercised, there may be
further dilution. See "Dilution."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 850,000 shares of
Common Stock and Warrants offered hereby are estimated to be approximately
$4,677,000 ($5,367,000 if the Underwriters' over-allotment option is exercised
in full), after deducting estimated underwriting discounts and commissions and
offering expenses. The Company expects to use the net proceeds of this
offering as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPLICATION OF NET APPROXIMATE PERCENTAGE OF NET
PROCEEDS DOLLAR AMOUNT PROCEEDS
------------------ ------------- -----------------
<S> <C> <C>
Repayment of outstanding
debt(1)................. $1,261,000 27%
Facilities and Capital
Expenditures(2)......... $ 930,000 20%
Research and
development............. $1,000,000 21%
Working capital and
general corporate
purposes................ $1,486,000 32%
</TABLE>
- --------
(1) The Company intends to apply these proceeds to repay approximately
$1,261,000 payable under the notes issued in the Placement. See
"Capitalization--Recent Financing Transactions" and "Certain
Transactions."
(2) The Company intends to conduct a feasibility study concerning construction
of an isotope manufacturing facility and to purchase equipment and upgrade
management information systems. See "Business--Manufacturing and Supply."
The foregoing represent estimates only, and the actual amounts expended by
the Company for these purposes and the timing of such expenditures will depend
on numerous factors. The Company may use a portion of the net proceeds to
acquire businesses or products complementary to the Company's business,
although the Company currently has no specific plans or commitments in this
regard. Pending use of the net proceeds for the above purposes, the Company
intends to invest such funds in short-term, interest-bearing, investment-grade
obligations and federally insured certificates of deposit.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The payment of any future dividends will be at the discretion of the
Company's Board of Directors and will depend upon, among other things, future
earnings, operations, capital requirements, the general financial condition of
the Company, general business conditions and contractual restrictions on
payment of dividends, if any. The Company currently anticipates that it will
retain all future earnings for use in its business and does not anticipate
paying any cash dividends in the foreseeable future.
12
<PAGE>
CAPITALIZATION
The following table sets forth, as of July 31, 1996, (1) the actual
capitalization of the Company, (2) the pro forma capitalization of the Company
giving effect to the closing of a private placement transaction (the
"Placement") in August and September 1996 and the issuance of warrants in the
Placement and (3) the capitalization of the Company as adjusted to give effect
to the sale of 850,000 Shares and 850,000 Warrants offered hereby at an assumed
initial public offering price of $6.90 per Share (the price per share at which
the Shares are sold hereby referred to as the "IPO Price Per Share") and $0.10
per Warrant, the issuance of Representatives' Warrants to purchase 170,000
shares of Common Stock, 85,000 of which are exercisable at an assumed price of
$8.40 per share and 85,000 of which are exercisable at an assumed price of
$10.35 per share, the exercise of options, after July 31, 1996, to purchase
315,376 shares of Common Stock at a weighted average exercise price of $1.69
per share and the issuance of 100,780 shares of Common Stock upon the
conversion of existing preferred shares, after deducting underwriting discounts
and commissions and other estimated expenses of the offering.
<TABLE>
<CAPTION>
JULY 31, 1996
-------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED
------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes payable.............................. $177 $1,065 $ 177
==== ====== =======
Shareholders' equity:
Preferred stock, no par value, 100,000
shares authorized actual, 10,000,000
shares authorized pro forma and as
adjusted; 6,250 issued and outstanding,
no shares issued or outstanding pro
forma and as adjusted .................. 125 125 --
Common stock, $1.00 par value actual and
no par value pro forma and as adjusted
14,513,788 shares authorized actual,
20,000,000 shares authorized pro forma
and as adjusted: 1,499,419 shares issued
and outstanding actual, 2,765,576 as
adjusted................................ 78 78 5,412
Warrants................................. -- 373 373
Common stock subscriptions receivable.... -- -- (330)
Retained earnings (accumulated deficit).... 10 10 (499)
---- ------ -------
Total stockholders' equity............... 213 586 4,956
---- ------ -------
Total capitalization................... $390 $1,651 $ 5,133
==== ====== =======
</TABLE>
- --------
(1) The Placement is reflected in the Pro Forma amounts as a borrowing and a
sale of securities. See "--Recent Financing Transactions." The $1,261,000
gross proceeds of the Placement has been allocated between the Placement
Notes and Placement Warrants based on their estimated relative fair values
at the date of issuance. The fair value of the warrants issued in
connection with the Placement as estimated by the Company approximates
$373,000. Expenses and discounts related to the issuance of the Placement
Notes were $136,000. The Placement Notes are due upon closing of this
offering. The "As Adjusted" amount includes a charge to retained earnings
and the statement of operations of $509,000, representing the value of the
Warrants and the aggregate discounts relating to the Placement.
The foregoing table excludes (i) 272,134 shares of Common Stock issuable upon
exercise of outstanding options at a weighted average exercise price of $1.56
per share, (ii) 275,000 shares reserved for future grants under the Company's
employee benefit plans, (iii) 390,943 shares of Common Stock issuable upon the
exercise of outstanding warrants at a weighted average exercise price of $1.73
per share, (iv) 170,000 warrants to purchase shares of Common Stock issuable to
the Representatives at a weighted average exercise price of $9.38 per share,
(v) 850,000 shares of Common Stock issuable upon exercise of the Warrants
offered hereby and (vi) options to purchase 40,000 shares of Common Stock at an
exercise price equal to 110% of the IPO Price Per Share.
13
<PAGE>
RECENT FINANCING TRANSACTIONS
In an August and September 1996 private placement (the "Placement"), the
Company issued approximately $1,261,000 principal amount of 12% nonconvertible
promissory notes (the "Placement Notes") and warrants (the "Placement
Warrants") to acquire 263,222 shares (the "Placement Shares") of Common Stock
to a small number of sophisticated investors (the "Placement Investors"). Net
proceeds were approximately $1,125,000.
The Placement Notes bear interest at 12% per annum and are due and payable
in full at the earlier of five business days after the Company receives funds
from this offering or May 1, 1998. Unless the Placement Notes are earlier paid
in full (i) accrued but unpaid interest at 15% per annum is due and payable
monthly from September 1996 through May 1997 and (ii) principal and accrued
but unpaid interest is due and payable in equal installments monthly from June
1997 through May 1998. The Company may prepay any or all of the amounts due
under the Placement Notes at any time without penalty. To secure repayment of
the Placement Notes, the Company entered into a security agreement, granting a
security interest to the Placement Investors in substantially all of the
assets of the Company. The security agreement and certain provisions of
California law govern the rights of the Placement Investors in the collateral,
the events of default which authorize their resort to the collateral, and the
procedures governing the treatment and disposition of the collateral if the
Placement Investors elect to resort to the collateral in the event of such
default. Upon repayment of the Placement Notes, the collateral will be
released in full.
Placement Warrants to purchase 131,611 Placement Shares are exercisable in
whole at any time or in part at $.4217 per share, and Placement Warrants to
purchase 131,611 Placement Shares are exercisable in whole at any time or in
part at $3.3727 per share, in each case for a period of five years. If the
Company defaults in its payment obligations under the Placement Notes, then
the Placement Investors may, in addition to exercising their rights in the
collateral, exercise additional Placement Warrants to purchase a total of
approximately 325,500 additional Placement Shares (such warrants referred to
as "Default Warrants") at $.0689 per share, and can require the holders of
approximately 1,387,810 shares of Common Stock to vote their shares to elect
as a majority of the Company's Board of Directors the designees of the
Placement Investors. In conjunction with the financing, the Company issued
warrants to purchase 127,721 shares of Common Stock exercisable for a period
of five years at $1.378 per share to an advisor.
The Company intends to repay the Placement Notes out of a portion of the net
proceeds of this offering. See "Use of Proceeds." As a result, after the
closing of this offering no Placement Notes will remain outstanding, and no
Default Warrants will be issued.
The Company has agreed to file at its expense a registration statement under
the Securities Act no later than nine months after the effectiveness of this
offering registering the resale of the Placement Shares, and the Placement
Investors have certain additional piggyback registration rights. See
"Description of Capital Stock--Registration Rights."
The estimated fair value of the warrants issued in connection with the
Placement was approximately $373,000. This amount represents a discount from
the principal amount of the Placement Notes. In addition, certain of the
Placement Notes, in an aggregate principal amount of approximately $300,000,
were issued to Lindsay Gardner, a director of the Company, one employee of the
Company and two affiliates of directors or officers of the Company at a
discount totalling approximately $30,000, and other discounts total
approximately $106,000. The aggregate discount of $509,000 will be amortized
to interest expense over the contractual life of the Placement Notes.
Accordingly, in the quarter in which this offering is completed, the amount of
the discounts which have not already been amortized will, be recorded as a
charge to operations for debt restructuring (and if material, will be shown as
an extraordinary item) and will be reflected in the Company's statement of
operations for that period. The charge is likely to have a material effect on
the Company's reported earnings for that quarter.
14
<PAGE>
DILUTION
The net tangible book value of the Company as of July 31, 1996 was
$(119,000) or $(.06) per share of Common Stock. The July 31, 1996 book value
was adjusted for the following items: (i) the assumed conversion of the
preferred shares, (ii) the exercise of options by two of the Company's
executive officers in September 1996 to purchase an aggregate of 217,706
shares of Common Stock at an exercise price of $1.52 per share and (iii) the
exercise of options by one employee of the Company in September 1996 to
purchase 97,671 shares of Common Stock at an average exercise price of $2.06
per share. The Company loaned the two executive officers $165,000 each
representing the purchase price for the options, and the officers executed
promissory notes reflecting these loans. Under Generally Accepted Accounting
Principles ("GAAP"), such promissory notes are shown as a reduction of
shareholders equity. Therefore, the promissory notes have not been reflected
as tangible assets for purposes of the dilution table. Net tangible book value
per share is determined by dividing the amount of total tangible assets of the
Company less total liabilities by the number of shares of Common Stock
outstanding at that date. After giving effect to the sale of the 850,000
shares of Common Stock and 850,000 Warrants offered by the Company hereby at
an assumed initial public offering price of $7.00 per Share and ascribing no
value to the Warrants for this purpose, and after deducting the estimated
underwriting discounts and commissions and offering expenses, the pro forma
net tangible book value of the Company as of July 31, 1996, as adjusted, would
have been $4,558,000 or $1.65 per share. This represents an immediate increase
in net tangible book value of $1.71 per share to existing shareholders and an
immediate dilution of $5.35 per share to new investors purchasing Common Stock
and Warrants at the initial public offering price. The following table
illustrates the per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $7.00
Net tangible book value per share at July 31, 1996........... $(.06)
Increase in net tangible book value per share attributable to
new investors............................................... $1.71
Pro forma net tangible book value per share after the offering. 1.65
-----
Net tangible book value dilution per share to new investors.... $5.35
=====
</TABLE>
The following table summarizes, on a pro forma basis as of July 31, 1996,
giving effect to the transactions described above, the number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price per share paid by the existing shareholders and by the new
investors purchasing shares of Common Stock and Warrants in this offering, an
assumed initial public offering price of $7.00 per share and ascribing no
value to the Warrants for this purpose, and before deduction of estimated
underwriting discounts and commissions and offering expenses:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
----------------- ------------------ AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
--------- ------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.. 1,915,576 69.0% $ 735,000 11.0% $0.38
New investors.......... 850,000 31.0% $5,930,000 89.0% $7.00
--------- ----- ---------- -----
Totals............. 2,765,576 100.0% $6,685,000 100.0%
========= ===== ========== =====
</TABLE>
The foregoing table assumes no exercise of the Underwriters' over-allotment
option and no other exercise of options and warrants. Giving effect to the
Placement and this offering, as of July 31, 1996, there were (i) 272,134
shares of Common Stock issuable at a weighted average exercise price of $1.56
per share upon exercise of options granted under the Company's employee
benefit plan, (ii) Placement Warrants and warrants issued in conjunction with
the Placement to acquire 390,943 shares of Common Stock issuable at a weighted
average exercise price of $1.73 per share, (iii) additional warrants to
purchase 850,000 shares of Common Stock at an exercise price of 150% of the
initial public offering price of the Shares offered hereby and (iv) 170,000
shares of Common Stock issuable upon exercise of the Representatives'
Warrants, 85,000 of which have an exercise price of 120% of the IPO Price Per
Share and 85,000 of which have an exercise price of 150% of the IPO Price Per
Share. To the extent that any of these options or warrants are exercised,
there may be further dilution to new investors. See "Capitalization,"
"Management--Employee Benefit Plans" and "Description of Capital Stock."
15
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere
in this Prospectus. The selected financial data, insofar as it relates to each
of the years ended April 30, 1995 and 1996, have been derived from audited
financial statements, including the balance sheets at April 30, 1995 and 1996
and the related statements of operations for each of the two years ended April
30, 1996 and notes thereto appearing elsewhere herein. The selected financial
data as of July 31, 1996 and for the three months ended July 31, 1995 and 1996
are derived from unaudited financial statements of the Company and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and the results of operations for
the period. Operating results for the three months ended July 31, 1996 are not
necessarily indicative of the results that may be expected for the entire
year.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED JULY
APRIL 30, 31,
------------- --------------
1995 1996 1995 1996
----- ------ ------ ------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................. $ 738 $5,567 $1,190 $1,564
Cost of revenues........................... 626 3,835 807 1,123
----- ------ ------ ------
Gross margin............................... 112 1,732 383 441
Operating expenses:
Selling, general and administrative........ 293 902 186 266
Research and development................... 162 308 59 90
----- ------ ------ ------
455 1,210 245 356
----- ------ ------ ------
Operating income (loss)...................... (343) 522 138 85
Other expenses, net.......................... (15) (66) (3) (12)
----- ------ ------ ------
Income (loss) before income taxes............ (358) 456 135 73
Income tax expense (benefit)................. (215) 175 52 30
----- ------ ------ ------
Net income (loss)............................ $(143) $ 281 $ 83 $ 43
===== ====== ====== ======
Net income (loss) per share ............... $(.06) $ .12 $ .04 $ .02
===== ====== ====== ======
Shares used in computing per share
information............................... 2,201 2,343 2,342 2,344
===== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
------------ --------
1995 1996 1996
----- ----- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents............................. $ 38 $ 116 $ 147
Working capital (deficiency).......................... (248) (61) (134)
Total assets.......................................... 1,057 1,788 2,138
Long-term debt........................................ 352 276 177
Retained earnings (accumulated deficit)............... (314) (33) 10
Total shareholder's equity (deficit).................. (111) 170 213
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
OVERVIEW
The business of the Company was founded in March 1992 and was initially
conducted as a partnership. In March 1993, the Company was incorporated and
the business was transferred to the Company. The Company was initially engaged
in the business of marketing non-radioactive stable isotopes for the energy
industry. During fiscal 1996, the Company expanded its business operations to
include developing specialty chemicals and materials, and conducting research
and development concerning potential products, for the medical research,
diagnostic, pharmaceutical and semiconductor industries. The Company believes
that a substantial portion of its revenues in the future will depend on its
success in developing and selling products in these markets.
The Company's quarterly operating results have varied in the past and may in
the future vary significantly, depending on factors such as the size and
timing of customer orders, price and other competitive conditions and the
timing of new product announcements and releases by the Company and its
competitors. The Company operates with little order backlog. Moreover, a
significant portion of the Company's total revenues have been, and the Company
believes will continue to be, derived from a limited number of orders in any
particular quarter, and the timing of such orders and their fulfillment has
caused, and is likely to continue to cause, material fluctuations in the
Company's operating results, particularly on a quarterly basis. As a result, a
lost or delayed sale could have a significant impact on the Company's
operating results for a particular period. It is likely that in some future
quarter, the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the price of the Common
Stock would likely be materially adversely affected.
The Company has experienced, and expects to continue to experience,
significant fluctuations in its results of operations. See "Risk Factors."
Some of the factors that affect the Company's results of operations include
the volume and timing of orders received, changes in the mix of products sold,
market acceptance of the Company's and its customers' products, competitive
pricing pressures, the Company's ability to develop and introduce new
products, and the timing and extent of research and development expenses. As a
result of the foregoing or other factors, there can be no assurance that the
Company will not experience material fluctuations in future operating results
on a quarterly or annual basis, and such fluctuations could materially and
adversely affect the Company's business, financial condition and results of
operations.
Historically, substantially all of the Company's net revenues in any
particular period have been attributable to a limited number of customers. Net
revenues from three customers accounted for approximately 66%, 20% and 10%,
respectively, of the Company's net revenues for the three months ended July
31, 1996. In fiscal 1996 two customers accounted for approximately 88% and
11%, respectively, of net revenues. In fiscal 1995 three customers accounted
for approximately 59%, 26% and 11% of net revenues. The Company expects that
if it continues to increase sales of depleted zinc products to end users and
develop and sell products in the medical and research and electronic materials
industries, concentration of net revenues from a limited number of customers
will be reduced. None of the Company's customers have entered into long-term
agreements to purchase the Company's products. If completed sales orders are
not replaced on a timely basis by new orders from customers, the Company's net
revenues could be materially and adversely affected. The Company's net
revenues also could be adversely affected by a number of factors including the
loss of a significant customer, reductions in orders from any significant
customer compared to historical buying levels or otherwise or the cancellation
of a significant order from a customer. Any of these factors, many of which
are outside the Company's control, could have a material adverse effect on the
Company's business, financial condition and results of operations.
In March 1995, the Company acquired certain assets and assumed certain
liabilities of Isoserve, Inc. ("Isoserve"), a stable isotope supplier. The
acquisition was accounted for as a purchase. The Financial Statements for the
fiscal year ended April 30, 1995 include the operations related to Isoserve
from March 28, 1995. See note 10 to the Financial Statements.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total net revenues for the periods indicated.
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED
APRIL 30, JULY 31,
------------- -------------
1995 1996 1995 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenues................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................ 84.8 68.9 67.8 71.8
----- ----- ----- -----
Gross margin.............................. 15.2 31.1 32.2 28.2
Operating expenses:
Selling, general and administrative....... 39.7 16.2 15.6 17.0
Research and development.................. 22.0 5.5 5.0 5.8
----- ----- ----- -----
Total operating expenses.................... 61.7 21.7 20.6 22.8
----- ----- ----- -----
Operating income (loss)..................... (46.5) 9.4 11.6 5.4
Other expense, net.......................... (2.0) (1.2) (0.3) (0.7)
----- ----- ----- -----
Income (loss) before income taxes........... (48.5) 8.2 11.3 4.7
----- ----- ----- -----
Income tax expense (benefit)................ (29.1) 3.1 4.4 1.9
----- ----- ----- -----
Net income (loss)........................... (19.4)% 5.0 % 7.0 % 2.7 %
===== ===== ===== =====
</TABLE>
Net Revenues. Net revenues increased from $738,000 in 1995 to $5.6 million
in 1996. The increase was due to stronger demand for the Company's energy
products, increased unit prices of products following the acquisition of
Isoserve in March 1995 and sales of a new product, cadmium, which is used for
laser holography applications.
Net revenues for the three months ended July 31, 1996 were $1.6 million
compared to $1.2 million for the three months ended July 31, 1995, an increase
of approximately $400,000 or 33%. The increase was due to stronger demand for
the Company's energy products and cadmium, and to a lesser extent sales of
stable isotope labeled compounds. The Company believes that its revenue growth
in the first three months of fiscal 1997 compared to the comparable period of
fiscal 1996 is not necessarily indicative of the results to be expected in the
future.
International sales represented 14%, 13%, 18% and 20% of net revenues for
fiscal 1995, 1996 and the three months ended July 31, 1995 and 1996,
respectively. International sales were principally to Asia and are denominated
in U.S. dollars.
Gross Margin. Gross margin is affected by the volume of product sales,
product mix and average selling price. The Company's gross margin increased
from 15.2% of net revenues in fiscal 1995 to 31.1% in fiscal 1996. The gross
margin in fiscal 1995 was negatively impacted by competitive pricing
pressures. Gross margin in fiscal 1996 increased in part from the acquisition
of Isoserve, a supplier of depleted zinc oxide, which contributed to increased
per unit selling price and relatively stable production costs. Gross margin
for fiscal 1996 also improved from sales of cadmium.
The Company's gross margin percentage decreased to 28.2% in the three month
period ended July 31, 1996 from 32.2% in the comparable period of the prior
year, due to increased raw material costs associated with the production of
energy related products which was offset in part by increased sales prices.
Gross margin percentage was also negatively affected by discounts given to
customers for prompt payment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $293,000 in fiscal 1995 to $902,000 in
fiscal 1996; however, as a percentage of net revenues such expenses decreased
from 39.7% to 16.2% of net revenues, respectively. The increase on a dollar
basis was primarily due to expanded marketing, business development and
administrative activities, while the decrease as a percentage of net revenues
was due to significant revenue growth.
18
<PAGE>
Selling general and administrative expenses increased from $186,000, or
15.6% of net revenues, to $266,000, or 17.0% of net revenues, for the three
months ended July 31, 1995 and 1996, respectively. The increase was due to
additional staffing for medical, research and diagnostics products and for
finance and administration. The Company anticipates selling, general and
administrative expenses will generally continue to increase in absolute
dollars, but may vary as a percentage of net revenues.
Research and Development Expenses. Research and development expenses include
costs associated with new product development. Research and development
expenses increased from $162,000 in fiscal 1995 to $308,000 in fiscal 1996;
however, as a percentage of net revenues such expenses decreased from 22.0% to
5.5% of net revenues, respectively. The increase in fiscal 1996 on a dollar
basis from the prior year reflected the Company's continued efforts to remain
competitive through investments in product development by increased staffing,
while the decrease as a percentage of revenues was due to significant revenue
growth and management's decision to balance research and development
expenditures and financial results.
Research and development expenses increased from $59,000, or 5.0% of
revenues, to $90,000, or 5.8% of revenues, for the three months ended July 31,
1995 and 1996, respectively. The increase was due to increased staffing for
product development. The Company believes that the development and
introduction of new product applications is critical to its future success and
expects that research and development expenses will increase on a dollar basis
and as a percentage of revenues in the future.
Other Expense, Net. Other expense reflects interest incurred by the Company
on its long and short-term borrowings. Other expense, net, increased from
$15,000 in fiscal 1995 to $66,000 for fiscal 1996, and from $3,000 to $12,000
for the three months ended July 31, 1995 and 1996, respectively, but remained
consistent as a percentage of net revenues.
Income Taxes. For fiscal 1995 and 1996, the income tax expense (benefit) was
$(215,000), or (29.1)% of net revenues, and $175,000, or 3.1% of net revenues,
respectively. The effective tax benefit rate of 60% in fiscal 1995 differed
from the federal statutory rate due principally to the realization of
temporary differences and loss carryforwards and the determination that such
differences were realizable. The Company's effective tax rate of 39% in fiscal
1996 differs from the statutory rate due to state income taxes, net of the
federal benefit.
The provision for income taxes was $52,000 and $30,000 for the three months
ended July 31, 1995 and 1996, respectively. The Company's effective tax rate
of 38% and 41% differs from the statutory rate due to state income taxes, net
of the federal benefit.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has primarily financed its operations through a
combination of cash flow from operations, borrowed funds, lease financing and
private sales of equity securities. The Company generated cash flow from
operating activities of $180,000 in fiscal 1996, principally as a result of
net income, adjusted for non-cash items, increases in accounts payable and
income taxes payable offset by increased inventory. Cash used by operations of
$96,000 in fiscal 1995 was principally a result of the net loss during the
period and adjustments for non-cash items, offset by increases in accounts
payable and accrued liabilities. The Company generated cash flow from
operating activities of $78,000 for the three months ended July 31, 1996,
principally as a result of net income, adjusted for non-cash items, and
increases in accounts payable offset by increased inventory and decreases in
accrued liabilities.
The Company's investing activities used cash of $57,000, $7,000, $2,000 and
$4,000 in 1995 and 1996 and the three months ended July 31, 1995 and 1996,
respectively. Such investing activities were principally for purchases of
property and equipment and the cash paid for the acquisition of Isoserve in
fiscal 1995.
Financing activities used cash of $95,000, $49,000 and $43,000 in fiscal
1996 and the three months ended July 31, 1995 and 1996, respectively, and
provided cash of $187,000 in fiscal 1995. Financing activities in fiscal
19
<PAGE>
1996 consisted of the issuance of notes which were more than offset by
payments of principal, while financing activities for the three months ended
July 31, 1996 consisted of debt repayments. Financing activities in fiscal
1995 consisted of the issuance of notes and preferred stock which were offset
in part by payments of principal.
As of April 30, 1995 and 1996, and July 31, 1996 the Company had negative
working capital of $248,000, $61,000, and $134,000, respectively. At present,
the Company has no credit facility with a bank or other financial institution
and no in-place source of capital, other than the approximately $1,125,000 net
proceeds of the Placement, see "Capitalization--Recent Financing
Transactions." The Company intends to use a portion of the net proceeds of
this offering to repay the Placement Notes. The Company is also considering
building an isotope manufacturing facility. The Company intends to use a
portion of the net proceeds of this offering to conduct a feasibility study
concerning such a facility. If the Company decides to proceed with
construction of such a facility, additional financing would be required. The
Company currently has no arrangements for loans or other financing relating to
any such construction. The unavailability of such financing could adversely
affect its ability to increase sales of new products. The additional funding,
if needed, may not be available on terms attractive to the Company, if at all.
While the timing and amount of capital requirements cannot be predicted with
certainty, the Company believes that cash on hand at July 31, 1996, together
with the proceeds from the Placement and the net proceeds from this offering
will be sufficient to allow the Company to continue its expected level of
operations for at least 12 months from the date of this Prospectus. Any
additional equity financing may be dilutive to shareholders, and debt
financing, if available, may involve restrictive covenants. See "Use of
Proceeds" and "Risk Factors--Future Additional Capital Requirements."
20
<PAGE>
BUSINESS
Isonics is an advanced materials and technology company which develops and
commercializes products based on enriched stable isotopes and high purity
materials. Stable isotopes can be thought of as ultra-ultra pure materials.
This high degree of purification accomplished on the sub-atomic level provides
enhanced performance properties compared to normal purity materials. Stable
isotopes have commercial uses in several areas, including energy; medical,
research, diagnostics and drug development; product tagging and stewardship;
semiconductors; and optical materials. Isonics has successfully developed and
commercialized two stable isotope products and intends to promote the
emergence and growth of new stable isotope applications.
The Company's principal product to date is isotopically depleted zinc
("DZ"). DZ, in different chemical forms, is used to prevent corrosion in
nuclear power plants. Corrosion is a cause of high radiation fields in such
plants and can result in radiation exposure to workers. DZ also reduces
environmental cracking in certain kinds of nuclear reactors which, if not
controlled, can require extremely costly repairs or can result in premature
shutdown and de-commissioning of the facility. The Company believes that it
provides substantially all of the DZ used in nuclear power plants worldwide.
The application of DZ was developed by General Electric Company ("GE"),
where the founders of the Company were previously employed. Before May 1996,
all sales of DZ by the Company were made to GE, which in turn resold the
product to end users. In addition to sales to GE, in May 1996 Isonics
commenced direct sales to end users, and for the three months ended
July 31, 1996, approximately 10% of net revenues were from sales made directly
to end users.
New applications for stable isotopes are continually being developed by the
Company and by third parties. The Company believes that many new applications
have the potential to create new markets. One opportunity is to supply stable
isotope labeled compounds for the diagnostic breath test ("DBT") market. DBTs
provide early diagnosis of conditions that could otherwise lead to expensive
procedures such as endoscopies and biopsies. DBTs under development by third
parties which utilize stable isotopes in their application include tests to
diagnose peptic ulcers, fat malabsorption and liver function. A urea DBT
relating to peptic ulcers has recently been approved by the U.S. Food and Drug
Administration (the "FDA"), and the Company believes that other companies have
applied to the FDA or comparable agencies in foreign countries for approval of
these tests, which must be obtained before any products can be sold. Certain
DBTs are currently marketed in certain European countries.
The Company holds an option, subject to satisfaction of certain conditions,
to acquire an exclusive license to two Yale University patents which cover
semiconductor devices made of isotopically pure silicon, germanium, gallium
arsenide and most isotopically pure compound semiconductors. The patents claim
that isotopic purity provides improved device speed and improved thermal
conductivity, two properties which are of great importance to the
semiconductor industry. According to the Semiconductor Industry Association,
sales in 1995 of silicon wafers and other semiconductor substrates were
approximately $6 billion. The Company is collaborating with Yale to evaluate
these isotopically engineered semiconductor applications. The Company believes
that if evaluations demonstrate the commercial feasibility of one or more
products, demand could emerge in certain segments of the semiconductor market.
There can be no assurance, however, that these evaluations will demonstrate
the commercial feasibility of any products, that the Company will be able to
commercialize any such products or that a market will emerge for any such
products.
The Company was formed in March 1992 and incorporated in California in March
1993 under the name A&R Materials, Inc. In September 1996, the Company changed
its name to Isonics Corporation. The Company's principal executive offices are
located at 4010 Moorpark Avenue, Suite 119, San Jose, California, 95117. Its
telephone number is (408) 260-0155.
21
<PAGE>
BACKGROUND
The following discussion utilizes several technical terms which are
explained in greater detail in the Glossary preceding the financial statements
at the end of this Prospectus.
An isotope is one of two or more species of the same chemical element which
differ from one another only in the number of neutrons in the nucleus of the
atom. The different number of neutrons can create significantly different
nuclear physics characteristics. To take advantage of some of these different
characteristics, it is usually necessary to increase ("enrich") or decrease
("deplete") the concentration of a particular isotope. There are over 280
naturally occurring stable isotopes of 83 elements. Some elements have only
one naturally occurring stable isotope, while others have many. Stable
isotopes are not radioactive.
Stable isotopes of an element differ in mass and diameter as well as several
nuclear properties, such as cross-section, spin and magnetic moment.
Differences in these properties can result in substantially different effects,
and some of these differences have the potential for commercial application.
For example, in ultra chemically pure crystals grown for electronics or
optical applications, isotopic impurities are the greatest contributor to
crystal disorder due to mass and diameter variations. Eliminating this
disorder by using a single enriched isotope results in increased thermal
conductivity and optical transparency, and thus in improved product
performance. Similarly, enriching or depleting isotopes based upon their
cross-sections allows materials to be engineered for applications in the
nuclear power industry, for controlled doping of some semiconductors and for
use as targets to produce radioisotopes for medicine and industry.
Stable isotopes of an element do not differ significantly in their chemical
behavior. Tagging of materials can be performed by varying the natural
abundance of isotopes to give a compound its own mass or nuclear magnetic
signature without changing its chemical properties. Though chemically
equivalent, the "tagged" or labeled compound is discernible from its unlabeled
twin through the use of several types of instruments called spectrometers.
COMPANY STRATEGY
The Company believes that its strength is the ability to bring the necessary
elements together to identify, evaluate, develop, engineer and successfully
commercialize applications for stable isotopes and value-added products
manufactured from stable isotopes. This is evidenced by management's
experience (at the Company and in prior employment) in developing DZ from a
cost prohibitive concept to a commercial product. DZ is now one of the largest
worldwide commercial applications of a stable isotope product.
The Company believes it has created a product development model that can
serve as a basis for current and future expansion efforts of the Company.
Isonics believes that coordination with the ultimate user to establish a
product specification and, with the Company's Russian partners, to establish a
cost effective product manufacturing process to meet that specification, has
the potential to make the Company a viable competitor. This coordination
process also includes initiating and managing development projects necessary
to adapt existing manufacturing methods to new missions, assembling and
coordinating necessary project-specific product and service suppliers,
obtaining appropriate regulatory approvals, and verifying product conformance
to stringent customer requirements.
To capitalize on the commercial opportunities that have been identified for
stable isotopes, the Company has adopted a business strategy designed to
maximize the value of its technologies, business development and management
resources, while attempting to minimize capital costs arising from addressing
multiple markets. This strategy involves:
. focusing on development of high value-added products which have a
perceived competitive advantage in large or growing markets;
. leveraging research and development expenditures through collaborations,
government programs and corporate partnerships, including performing
substantial work in Russia, where the Company believes an attractive
value per dollar of cost can be obtained;
22
<PAGE>
. minimizing early capital needs by obtaining stable isotopes through
alliances and supply agreements with Russian stable isotope sources,
followed by investment in Company owned isotope production facilities
when markets are more established and the optimum production technology
has been determined;
. obtaining value-added processing technology through sub-contract
manufacturing agreements, joint ventures and acquisitions of
strategically important technologies and companies; and
. developing a time-balanced product pipeline to provide a continual supply
of new business opportunities.
PRODUCTS
The Company's product pipeline includes products with current revenues
(consisting of DZ, cadmium, medical imaging target materials and stable
isotope labeled compounds), and other potential products that may, but will
not necessarily, generate revenues beginning in future years (such as
manufactured labeled compounds, electronic materials and diagnostic breath
test substrates, isotopically pure semiconductor fabrication materials and
diagnostic breath test kits).
Isotopically Depleted Zinc
Maintaining radiation exposure of nuclear power plant workers to levels as
low as reasonably achievable is mandated in the U.S. by the Nuclear Regulatory
Commission. Also of significant concern is cracking of nuclear power plant
structural materials due to the corrosive nature of the water used to cool the
nuclear reactor core. Nuclear power plants are designed with substantial
safety margins against such cracking, and frequent surveillance is performed
to assure that this safety margin is not compromised. If not controlled,
cracking can require extremely costly repairs or, if not reparable, can result
in premature shutdown and de-commissioning of a facility which may have cost
hundreds of millions of dollars or more to construct.
Zinc provides the important benefits outlined above, but one isotope of
natural zinc becomes radioactive in the nuclear reactor, thus offsetting a
substantial portion of the desired benefits. By depleting this zinc isotope,
the desired benefits are still obtained while the detrimental side effect is
essentially eliminated. This product is known as isotopically depleted zinc
("DZ").
Testing sponsored by the Electric Power Research Institute has shown that
the addition of a soluble form of zinc to the nuclear reactor coolant reduces
plant radiation fields, and in some cases, substantially mitigates
environmentally induced cracking. Zinc acts as a corrosion inhibitor for the
stainless steel and other metal components of the nuclear reactor systems. In
boiling water reactors ("BWRs"), zinc prevents the development and
concentration of corrosion products, the cause of high radiation fields which
can result in radiation exposure to plant workers. In pressurized water
reactors ("PWRs"), zinc not only prevents radiation field build-up, but has
been shown in a PWR test to substantially reduce environmental cracking.
DZ is currently sold to 19 of the approximately 95 BWRs in the world
including 16 of the 37 U.S. BWRs. Typical current annual DZ requirements for a
BWR utilizing DZ are approximately $250,000 to $350,000, based on current
prices. No PWRs are currently adding either natural zinc or DZ on a routine
basis; however, the Company believes that one or more PWRs may in the near
future begin doing so. Programs to evaluate the effectiveness of utilizing DZ
at PWRs are planned or underway in the United States and certain foreign
countries. If these programs demonstrate the commercial effectiveness of DZ
for PWRs, the Company believes that a market may develop for DZ use in PWRs,
due in part to the importance of environmental cracking mitigation. Initial
test results suggest that PWRs will probably use a smaller amount of DZ per
plant as compared to BWRs, but there are approximately 200 PWRs in the world.
At present prices, the Company estimates the potential market for sales to
nuclear power plants to be between approximately $50-$70 million. There can be
no assurance that a market will develop for DZ sales to PWRs, that the Company
will be able to sell DZ to all such potential customers, or that selling
prices of DZ will not decrease.
23
<PAGE>
Sales of DZ are presently the Company's largest source of revenues,
representing approximately 59%, 88% and 76% of net revenues in fiscal 1995 and
1996 and the three months ended July 31, 1996, respectively. In March 1995,
Isonics acquired the stable isotope business of Isoserve. The Company and
Isoserve have supplied substantially all of the DZ used in nuclear power
plants in the world to date. Until May 1996, DZ was sold only to GE, which in
turn resold it to the end-user nuclear power utilities. In addition to sales
to GE, the Company currently is marketing DZ directly to U.S. and foreign
utilities and concluded its first direct end-user sale in May 1996. The
Company believes that direct sales to end users may increase in the future,
while sales to GE may remain level or decrease. There can be no assurance as
to the size of orders, if any, from direct end users in the future or as to
the number of customers that can purchase DZ from the Company. See "Risk
Factors--Number of DZ Customers."
The Company believes that the decision to purchase DZ is price sensitive.
The Company is actively working to further reduce costs by utilizing in-house
production of raw materials, developing and implementing low-cost zinc oxide
processing technologies, and providing DZ in innovative forms which lowers the
utilities' overall cost.
Cadmium
Sales of cadmium isotopes are presently the Company's second largest source
of revenues, representing approximately 11%, 11% and 20% of net revenues in
fiscal 1995 and 1996 and the three months ended July 31, 1996, respectively.
The Company sells enriched cadmium for use in helium cadmium lasers. Cadmium
isotopes may also be used for the manufacture of radioisotopes and might be
used in semiconductors and cadmium vapor lighting products.
In a helium cadmium laser, cadmium is vaporized and behaves like a gas along
with helium. Enriched cadmium is routinely used in these lasers to achieve
optimum performance. Tests by laser manufacturers have shown that by using
only a single, even isotope of cadmium, such as cadmium-114, the power output
of a laser can be increased by at least 50% and the laser light coherence can
be improved significantly.
Stable Isotope Labeled Compounds
Stable isotope labeled compounds ("SILCs") are created by incorporating
carbon, nitrogen, hydrogen and oxygen isotopes into several thousand relevant
chemical compounds. SILCs allow researchers to probe the metabolism of living
systems, determine the structures of important biological compounds, design
new drugs and measure extremely low levels of environmental toxins. The
Company believes that greater availability of stable isotopes and advances in
instrumentation (improvements in sensitivity and reduced cost) will promote
increased demand for SILCs. Examples of existing and emerging applications
include:
. Metabolic studies. Increasingly, drug studies are performed with labeled
drugs to facilitate research on metabolism, distribution, mode of action
and elimination. The FDA may eventually mandate the labeling of all new
drugs for investigational use during some or all phases of pre-clinical
and clinical evaluations of these drugs, but there can be no assurance
that the FDA will make this mandate in the near future, if at all.
. Rational drug design. Nuclear magnetic resonance ("NMR") spectroscopy is
being developed as a tool to determine the structure of larger and larger
molecules in solution, many of which cannot be analyzed by the more
traditional x-ray crystallography techniques. The Company believes that
this new NMR sensitivity combined with the sophisticated isotopically
labeled cell growth media needed to produce the labeled human proteins
will require an increasing supply of the stable isotopes of carbon,
nitrogen and deuterium.
. Product tagging and stewardship applications. The source of materials and
explosives may be identified, without changing their chemistry, by
tagging with the stable isotopes of carbon, nitrogen, oxygen and
hydrogen. Several other approaches are currently being implemented, and
other technologies have also been proposed. These other approaches
involve the addition of extraneous materials such as dyes, exotic
24
<PAGE>
chemical compounds or radioactive compounds. The Company believes that
adding such extraneous materials can sometimes detract from the
performance of the product. Tagging with small amounts of isotopically
engineered versions of the material itself results in a unique identifier
which behaves chemically in exactly the same way as the host material.
The Company's efforts to date in the production and sales of SILCs have
focused on structurally simple "building block" compounds which are used to
synthesize more complex and higher value SILCs. The Company presently markets
carbon-13 and nitrogen-15 building block SILCs which it obtains through its
supply alliance and network of stable isotope producers. See "--Manufacturing
and Supply." The Company intends to expand into the synthesis of more complex
SILCs. In addition to providing additional revenue potential and possibly
higher margins, the Company believes that developing complex SILC synthesis
capability is synergistic with the Company's breath test diagnostics
development efforts and will aid the Company in early identification of future
stable isotope business opportunities. To effectively implement this product
expansion strategy, the Company believes that it is necessary to establish its
own isotope enrichment capability and to obtain cost-competitive SILC
synthesis technology. See "--Manufacturing and Supply." The Company is
recruiting personnel with the requisite chemical synthesis skills and labeled
compound market knowledge to establish a production laboratory. See "--
Facilities."
Diagnostic Breath Tests
Healthcare consumes a large amount of resources in the U.S. and worldwide.
The Company believes that substantial changes are taking place to control or
reduce the high costs of health maintenance. A significant trend is a general
shift from therapy to cost-effective prevention. Early diagnosis of conditions
which otherwise could require expensive therapies, such as surgical and
invasive diagnostic gastrointestinal procedures, could help diminish the risks
and expense of such subsequent procedures. The Company has elected to pursue
what it believes is a promising segment of this market: Diagnostic Breath
Tests ("DBTs").
Breath tests are all based on the same principle and use a common instrument
to measure the result:
. a small amount of a carbon-13 SILC (referred to as a substrate) is
swallowed by the patient;
. breath samples are collected at regular intervals; and
. breath samples are analyzed for their carbon-13 content.
Most DBTs are intended to replace unpleasant, costly and sometimes risky
procedures such as endoscopies and biopsies of the digestive system. The
Company believes that DBTs may become a widely used and accepted diagnostic
tool. Certain DBTs are currently being sold in certain European countries.
Their ease of administration may allow medical internists and general
practitioners to use them, potentially resulting in lower cost, earlier
diagnosis and broader application.
The market for DBTs is defined by the incidence of diseases addressed and
existing alternative diagnostic procedures. The urea breath test is the most
established DBT. If they become commercially available, carbon-13 urea breath
tests ("UBTs") may address a potential population of approximately 8 million
peptic ulcer patients in the U.S., who presently utilize drugs and procedures
with an estimated cost of at least $2 billion each year. The Company believes
that the UBT, coupled with antibiotic treatment, can reduce the cost of peptic
ulcer management. The Company believes that one company in the U.S. has
recently received FDA approval for a carbon-13 UBT, that another company has
applied for FDA approval for a carbon-13 UBT, and that several companies in
Europe, including Sanofi and Inbiomed in France, are also pursuing regulatory
approval. The Company intends first to enter this market as a carbon-13 and a
pharmaceutical-grade substrate supplier. The initial step in pursuing this
objective was the addition of Dr. Jacques Delente, an experienced researcher
and developer of breath test diagnostics, to the Company's management team.
25
<PAGE>
The following table provides breath tests which are at various stages of
clinical research and pre-clinical and clinical trials by various third
parties.
<TABLE>
<CAPTION>
BREATH TEST CONDITION DIAGNOSED
----------- -------------------
<C> <S>
/1//3/ C-Urea Helicobacter pylori
/1//3/ C-Triolein Fat malabsorption
/1//3/ C-Galactose Liver function
/1//3/ C-Xylose Small Bowel Bacterial Overgrowth (the
major cause of chronic diarrhea)
/1//3/ C-Aminopyrine Liver function
/1//3/ C-Caffeine Liver function
Cyclosporin dosage following
/1//3/ C-Erythromycin transplantation
Genotype of MSUD (Maple Syrup Urine
/1//3/ C-Valine Disease)
/1//3/ C-Phenylalanine Genotype of PKU (Phenylketonuria)
/1//3/ C-Sucrose Sucrose malabsorption (sucrase-isomaltase
complex deficiency)
/1//3/ C-Starch Pancreas amylase function
/1//3/ C-Cholesteryl Octanoate Pancreas esterase function
</TABLE>
The DBT business is subject to extensive government regulation. The products
and instruments used, which may be regulated as drugs and devices, are subject
to the scrutiny of FDA review and approval as well as ongoing FDA inspection
of most aspects of the production, marketing, distribution and use of these
tests. The Company believes that the production and marketing of DBTs is also
subject to similar regulatory controls in the foreign countries where the
Company would likely seek to market products. Consequently, such products
cannot be commercially introduced for several years, and there can be no
assurance that the products would ever be approved for use.
The DBT business is complex. The Company intends to enter the market
initially as a carbon-13 supplier or as a bulk supplier of carbon-13 SILCs
(substrates). The Company may also seek to develop a DBT measurement device
under the jurisdiction of the FDA. At some future date, the Company may seek
to become a more fully integrated supplier of DBT kits and measurement
instrumentation, although there can be no assurance that the Company will
pursue this strategy.
In a parallel effort, the Company is currently exploring several options for
commercializing a UBT and other DBTs in Russia. Recent agreements between the
United States and Russia in the area of drug and device regulation allow for
more cooperation in the review and approval of new applications, such as DBTs.
Russian authorities already have in place or are working on similar agreements
with other countries. The Company believes that these agreements will simplify
and shorten the Russian process of approving health care products already
approved in countries with which they have agreements, although there can be
no assurance that this will be the case. The Company plans to capitalize on
its strengths in supplying carbon-13, labeled substrates, clinical knowledge
and data and regulatory support while looking for one or more local partners
with strengths in the Russian regulatory system, measurement hardware and
facilities, and marketing and sales capabilities. The Company also believes
this approach has the potential to improve its entry into the European market,
because of proximity, existing relationships and cost advantages.
Medical Imaging and Therapy Materials
Stable isotopes of thallium, zinc, cadmium, xenon, oxygen, strontium and
many others are routinely used in a variety of medical imaging and therapy
applications. In their enriched form or converted to a specific radioactive
isotope in a cyclotron or nuclear reactor, these materials are incorporated in
chemical compounds which concentrate in specific parts of the human body upon
injection, inhalation or ingestion. Measuring the distribution of the
materials in the patient can assist physicians in diagnosing disease states
and developing appropriate treatment therapies, some of which incorporate
radioactive materials produced from stable isotopes.
26
<PAGE>
Most phases of the development and ongoing production of these materials are
controlled by the FDA and similar foreign regulatory agencies. This fact,
combined with the complexities of production and distribution, has resulted in
a market with only a few manufacturers. Tight quality control requirements and
the importance to the health care industry of a ready supply of these drugs
leads these manufacturers to pay close attention to their stable isotope
suppliers. Quality, supply reliability, ultimate source, breadth of offerings,
price and track record are principal factors that a manufacturer considers in
evaluating a potential stable isotope supplier. Much of the material used to
manufacture such products originates in countries of the former Soviet Union.
While the U.S. Department of Energy ("DOE") has significant capabilities in
this area, its costs are usually substantially higher because of the full cost
recovery mandated by legislation governing the DOE's operations.
The Company is capable of supplying many of the stable isotopes currently
sold in this market. The Company also has established relationships in Russia,
an important consideration for those drug manufacturers that have less
established relationships with Russian suppliers. Finally, the original
impetus for new applications of stable isotopes in health care frequently
comes from the drug manufacturers. For these reasons, the Company has recently
begun marketing its products, services and capabilities to the existing and
emerging manufacturers.
Isotopically Pure Semiconductors
Isotopic purification of carbon used to manufacture synthetic diamonds has
resulted in substantially improved physical properties. Published tests
conducted by GE and others have shown that the removal of a small amount of
carbon-13 to produce isotopically pure carbon-12 synthetic diamonds can result
in a 50% improvement in room temperature thermal conductivity of the diamond.
At cryogenic (i.e., extremely cold) temperatures, the heat conductivity is so
great that it cannot be measured using conventional techniques. Additionally
the new diamond was found to be highly transparent, and the transmission of
certain frequencies of light was increased by approximately 10 times without
the diamond sustaining damage. GE has stated that isotopically pure carbon-12
diamonds may enable faster, more reliable computers due to their superior heat
removal capability and may result in more efficient laser cutting tools and
more accurate laser measurement devices, and that the new diamonds may enable
designers to use lasers in semiconductor fabrication techniques.
Synthetic diamonds made from isotopically pure carbon-13 have been found by
Ford Motor Company scientists to have more atoms per cubic centimeter than any
other solid known to exist on earth. These isotopically pure carbon-13
diamonds are harder than any other presently-known material. Studies conducted
at Lawrence Berkeley Laboratory and the Max Planck Institute on isotopically
pure germanium have shown thermal conductivity improvements similar to those
found in isotopically pure carbon-12 diamonds.
The Company believes that these and other improved properties might be found
in other isotopically pure materials and may result in commercial
opportunities, particularly in the area of semiconductors. According to the
Semiconductor Industry Association, the 1995 market for silicon wafers and
other semiconductor substrates was approximately $6 billion. This market is
projected to grow 50% by the year 1999 to over $9 billion. Improvement in the
thermal conductivity of these materials is important since as the feature size
continuously decreases, the power density increases. As power density
increases, more heat is generated per unit volume, causing device operating
temperature to rise. The semiconductor industry is moving toward lower
operating voltages and is using mechanical means to remove bulk heat, but the
Company believes that greater heat dissipation on the micro scale will become
even more important to the industry in the future. Better thermal conductivity
directly affects heat removal capability and indirectly improves device speed.
As the industry moves toward multi-layer devices and true 3-D chips, the
ability to remove heat will be a material consideration for the semiconductor
industry.
Natural silicon contains three isotopes, silicon-28 (92%), silicon-29 (5%)
and silicon-30 (3%). An otherwise perfect crystal of silicon will contain
imperfections in the form of isotopes of different mass, with the density of
these imperfections amounting to nearly 8%. This far exceeds the doping levels
and density of imperfections ordinarily found in device-quality crystals. The
Company believes that removal of the minor isotopes should result in
substantially improved thermal conductivity.
27
<PAGE>
The Company believes that if commercial opportunities emerge, isotopically
pure silicon-28 (99.5%) deployed as wafers or substrates and as silane for
building epitaxial layers should find a niche in the manufacture of high
performance silicon semiconductors. Even at the premium price required for
isotopically pure silicon, the Company believes that it can compete in high
performance, less cost driven market segments.
Isonics has obtained an option entitling it, upon the satisfaction of
certain conditions, to acquire an exclusive license regarding two U.S. patents
concerning isotopically pure semiconductor devices, which are owned by Yale
University. Yale's prior efforts to license its technology to semiconductor
manufacturers was hindered by Yale's inability to obtain the necessary
isotopically pure and chemically pure materials to evaluate its use. Since the
Company's stable isotopes could enable the development and commercialization
of the Yale technology, Yale chose to collaborate with the Company in
evaluating isotopically pure semiconductors. These patents cover silicon,
germanium, gallium arsenide and most isotopically pure compound
semiconductors. The Company is collaborating with Yale to evaluate possible
isotopically engineered semiconductor applications and their commercial
feasibility, including cost. The Company believes that if evaluations
demonstrate the commercial feasibility of one or more products, demand could
emerge in certain segments of the semiconductor market. There can be no
assurance, however, that these evaluations will demonstrate the commercial
feasibility of any products, that the Company will be able to commercialize
any such products or that a market will emerge for any such products. To
exercise the option, the Company must deliver to Yale before March 1997
specimens of isotopically pure silicon-28 meeting certain specifications. The
Company believes it will be able to satisfy this requirement, but there can be
no assurance that this will be the case. The option specifies that the terms
of the license shall be reasonable, but the terms may be no less favorable to
the Company than those specified in the option. The license, if obtained, will
require payment by the Company of an annual royalty based on a percentage of
the Company's or its sublicensees' net sales of products derived from
technology covered by the Yale patents. In addition, the license will permit
deduction of one-half of the Company's reasonable cost of securing the
silicon-28 from its future royalty payments to Yale University. Upon notice by
the Company of its exercise of the option, the Company and Yale are required
to negotiate in good faith to arrive at a license agreement within 90 days.
In addition to silicon, the Company plans to evaluate a number of compound
semiconductors, such as gallium arsenide, which may particularly benefit from
enhanced heat dissipation capability.
RESEARCH AND DEVELOPMENT
Consistent with the Company's product development strategy, a variety of new
stable isotope products and potential markets are continually being identified
and evaluated for economic and technical feasibility, and the Company intends
to devote a portion of the net proceeds of this offering for research and
development. See "Use of Proceeds." The Company intends to spend substantial
resources on improved technologies for isotope separation and materials
processing technologies. Much of the expenditures to date have been in Russia
to capitalize on the high quality of technology and economical labor rates.
The Company's activities in Russia could, however, be directly affected by
political, economic and military conditions in Russia. See "Risk Factors--
Operations in Russia."
PATENTS AND PROPRIETARY RIGHTS
The Company relies primarily on a combination of trade secrets,
confidentiality procedures and contractual provisions to protect its
technology. Despite the Company's efforts to protect its rights, unauthorized
parties may attempt to copy aspects of the Company's products or to obtain and
use information that the Company regards as proprietary. Policing unauthorized
use of the Company's technology and products is difficult. In addition, the
laws of many countries do not protect the Company's rights in information,
materials and intellectual property that it regards as proprietary to which it
regards as great an extent as do the laws of the United States. There can be
no assurance that the Company's means of protecting its rights in proprietary
information, materials and technology will be adequate or that the Company's
competitors will not independently develop similar information, technology or
intellectual property.
28
<PAGE>
The Company currently has no patents and has not filed any patent
applications. The Company has rights to several isotopically engineered
innovations regarding electronic and optical materials which it believes may
be patentable. Ongoing work in the area of isotope separation by biochemical
means may also lead to patentable inventions.
To date, the Company has not been notified of any claim that the Company's
products infringe the proprietary rights of third parties, but there can be no
assurance that third parties will not claim infringement by the Company with
respect to current or future products. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable to the Company or at all, which could have a material adverse
effect upon the Company's business, financial condition or results of
operations. See "Risk Factors--Protection of Intellectual Property."
COMPETITION
The markets for the Company's products and proposed products are highly
competitive, and the Company expects that competition will continue and
increase as markets grow and new opportunities are realized. Some of the
Company's current competitors, and many of the Company's potential
competitors, are larger and have significantly greater financial, technical,
marketing and other resources. Some of the Company's competitors may form
partnerships or alliances with large pharmaceutical or electronics companies,
with the resulting entity possessing more market strength than the Company.
The Company's competition varies greatly depending on which product or
industry is considered.
DZ. At present, the Company is the only producer of DZ, but believes that
other entities or persons may begin producing DZ. Several such possible
producers have adequate technical and financial resources to become viable
competitors of the Company in the near future. In particular, Siemens has
indicated that it has a relationship with Ultracentrifuge Netherlands ("UCN")
and GE has indicated that it intends to establish a second Russian source to
compete with the Company for GE purchases. UCN also competes with the Company
in the markets for cadmium and in medical target isotopes.
SILCs. The Company has several larger and numerous smaller competitors in
the markets for the SILC products that the Company currently supplies, and
will have additional competitors if it offers breath test diagnostic products
and additional SILCs in the future. Two of these companies, Cambridge Isotope
Laboratories Inc., and Isotec, Inc., have their own isotope separation
capability, while all of the competitors produce some combination of SILCs and
DBT substrates. The Company believes that one company in the U.S. has recently
received FDA approval for a carbon-13 UBT, that another company has applied
for FDA approval for a carbon-13 UBT, and that several companies in Europe are
also pursuing regulatory approval. The Company's principal current competitors
and potential competitors include Tracer Technologies, Aldrich Chemicals, Icon
Services, MicroForest, Omicron, C/D/N Isotopes and Martek Biosciences. The
Company has in the past, and may in the future, sell products to or purchase
products from these companies.
Electronics and Optical Materials. Due to the early stage of the electronic
and optical materials opportunities, the Company has not identified material
competitors in these markets. However, given the potential size and importance
of these new potential markets, the Company anticipates that substantial
competition will emerge if these markets develop.
Many of the areas in which the Company is or intends to compete are rapidly
evolving. There can be no assurance that an existing or potential competitor
has already developed, or may develop, a patentable product or process which
will substantially prevent the Company from competing in its intended markets.
The Company competes primarily on the basis of product performance,
proprietary position and price. Some of the Company's products may also
compete based on product efficacy, safety, patient convenience and
reliability. In many cases the first company to introduce a product to the
market will obtain at least a temporary competitive advantage over subsequent
market entrants.
29
<PAGE>
MANUFACTURING AND SUPPLY
Consistent with the Company's strategy to minimize capital expenditures, the
Company obtains stable isotopes through alliances and multi-year supply
agreements with Russian stable isotope sources and may invest in Company-owned
isotope production facilities in the future upon determining the optimum
production technology. Currently, the Company obtains substantially all its
isotopes from a supply alliance in the former Soviet Union.
The production of DZ is an international activity involving several distinct
steps which require up to nine months for the complete production cycle. First
the feed material, high purity diethylzinc, is procured from a chemical plant
in the United States and shipped by freighter to St. Petersburg, Russia. There
it is transported by truck or train to the gas centrifuge plant where it is
depleted of the zinc-64 isotope and converted to depleted zinc oxide. The
oxide form of DZ, which is acceptable for air freight, is then shipped to a
processing facility in the United States where additional chemical and
mechanical operations are performed to prepare the powder for use in nuclear
plants either as pellets or as a very fine grained powder. If the final
product form is pellets, further processing is performed in Ireland, but the
Company is pursuing development of the technology to perform this
manufacturing step in-house in the future.
The Company has entered into an agreement with an isotope enrichment plant
located in Russia. The term of the agreement is through 1999. Under the
agreement, the plant will produce DZ and other stable isotopes for the Company
will allocate its entire stable isotope production capacity to the Company and
will produce other isotopes to respond to marketplace demand on the Company
for other stable isotopes. Under the agreement, the specific terms for each
year's production, including pricing terms, are negotiated between the parties
by November 1 of the preceding year, and the next such negotiation is expected
to occur in November 1996. The agreement provides that disputes arising
thereunder are to be resolved by arbitration conducted in Europe under
international commercial arbitration rules, and accordingly the enforceability
of the agreement might be subject to the greater degree of uncertainty than if
the agreement was with a U.S. company and disputes were resolved in the U.S.
The supply of stable isotopes could be directly affected by political,
economic and military conditions in Russia. Accordingly, the operations of the
Company could be materially adversely affected if hostilities involving Russia
should occur, if trade between Russia and the United States were interrupted
or curtailed, or if the Company should fail to obtain and maintain all
necessary governmental approvals. Operations in Russia entail certain other
risks, including, among others, supply disruptions as well as introduction of
tariffs and fluctuations in freight rates. See "Risk Factors--Operations in
Russia." There can be no assurance that the Company's relationship with its
processor in Russia will be successfully maintained. Disruption or termination
of the Company's supply sources could delay shipments by the Company and could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company does not presently maintain political
risk insurance but will evaluate the desirability and availability of such
insurance in the future.
To increase capacity and to geographically diversify the Company's
production of certain isotopes, the Company is considering constructing a
facility outside of Russia. The Company believes that owning this facility may
improve its profitability and will improve the security of its supply. The
Company intends to conduct a feasibility study to evaluate the nature and
timing of such a facility, and a portion of the net proceeds of this offering
will be used to fund that study. See "Use of Proceeds." The nature and timing
of any such construction will depend on several factors, including the results
of the study. If such a facility is constructed, it is likely that the
facility would be located in North America.
The Company depends upon a single processor, located in Russia, for one
process involved in the manufacturing of its products, and upon a single
supplier or a limited number of suppliers and processors for certain other
manufacturing processes. Although the Company does have written agreements
with certain of its suppliers and processors, the Company does not have any
written agreements with other suppliers and processors. The Company seeks to
reduce its dependence on its sole and limited suppliers, but disruption or
termination of any of the sources could occur, and such disruptions could have
at least a temporary material adverse affect on the Company's business,
financial condition and results of operations. Moreover, a prolonged inability
to obtain alternative sources for processing could materially adversely affect
the Company's relations with its customers.
30
<PAGE>
GOVERNMENT REGULATION
Regulation by government authorities in the United States and other countries
is a significant consideration in the development, production, distribution
and marketing of the Company's products and in its continuing research,
development, and other activities. In order to clinically test, manufacture,
distribute, market and sell products, especially those intended for
therapeutic or diagnostic use, mandatory procedures and safety and other
standards established by applicable regulatory authorities must be followed.
In many cases, specific approval to clinically test and commercially
distribute such products must be obtained from numerous governmental
authorities. Furthermore, the Company is subject to various laws, regulations
and requirements relating to such matters as the import and export of its
products, ensuring safe working conditions, laboratory and manufacturing
practices, the use and disposal of hazardous or potentially hazardous
substances used in connection with the Company's research, development and
manufacturing activities. Some of the regulations are summarized below. See
"Risk Factors--Government Regulation."
FDA Regulation
The Company's testing, manufacture, marketing, distribution, export and sale
of diagnostic products, such as any DBT it might in the future develop and
seek to sell, are subject to extensive and rigorous regulation by United
States and other countries in which the Company may choose to test,
manufacture or market its proposed diagnostic products. As of the date of this
Prospectus, the Company has not determined those countries, other than the
United States, where it might seek regulatory approvals to market any such
products it may develop. The products the Company intends to develop are
subject to rigorous preclinical and clinical testing and other FDA approval
requirements, and similar requirements in most other countries.
The process for obtaining the required regulatory approvals from the FDA and
other regulatory authorities takes many years and can be expensive. The
Company has limited experience in conducting and managing the preclinical and
clinical testing necessary to obtain regulatory approvals and expects to rely
on experienced outside experts to assist as well as develop its own resources.
The various diagnostic products of which the Company is contemplating
development are subject to different regulations and other requirements.
Various components of the DBT and other products proposed for development are
regulated as drugs or medical devices under the Federal Food, Drug, and
Cosmetic Act ("FDCA"). The applicable FDA requirements for approval may be
different for different types or components of products.
There can be no assurance that any product developed by the Company, or
other entities to which the Company may sell bulk or other materials, will
prove to meet all of the applicable standards to receive marketing approval,
or that any such approvals will be granted on a timely basis, if at all, or
that such products if approved will be commercially successful. Delays and
costs in obtaining these regulatory approvals could adversely affect the
Company's ability to commercialize its products and its ability to receive
market revenues. Even if regulatory approvals for a product are obtained, such
approvals may involve restrictions and limitations on the labeling and
clinical use of the product. Following market approval, the product will
continue to be subject to compliance with applicable federal and state laws
and regulations.
The Company or the FDA may suspend clinical trials or commercial
distribution at any time if either determines that the subjects or patients
are being exposed to an unacceptable health risk related to the manufacturing,
testing and use of the Company's investigational or approved products, or if
the FDA determines that the Company has violated applicable laws or
regulations. If clinical studies are suspended, the Company may be unable to
continue development of the investigational products affected. Violation of
applicable laws and regulations, particularly those dealing with medical
products, can result in the imposition of substantial penalties against the
Company and its employees and officers, such as product seizures, recalls,
fines, injunctions and withdrawal or suspensions of approvals to test,
manufacture, export or market products. Delays and costs in obtaining or
reinstating these approvals and the subsequent compliance with applicable
federal and state statutes and regulations, and any penalties imposed for
their violation, could adversely affect the Company's ability to commercialize
products.
31
<PAGE>
Diagnostic Medical Device Products
Certain diagnostic products that the Company may pursue, such as the DBT
products, are regulated as medical devices. Diagnostic products may be subject
to one of two marketing approval procedures. One procedure, known as a "510(k)
review," is available when the manufacturer can demonstrate that the proposed
product is "substantially equivalent" to another product that either was in
commercial distribution in the United States before May 28, 1976, or that has
been subsequently classified as a Class I or Class II medical device. When a
510(k) review is used, a sponsor is required to submit a Pre-Market
Notification to the FDA, at least 90 days before it plans to initiate
commercial distribution of the product.
The Company cannot proceed with sales of such products for human clinical
use until it receives notification from the FDA that FDA agrees with the
Company's assertion of substantial equivalence, a process that can take six to
eighteen months, or longer. In the event that the FDA requests additional
information for the Pre-Market Notification, there could be multiple cycles of
submissions, each involving an additional waiting period, until clearance is
obtained. The FDA also has statutory authority to require clinical or other
study data to support a Pre-Market Notification 510(k).
Where there is no existing legally marketed product "substantially
equivalent" to the Company's product, the Company will be required to seek
marketing approval of its product by the second procedure. This second
procedure, a Pre-Market Approval ("PMA") application, involves a lengthier and
more burdensome procedure, which would likely require clinical studies.
Together with the FDA review of the PMA, this application process may take 3-5
years before commercial marketing can occur, if the PMA is approved. There can
be no assurance that any future product the Company develops which is the
subject to FDA review will be found to have an intended use and
characteristics that would qualify the new test for commercial distribution
for clinical use under 510(k) Pre-Market Notification. Thus, PMAs may be
required for some or all of the Company's future proposed products.
The FDA invariably requires clinical data before approving either a PMA or a
510(k). The FDA is empowered to grant a 510(k) clearance without supporting
clinical data. If clinical studies are necessary for either a PMA approval or
510(k) clearance, the FDA may require the Company to obtain an investigational
device exemption ("IDE"). An IDE normally restricts the transfer of an
investigational device to a limited number of institutions, and use to a
limited number of investigators. Before the approval and/or clearance is
issued, such institution or investigators may receive the Company's
investigational devices only for the purpose of performing the clinical
studies that are to be submitted to the FDA in support of a 510(k) or a PMA
application.
The Company believes that DBT instruments, if any, that it may develop in
the future will be eligible for marketing under a 510(k) Premarket
Notification, if cleared by FDA, but that the substrate would require approval
of a New Drug Application as described in the following section. The Company
believes that clinical studies would be required to obtain FDA approval of the
510(k)/NDA the DBT instrument/substrate, and would be conducted under IDE
approved by FDA. There can be no assurances that FDA will allow the Company to
conduct such clinical studies or that such studies will provide the data
necessary to obtain the approval of the 510(k)/NDA for any DBT or other
product that the Company may develop, or that FDA will in fact provide the
necessary approval of the 510(k)/NDA in a timely manner, if at all.
In addition, use of the DBT and other diagnostic products developed by the
Company may be subject to regulation under the Comprehensive Laboratory
Improvement Act of 1986 ("CLIA"). Under CLIA, clinical laboratories must be
certified to perform diagnostic tests. Such certification specifies the
highest "complexity level" of tests that the laboratory can perform. The
specific complexity level of a given diagnostic product is determined by
governmental agencies, currently the U.S. Centers for Disease Control. The
Company's ability to successfully market diagnostic products within the U.S.
may depend on its obtaining a complexity level determination that allows the
broadest use. There can be no assurance that such complexity level
determination can be obtained in a timely manner, if at all, and that such
failure will not have a material adverse effect on the Company and its
operations.
32
<PAGE>
Drug Products
Certain products that may be developed by the Company may be classified,
depending on their characteristics, as drugs regulated under the FDCA.
Development of a drug product for use in humans is a multistep process. First,
laboratory and animal testing establishes reasonable safety of the
experimental product for testing in humans and suggests potential efficacy
with respect to a given disease. Once the general investigative plan and
protocols for specific human studies are developed, an investigational new
drug application ("IND") is submitted to the FDA. Under FDA regulations, the
Agency does not approve an IND. Rather, assuming compliance with applicable
requirements, the IND becomes effective, thus allowing a clinical
investigation to commence unless FDA notifies the sponsor to the contrary
within 30 days of receipt of the IND. That approval may come within 30 days of
IND submission but may involve substantial delays if the FDA requests
additional information before approving any clinical testing.
The initial phase of clinical testing (Phase 1) is conducted on a relatively
small number of subjects (e.g., 20-50) to evaluate the pharmacological actions
and side effects of the experimental product in humans and, if possible, to
gain early evidence of effectiveness. Phase 1 studies evaluate various routes,
dosages and schedules of product administration. The demonstration of
diagnostic performance is not required in order to complete such studies
successfully. If acceptable product safety is demonstrated, then Phase 2
studies may be initiated. The Phase 2 studies are designed to evaluate the
effectiveness of the product in the diagnosis of a given disease and,
typically, are well-controlled, closely monitored studies on a relatively
moderate number of patients (e.g., 50-200). The optimal routes, dosages and
schedules of administration, and other matters, are determined in these
studies. If Phase 2 trials are successfully completed, Phase 3 trials will be
commenced.
Phase 3 trials are the larger controlled trials and uncontrolled studies,
often involving hundreds of patients (400-500 or more) that are intended to
gather additional information about safety and effectiveness in order to
demonstrate the overall risk/benefit relationship of the experimental product
and to provide an adequate basis for labeling and marketing approval. It is
not possible to estimate the time in which Phase 1, 2 and 3 studies will be
completed with respect to a given product, although the time period required
is often four to ten years in duration, depending on the clinical protocol
design, endpoints and FDA requirements.
Following the successful completion of these clinical trials, the clinical
evidence that has been accumulated is submitted to the FDA as part of a new
drug application ("NDA"). Approval of the NDA is necessary before a company
may market the product. The approval process can be very lengthy, frequently
taking one to two years, or more, after submission and depends in part upon
the speed of FDA's review of the application and the time required for the
company to provide satisfactory answers or additional clinical or other data
when requested. With any given product, there is no assurance that an NDA will
ever be approved in a timely manner or at all. Failure to obtain such
approvals would prevent the Company from commercializing its products and
would have a material adverse effect on the Company's business. Furthermore,
the process of seeking and obtaining FDA approval for a new product generally
requires substantial funding, and there can be no assurance such funding will
be available.
cGMPs and Other Controls
The FDA also has extensive regulations concerning manufacturing of regulated
products in accordance with current good manufacturing practices ("cGMPs").
The Company's compliance with cGMPs, including compliance of its third-party
manufacturers, and its ability to ensure the potency, purity and quality of
the drugs and medical devices manufactured, must be documented in the NDAs,
510(k)s and PMAs submitted for the products. Continued compliance with cGMPs
is required to continue to market both drugs and medial devices once they are
approved. Failure to comply with the cGMP regulations or other applicable
legal requirements can lead to federal seizure of violating products,
injunctive relief actions brought by the federal government and potential
criminal investigation and prosecution of the Company and its officers and
employees who are responsible for the activities that lead to the violations.
33
<PAGE>
The Company and the facilities used by it also are required to comply with
environmental and other regulations concerning the operations of and the
materials used by the Company, as well as handling and distribution of
products and waste materials. Failure to ensure compliance with such federal,
state or local laws and regulations could have a material adverse effect on
the Company.
In addition, the manufacture, distribution and export of some of the
Company's current or potential products and technology may be subject to
governmental controls pertaining to materials and technology that might have
been used for military, nuclear power, or nuclear weapons purposes. These
controls include, in certain cases, export license requirements or other
restrictions. There can be no assurances that the Company will be able to
obtain or maintain such licenses, or that the failure to obtain or maintain
such licenses, or comply with other restrictions that might be placed on such
manufacturing and exports, will not have a material adverse effect on the
Company and its operations.
Export and Environmental Controls
Certain of the Company's products and technology, particularly those having
potential nuclear energy or military applications, such as DZ and related
technology, are subject to stringent controls over their manufacture, use,
distribution, dissemination and export. In many cases, such activities may
require approvals or licenses from various U.S. and foreign governmental
agencies, and compliance with substantial regulatory controls. Such approvals
can be difficult to obtain and maintain and may not be obtainable from certain
countries. Furthermore, such approvals or licenses may be restricted or
terminated because of changes in laws, regulations, policies governing those
approvals and licenses, or changes in the political or other matters in the
countries granting such approvals or licenses to which the Company's products
and technology would be exported. Likewise, certain current and potential
operations of the Company may necessitate submitting registrations or
notifications to federal and state regulatory authorities responsible for
environmental and related matters, including the U.S. Environmental Protection
Agency ("EPA") and complying with stringent controls pertaining to the
handling and distribution of the Company's products and operations, including
under certain conditions obtaining governmental approvals and licenses, either
of which may be subject to significant restrictions. Violation of any of these
regulatory controls may subject the Company to significant administrative
civil and criminal penalties, including loss of its approvals and licenses, or
the imposition of additional restrictions on the Company's operations.
There can be no assurances that the Company will be able to obtain and
maintain the approvals or licenses necessary to successfully market its
products and technology, or that it will be able to comply with applicable
laws and regulations. Any such failure to obtain such licenses or approvals,
where required, and comply with such laws and regulations may materially and
adversely affect the business, financial condition and results of operations
of the Company.
Regulation of Non-Medical Chemical Products
The import, export, handling, transportation, sale, storage and other
activities undertaken in connection with the Company's non-medical products
are subject, or potentially subject, to substantial federal, state, local and
foreign government controls pertaining to hazardous chemical and chemical
wastes, import export controls and other matters. These regulations are
complex, pervasive and evolving. The Company's ability to effect and maintain
compliance with these controls is important to its commercial success.
With respect to transportation of its products, the Company relies on
Russian and U.S. freight carriers to handle and deliver all its shipments, and
utilizes domestic overnight courier services for shipments to its customers.
These carriers must comply with Department of Transportation ("DOT")
regulations in the shipping and packaging of the stable isotope chemicals. The
Company must also comply with DOT regulations when packaging material kept in
inventory for domestic shipment. As required under federal and state law, the
Company has prepared Material Safety Data Sheets ("MSDS"), which are enclosed
with each product shipment. The Company must periodically update its MSDS
sheets based on new literature reports. The Company cannot assure that its
MSDS sheets will continue to be in compliance with applicable requirements.
34
<PAGE>
The shipments received at the Company's Columbia, Maryland facility are
subject to federal and Maryland regulations pertaining hazardous chemicals and
hazardous waste disposal. These shipments are stored in an area of the
facility designated for such materials. Currently, the Company is considered a
small quantity generator of hazardous waste and will rely on certified haulers
to dispose of its minimal amounts of hazardous waste. Should the levels of
hazardous waste increase as its inventory and handling operations increase in
volume, then it would have to comply with Environmental Protection Agency
("EPA") requirements and obtain an EPA ID number, which are costly and require
an increased investment of personnel and money. The Company has no experience
in this area of compliance and would have to rely on outside consultants or
hire additional employees with pertinent experience and training. Potentially,
if substantially larger inventories of hazardous chemicals must be maintained
at the Maryland facility, the Company might have to move to new facilities in
order to meet EPA requirements for the storage of hazardous chemicals.
The shipments from Russian manufacturing sources now enter the U.S. duty
(without tariff) free; however, there can be no assurance that such duty-free
importation will continue. If the shipments are subject to tariff, the Company
cannot assure that it will be able to sell the imported products will be
commercially viable because of these increased tariff costs.
The Nuclear Regulatory Commission ("NRC") has authority to regulate
importation and exports of deuterium containing chemicals whose ratio of
deuterium atoms to hydrogen atoms exceed 1:5000. At present, the deuterium
containing compounds which the Company imports do not require any special
licenses or importation authorization. There can be no assurances that the NRC
will continue these policies. The NRC regulates exports of deuterium
containing chemicals under general license. The Company will not be able to
ship these chemicals to certain countries which require a special license for
such shipments; none of these countries represent significant current or
expected future markets for the Company. In addition, certain technology or
products that the Company is or may in the future develop, may be subject to
other government controls pertaining to armaments, including the need to
obtain special licenses for exports. The imposition of such controls may
impair the ability to broadly market such products.
PRODUCT LIABILITY AND INSURANCE
The Company's business exposes it to potentially substantial product,
environmental, occupational and other liability risks which are inherent in
product research and development, manufacturing, marketing distribution and
use of its products and operations, including, but not limited to, products
used in nuclear power plants and medical device products. The Company
currently does not have product liability insurance, but may seek such
insurance before it begins commercial distribution of medical or other
products that it may develop. There can be no assurance that adequate or
necessary insurance coverage will be available at an acceptable cost, if at
all, or that even if such insurance were obtained, a product liability or
other claim would not materially and adversely affect the business or
financial condition of the Company. See "Risk Factors--Product Liability;
Minimal Insurance Coverage."
The terms of the Company's agreements with its customers provide that
liability to nuclear power plant utilities is limited to the Company's
standard warranty to replace non-conforming product, and liability for
consequential damages caused by the improper use of the Company's products is
limited by contractual terms. Nevertheless, one or more third parties could
bring an action against the Company based on product liability, breach of
warranty or other claims, and, there can be no assurance that the foregoing
contract clauses would effectively limit the Company's liability in any such
actions.
EMPLOYEES
As of August 15, 1996, the Company had 10 full-time employees, of whom 2
have Ph.D.'s and 4 have advanced degrees in chemistry, engineering, and
related fields. Approximately 3 employees are involved in research and product
development, 2 in manufacturing and sourcing, and 5 in business development
and administration, but such employees' responsibilities may also encompass
areas other than their primary area of responsibility.
35
<PAGE>
The Company plans to recruit a Vice President to manage and lead its
development of the planned electronic and optical materials business and a
General Manager plus additional personnel as may be required to staff its
intended SILC laboratory and business expansion.
The Company considers its relations with its employees to be good. None of
the Company's employees are covered by a collective bargaining agreement.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
FACILITIES
The Company leases 2,500 square feet of administrative and technical space
in San Jose, California. The lease expires January 1999. The Company leases
641 square feet for an administrative office in Columbia, Maryland. This lease
expires in December 1997. The Company intends to lease or acquire a facility
in the Columbia, Maryland, area in which to relocate its administrative
offices in Maryland. The Company leases office and laboratory space on a
month-to-month basis at Moscow State University where it performs its contract
research on isotope separation.
36
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The members of the Board of Directors ("Board") and the executive officers
of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James E. Alexander 47 President, Chief Executive Officer and Chairman of the Board
Boris Rubizhevsky 45 Senior Vice President, Isotope Production and Supply and Director
Joe Friscia 64 Vice President, Energy and Environmental Products and Secretary
Daniel J. Grady 42 Vice President, Medical, Research & Diagnostics
Paul J. Catuna 32 Chief Financial Officer and Director of Administration
Lindsay A. Gardner 45 Director
Larry J. Wells 52 Director
</TABLE>
Each director holds office until the next annual meeting of shareholders and
until his or her successor is elected and qualified or until his or her
earlier death, resignation or removal. Each officer serves at the discretion
of the Board.
Mr. Alexander is a founder of the Company and has served as its President,
Chief Executive Officer and a director since its inception. He has worked
full-time for the Company since January 1994. From June 1972 to December 1993,
he worked in a variety of technology positions at GE in the aircraft engine
and nuclear power businesses, where his last position was Manager of
Technology Programs. Mr. Alexander received his bachelors degree in
Metallurgical Engineering from the University of Cincinnati and performed
graduate work in materials science there. He earned a masters degree in
Business Administration from Santa Clara University.
Mr. Rubizhevsky is a founder of the Company and has been a Senior Vice
President and a director of the Company since inception. From November 1986
through December 1994, he owned and operated SAR Marketing, a consulting firm
providing business advice and services to large multinational corporations.
From June 1977 to May 1986, Mr. Rubizhevsky worked at GE as Business
Development Manager in various international locations. He received his
bachelors degree in Engineering from the Stevens Institute of Technology.
Mr. Friscia joined the Company in April 1995 as Vice President Energy and
Environmental Products. From October 1994 through the Company's acquisition of
Isoserve in April 1995, he served as President of Isoserve. From January 1990
through October 1994, he served as a Vice President of Concord Trading
Company. Mr. Friscia was employed by GE from August 1954 until September 1987,
and held a number of sales and marketing positions in the power systems
business including Manager of Marketing, Europe for Nuclear Power Plants. He
received his bachelors degree in Electrical Engineering and a masters degree
in Nuclear Engineering from Georgia Institute of Technology.
Dr. Grady joined the Company as Vice President, Medical, Research &
Diagnostics in October 1995. From March 1994 through September 1995, Dr. Grady
was Vice President of Research and Development at Sopha Medical Systems. From
April 1991 until March 1994, he served as Marketing Manager, Nuclear Energy
for GE. From May 1998 through March 1991, Dr. Grady served as Software
Engineering Manager, Nuclear Medicine for GE in England. From October 1984
through May 1988, he served as Clinical Applications Manager for GE Nuclear
Medicine. Between June 1981 and October 1984, he served as the Engineering
Analysis Section Head for TRW. Dr. Grady received his bachelors and masters
degree, and Ph.D. in Nuclear Engineering from the University of Michigan.
Mr. Catuna joined the Company in July 1996 as Chief Financial Officer and
Director of Administration. From January 1994 to July 1996, Mr. Catuna was
employed at Deloitte & Touche LLP, an international accounting and consulting
firm, where he most recently served as an audit senior manager. From January
1988 to January 1994, Mr. Catuna worked for Grant Thornton LLP, an
international accounting and consulting firm, where he most recently served as
an audit manager. Mr. Catuna received his bachelors degree in Business
Administration-Accounting from California State University Fresno, and is a
certified public accountant.
37
<PAGE>
Ms. Gardner has served from 1991 through the present as President of LG
Associates, a US-based management consulting firm providing materials
management expertise to foreign company affiliates of US companies in
developing countries. She began performing consulting services for Isonics in
September 1992 and was elected a director in September 1993. During her tenure
at LG Associates, she resided in Moscow, Russia from September 1991 to January
1994 when she moved to Beijing, China, where she currently resides. From 1977
to 1991, Ms. Gardner worked for GE in a variety of management and functional
positions including international marketing, quality assurance and materials.
Ms. Gardner received her bachelors degree in International Economics from The
George Washington University Elliott School of International Affairs, and
earned a masters in Business Administration from the University of Louisville.
Mr. Wells was elected a director of the Company in September 1996. He is the
founder of Sundance Venture Partners, L.P. ("Sundance"), a venture capital
fund, and is the chairman of the entity that acts as the manager of Sundance.
From 1983 to 1987, Mr. Wells served as Vice President of Citicorp Venture
Capital and then became Senior Vice President of Inco Venture Capital. From
May 1969 to June 1983, Mr. Wells was the founder and President of Creative
Strategies International, a market research consulting firm specializing in
emerging markets. Mr. Wells is a director of Identix, Inc., Atlanta Technology
Group, Cellegy Pharmaceuticals, Gateway Data Sciences and Telegen Corporation
as well as several privately held companies. Mr. Wells holds a BA degree in
Economics and an MBA degree from Stanford University.
SCIENTIFIC ADVISORY PANEL
The Company has established relationships with a group of scientific
advisors with expertise in physics, material science, isotope separation,
nuclear medicine and chemical synthesis. The Company's advisors consult with
management and key scientific employees of the Company to assist the Company
in identifying stable isotope and other product development opportunities, to
help structure and review the progress of the Company's development projects
and to aid in the recruitment and evaluation of the Company's scientific
staff. The nature, scope and frequency of consultations between the Company
and each scientific advisor varies depending upon the Company's current
activities, the need for specific assistance and the individual scientific
advisor. Although the Company expects to receive guidance from its scientific
advisors, all of the advisors have substantial commitments to third parties
and are able to devote only a small portion of their time to the business of
the Company. To date the scientific advisory panel has not been compensated
for its services.
Michael Alferieff, Ph.D. Dr. Alferieff currently serves as an independent
consultant. He holds a bachelors degree in Mathematics and Physics from the
Massachusetts Institute of Technology and received his masters degree in
Theoretical Physics from Columbia University and a Ph.D. in Theoretical
Physics from the University of California. He has worked at the GE R&D Center
in Santa Barbara and at IBM's Thomas J. Watson Research Center, among other
assignments. More recently, Dr. Alferieff has focused on translation of
Russian technical articles for a number of international journals,
universities, and private companies.
Vladimir Yu. Baranov, Ph.D. Dr. Baranov is currently a director of the
Institute of Molecular Physics at the I.V. Kurchatov Institute in Moscow, an
institution specializing in theoretical physics, fusion energy research and
isotope separation technology development. He received a doctor of science
degree in Physics from the I.V. Kurchatov Institute and a Ph.D., from the
Moscow Institute of Electrical Engineering. In 1991, he was appointed a member
of the Academy of Sciences of the Russian Federation. Dr. Baranov has special
expertise in separation of stable isotopes utilizing high power lasers.
John Engdahl, Ph.D. Dr. Engdahl serves as President of Applied Nuclear
Imaging, Inc., a consulting company, which he founded in 1996. Since 1982, Dr.
Engdahl has worked in nuclear medicine in design of equipment and image
processing applications. Dr. Engdahl was Vice President of Clinical Science at
Sopha Medical Systems from 1990 to 1996. Dr. Engdahl was employed as
radiologic physicist in nuclear medicine at Henry Ford Hospital from 1987 to
1990, and from 1982 to 1987 he was employed at GE Medical Systems as manager
of product development for GE's nuclear imaging business. Dr. Engdahl chaired
the National Electrical
38
<PAGE>
Manufacturers Association, Nuclear Diagnostic Imaging Section from 1992 to
1995, is a member of the IEEE and Society of Nuclear Medicine. Dr. Engdahl
received his bachelors and masters degree, and Ph.D. from the University of
Michigan.
Eugene E. Haller, Ph.D. Dr. Haller is currently a Professor of Material
Science at the University of California at Berkeley and program leader of the
Advanced Electronic Materials Program at the Lawrence Berkeley Laboratory. Dr.
Haller received his doctorate degree in Solid State and Applied Physics from
the University of Basel, Switzerland. Dr. Haller has published many works on,
among other subjects, isotopically engineered semiconductors.
Ward Rigot. Mr. Rigot is a research associate at the Dow Chemical Company.
He holds a bachelors degree in Chemistry from Eastern Michigan University and
received a masters degree in Nuclear Engineering from the University of
Michigan. He has also served as an adjunct professor at Saginaw Valley State
University. Mr. Rigot is experienced in radiation detection and measurement,
analytical chemistry, and synthesis of organic and inorganic compounds.
Mammem Thomas. Mr. Thomas currently serves as Chief Executive Officer of
Technology Management Consultants, Inc., a consulting company, and Vice
President of Technology at Elan Microsystems, Inc., a semiconductor company.
Mr. Thomas holds a bachelors degree in Engineering from the University of
Kerala, India, and received a masters of Business Administration from the
Indian Institute of Management in Calcutta, and a masters in Electrical
Engineering from the University of Michigan. Mr. Thomas is experienced in the
manufacture of semiconductor devices and in the transfer of semiconductor
manufacturing technology.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to the Company in all capacities during the year
ended April 30, 1996 ("fiscal 1996") by (i) the Company's chief executive
officer and (ii) the Company's other executive officers whose salary and bonus
(including consulting fees) exceeded $100,000 during fiscal 1996 (each a
"Named Person").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
---------------- -------------------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING
POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS(#)
- ------------------ ---- -------- ------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
James E. Alexander ..... 1996 $135,000 $52,380 $ -- 108,853
President and Chief
Executive Officer
Boris Rubizhevsky....... 1996 $ 90,000 $36,666 $ -- 108,853
Senior Vice President
</TABLE>
- --------
(1) Excludes other compensation, the aggregate amount of which does not exceed
the lesser of $50,000 or 10% of such Named Person's annual compensation.
39
<PAGE>
The following table sets forth information with respect to the options
granted to each Named Person during fiscal 1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE
OPTION/SARS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED(#)(1) FISCAL YEAR SHARE($)(2) DATE
- ---- ------------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
James E. Alexander............ 108,853 26.1% $1.52 Jan. 2001
Boris Rubizhevsky............. 108,853 26.1% $1.52 Jan. 2001
</TABLE>
- --------
(1) Mr. Alexander's and Mr. Rubizhevsky's options are exercisable in full at
the date of grant, but are subject to a right of repurchase in favor of
the Company upon the employment termination of the optionee, which right
lapses over a three-year period with respect to 20% of the shares subject
to the option after one year from the grant date, an additional 8.33% of
the shares subject to the option each three month period from January 1997
through January 1998, and an additional 11.66% of the shares subject to
the option for each three month period from February 1998 through January
1999.
(2) The exercise price for these options represents 110% of the estimated fair
market value of the underlying Common Stock, as determined by the Board as
of the date of grant.
DIRECTOR COMPENSATION
Directors of the Company do not receive cash compensation for their services
as directors but are reimbursed for their reasonable expenses in attending
meetings of the Board. Directors are eligible to participate in the Executives
Plan and Incentive Plan. See "--Employee Benefit Plans."
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has employment agreements dated January 1, 1996 with James E.
Alexander and Boris Rubizhevsky. Effective upon the closing of this offering,
those agreements will be amended by new employment agreements. The new
agreements become effective upon the closing of this offering. The agreements
have a term of four years and provide for annual salaries of $200,000 and
$180,000, respectively. Either the Company or the officer may terminate the
agreement at any time upon notice to the other party. The agreements provide
that upon a termination of employment other than for cause (as defined in the
agreements), the officer is entitled to severance compensation of 18 months of
his salary, paid at the same time as salary payments, and in addition all
outstanding stock options held by the officer will be accelerated and will
become exercisable in full and the Company's right of repurchase will
terminate with respect to such shares. The agreements provide for similar
accelerated vesting of outstanding stock options, upon a change in control of
the Company. The Company has also entered into an agreement with Paul Catuna,
the Company's Chief Financial Officer, providing for the grant of a stock
option to acquire 40,000 shares of Common Stock at an exercise price equal to
110% of the IPO Price Per Share. The shares subject to the option are subject
to a right of repurchase that lapses based upon the achievement of certain
financial requirements.
The Company has also entered into a number of employment agreements with
certain of its officers, including Daniel J. Grady, Martin Laurent, Joe
Friscia, Paul J. Catuna and Jacques Delente. The terms of these agreements are
similar in material respects except for the compensation payable to such
officers. The agreements have an indefinite term and provide for at-will
employment, terminable at any time by either party. The agreements provide for
a rate of annual compensation, which the Company will review annually. Under
the agreements, the employees are entitled to participate in the Company's
standard plans and policies. The agreements also include customary
confidentiality and invention assignment provisions.
40
<PAGE>
The Company has a consulting agreement with Donald P. Hateley pursuant to
which Mr. Hateley will provide financial, public relations and investor
relations services for a period of six months after the date of this offering.
The agreement provides for payments to Mr. Hateley totalling $180,000, of
which approximately $120,000 is expected to be paid and $90,000 is expected to
be expensed in the fiscal quarter during which the offering becomes effective.
Mr. Hateley is entitled to receive additional compensation if the Warrants are
exercised. A law firm, of which Mr. Hateley is of counsel holds warrants to
purchase 127,721 shares of Common Stock, exercisable at any time until
September 2000 at an exercise price of $1.38 per share, received approximately
$54,000 for legal services during fiscal 1996 and the first three months of
fiscal 1997. The Company has agreed to file a registration statement after the
effectiveness of this offering covering the resale of the shares issuable upon
exercise of the warrants.
EMPLOYEE BENEFIT PLANS
The Company currently has a 1996 Stock Option Plan (the "Existing Plan").
After the closing of this offering, no further options will be granted under
the Existing Plan, and future awards will be granted pursuant to the Company's
1996 Executives Equity Incentive Plan (the "Executives Plan") and the 1996
Equity Incentive Plan (the "Incentive Plan"). The terms of the Existing Plan
are, in material respects, similar to the terms of the Executives Plan and the
Incentive Plan. The Executives Plan and Incentive Plan are sometimes referred
to collectively as the "Plans." The Company's shareholders approved these
Plans in October 1996, and the Plans will become effective upon the effective
date of this offering.
1996 Executives Plan and Incentive Plan. In September 1996, the Board
adopted the Executives Plan and Incentive Plan. A total of 225,000 shares of
Common Stock and 50,000 shares of Common Stock are reserved for issuance under
the Executives Plan and the Incentive Plan, respectively. Except for the
number of shares reserved under each Plan, the terms of vesting of options or
other awards upon a Change of Control (as defined below) and as otherwise set
forth below, the Executives Plan and the Incentive Plan are similar in
material respects. Under each of the Executives Plan and the Incentive Plan,
shares that (i) are subject to an option under that Plan but cease to be
subject to such option for any reason other than exercise of such option, (ii)
are awarded under that Plan but are forfeited or are repurchased by the
Company at the original issue price or (iii) are subject to an award that
otherwise terminates without shares being issued will, in each case, be
redesignated as available for grant or issuance under that Plan. Both Plans
will terminate in September 2006, unless terminated earlier in accordance with
their provisions.
The Executives Plan and Incentive Plan provide for grants of stock options,
stock bonuses and awards of restricted stock by the Company to its officers,
directors who are employees of the Company, other employees, consultants,
independent contractors and advisors. No person will be eligible to receive
awards covering more than 200,000 shares in any calendar year under the
Executives Plan, and no person will be eligible to receive more than 30,000
shares in any calendar year pursuant to grants under the Incentive Plan. The
Plans will be administered by the Compensation Committee of the Board (the
administrator referred to as the "Committee"). The Plans permit the Committee
to grant options that are either incentive stock options, as defined in
Section 422 of the Code or nonqualified stock options, on terms (including the
exercise price, which may not be less than 85% of the fair market value of the
Common Stock, and the vesting schedule) determined by the Committee, subject
to certain statutory and other limitations in the Plans and certain
limitations imposed by state blue sky authorities. In addition to, or in
tandem with, awards of stock options, the Committee may grant participants
restricted stock awards to purchase Common Stock for not less than 85% of its
fair market value at the time of grant. The other terms of such restricted
stock awards may be determined by the Committee. The Committee may also grant
stock bonus awards of Common Stock either in addition to, or in tandem with,
other awards under the Plans, under such terms, conditions and restrictions as
the Committee may determine. Under the Plans, stock bonuses may be awarded for
the satisfaction of performance goals established in advance. In the event of
a dissolution, merger, consolidation or similar corporate transaction (each
such transaction a "Change of Control") (other than a merger into a parent,
wholly owned subsidiary or a reincorporation, in each event without
substantial change of equity interest), all outstanding awards under the
Executives Plan will become exercisable
41
<PAGE>
in full immediately before the consummation of such transaction and, if not
then exercised, will expire. In the event of a Change of Control under the
Incentive Plan, outstanding awards may be assumed, converted, replaced or
substituted by the successor corporation, which assumption, conversion,
replacement or substitution will be binding on all participants in the Plan. If
such successor corporation does not assume or substitute awards under the
Incentive Plan, such awards will expire on the consummation of such Change in
Control, on such terms and conditions as the Board determines.
401(k) Plan. The Board has adopted the Isonics Corporation 401(k) Plan (the
"401(k) Plan"), a defined contribution profit-sharing plan intended to qualify
under Section 401 of the Code. The shareholders of the Company approved the
401(k) Plan in October 1996. Under the 401(k) Plan, a participating employee
can make pre-tax contributions, subject to limitations under the Code, of a
percentage (not to exceed 15%) of his or her total compensation. Employee
contributions and the investment earnings thereon are fully vested at all
times. The Company may make contributions for the benefit of eligible
participating employees.
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND LIMITATION OF LIABILITY
The Company's Restated Articles of Incorporation (the "Restated Articles")
include a provision that eliminates to the fullest extent permitted by law the
personal liability of its directors to the Company and its shareholders for
monetary damages for breach of the directors fiduciary duties. This limitation
has no effect on a director's liability (i) for acts or omissions that involve
intentional misconduct or a knowing and culpable violation of law, (ii) for
acts or omissions that a director believes to be contrary to the best interests
of the Company or its shareholders or that involved the absence of good faith
on the part of the director, (iii) for any transaction from which the director
derived an improper personal benefit, (iv) for acts or omissions that show a
reckless disregard for the director's duty to the Company or its shareholders
in circumstances in which the director was aware, or should have been aware, in
the ordinary course of performing a director's duties, of a risk of serious
injury to the Company or its shareholders, (v) for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the Company or its shareholders, (vi) under Section 310
of the California Corporations Code (the "California Code") concerning
contracts or transactions between the Company and a director or (vii) under
Section 316 of the California Code concerning directors' liability for improper
dividends, loans and guarantees. The provision does not extend to acts or
omissions of a director in his or her capacity as an officer. Further, the
provision will not affect the availability of injunctions and other equitable
remedies available to the Company's shareholders for any violation of a
director's fiduciary duty to the Company or its shareholders.
The Restated Articles further authorize the Company to indemnify its agents
(as defined in Section 317(a) of the Code, which includes directors and
officers) through Bylaw provisions, agreements with agents, votes of
shareholders or disinterested directors or otherwise, to the fullest extent
permissible under California law. Pursuant to this provision, the Company's
Bylaws provide for indemnification of directors and officers. The Bylaws also
permit the Company to enter into indemnity agreements with individual
directors, officers, employees and other agents. The Company has entered into
such agreements with its directors and executive officers effective upon the
closing of this offering. These agreements, together with the Company's Bylaws
and Restated Articles, may require the Company, among other things, to
indemnify directors or officers against certain liabilities that may arise by
reason of their status or service as directors (other than liabilities
resulting from willful misconduct of a culpable nature), to advance expenses to
them as they are incurred (provided that they undertake to repay the amount
advanced if it is ultimately determined by a court that they are not entitled
to indemnification), and to obtain and maintain directors and officers
insurance if available on reasonable terms. Section 317 of the California Code,
the Company's Bylaws and the indemnity agreements provide for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons, under certain circumstances, for
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act. At present, there is no pending litigation or proceeding
involving a director, officer or employee of the Company regarding which
indemnification is sought, nor is the Company aware of any threatened
litigation that may result in claims for indemnification.
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<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
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<PAGE>
CERTAIN TRANSACTIONS
Since May 1, 1994, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which the Company was or is
to be a party in which the amount involved exceeds $60,000 and in which any
director, executive officer, holder of more than 5% of the Common Stock, or
any member of the immediate family of any such person had or will have a
direct or indirect material interest other than compensation arrangements, see
"Management," and as described below.
In connection with the August and September 1996 Placement, Placement Notes
in an aggregate principal amount of $300,000 were issued to Lindsay Gardner, a
director of the Company, one employee of the Company and two affiliates of
directors or officers of the Company at a discount totalling approximately
$30,000 and otherwise on the same terms as the other Private Investors. In
addition, an entity of which Larry J. Wells, a director of the Company, is an
affiliate, acquired $200,000 principal amount of Placement Notes and Placement
Warrants to acquire approximately 41,746 shares of Common Stock on the same
terms as other Private Investors, and the Company entered into a consulting
agreement with that entity, pursuant to which the Company paid the entity
$85,000. See "Capitalization--Recent Financing Transactions."
In September 1996, in part in order to allow the Company to establish a pool
of shares available for future awards pursuant to the Plans in amounts that
comply with the guidelines established by certain state blue sky authorities,
Mr. Alexander and Mr. Rubizhevsky exercised stock options to acquire 108,853
and 108,853 shares, respectively, of Common Stock at an exercise price of
$1.52 per share. The exercise price for the shares was paid by means of a loan
from the Company in the principal amount of the exercise price. The purchased
shares are pledged as collateral for the loans pursuant to a pledge agreement.
The loans bear interest at an annual rate equal to the minimum applicable
federal rate, and interest is payable annually. Principal and accrued but
unpaid interest is due five years from the date of the note. For each
optionee, until the note has been paid in full, upon any sale of such option
shares by the optionee a portion of the sales proceeds will be used to pay
amounts owed under the note. In addition, the Company has agreed to loan to
such officers, pursuant to a five-year note with interest at the minimum
applicable federal rate, an amount equal to the federal and state tax
liability incurred by them as a result of exercising such options, and to pay
compensation to such officers equal to the amount of interest payable under
the loans.
The predecessor entity to the Company was a general partnership. At the time
of incorporation in 1993, Mr. Alexander and Mr. Rubizhevsky exchanged their
partnership interests for 758,345 and 620,465 shares of Common Stock,
respectively.
The Company is also a party to several employment and consulting agreements.
See "Management--Employment and Consulting Agreements."
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Common Stock as of October 1, 1996, and
as adjusted to reflect the sale of the Securities offered hereby, by (i) each
person known by the Company to be the beneficial owner of more than 5% of the
Common Stock, (ii) each of the Company's directors, (iii) each Named Person
and (iv) all executive officers and directors as a group. The address of each
person is in care of the Company, 4010 Moorpark Avenue Suite 119, San Jose, CA
95117.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)(2)
----------------------------------------------
DIRECTORS, NAMED PERSONS, AND 5%
SHAREHOLDERS NUMBER PERCENT NUMBER PERCENT
-------------------------------- ------------ ---------------------- ----------
<S> <C> <C> <C> <C>
James E. Alexander(3).............. 867,198 33.6 867,198 19.3
Boris Rubizhevsky(3)(7)(8)......... 792,821 30.7 792,821 17.7
Lindsay Gardner(4)................. 95,760 3.7 95,760 2.1
Larry Wells(6)..................... 41,746 1.6 41,746 0.9
All executive officers and
directors as a group (7
persons)(5)........................ 2,040,718 77.9 2,040,718 45.5
</TABLE>
- --------
(1) The persons named in the table have sole voting and sole investment power
with respect to all shares beneficially owned, subject to community
property laws where applicable.
(2) Assumes that the Underwriters' over-allotment option to purchase up to
127,500 Shares and 127,500 Warrants from the Company is not exercised. See
"Underwriting."
(3) Includes 108,853 shares of Common Stock subject to a repurchase right in
favor of the Company.
(4) Includes warrants to purchase 23,191 shares of Common Stock issued in
connection with the Placement.
(5) Includes options to purchase 203,193 shares of Common Stock and 217,726
shares of Common Stock subject to repurchase rights in favor of the
Company, warrants to purchase 88,128 shares of Common Stock issued in
connection with the Placement, 40,312 shares of Common Stock issuable upon
conversion of Preferred Stock held by an affiliate of Mr. Rubizhevsky and
options to purchase 40,000 shares of Common Stock issuable at the closing
of this offering.
(6) Includes 41,746 shares issuable upon the exercise of Placement Warrants
held by an entity with which Mr. Wells is affiliated.
(7) Includes 40,312 shares of Common Stock issuable upon conversion of
Preferred Stock held by an affiliate of Mr. Rubizhevsky.
(8) Includes 23,192 shares issuable upon the exercise of Placement Warrants
held by an affiliate of Mr. Rubizhevsky.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 20,000,000 shares of Common Stock and 10,000,000
shares of Preferred Stock. As of October 1, 1996, there were outstanding
1,915,576 shares of Common Stock held of record by five shareholders, 6,250
shares of Class A Non-Voting Preferred Stock which will convert into 100,780
shares of Common Stock upon the closing of this offering, options and warrants
to purchase 663,077 shares of Common Stock, which included options to purchase
272,134 shares of Common Stock issued under the Company's employee benefit
plan and warrants to purchase 390,943 shares of Common Stock associated with
the Placement.
COMMON STOCK
Subject to preferences that may be applicable to any Preferred Stock
outstanding at the time, the holders of outstanding shares of Common Stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the Board of Directors may from time to time
determine. Each shareholder is entitled to one vote for each share of Common
Stock held on all matters submitted to a vote of shareholders. Cumulative
voting for the election of directors is specifically authorized by the Bylaws.
Moreover, until the Company becomes a "Listed Company" as defined by
applicable California law, the Company may not amend its charter documents to
prohibit the exercise of cumulative voting rights. Upon the closing of this
offering, the Company will not be a "Listed Company" as so defined, and
therefore cumulative voting will continue to be available in connection with
the election of directors. The Common Stock is not entitled to preemptive
rights and is not subject to conversion or redemption. Upon liquidation,
dissolution or winding up of the Company, the remaining assets legally
available for distribution to shareholders, after payment of claims or
creditors and payment of any liquidation preferences, if any, on outstanding
Preferred Stock, are distributable ratably among the holders of the Common
Stock and any participating Preferred Stock outstanding at that time. Each
outstanding share of Common Stock is, and all shares of Common Stock to be
outstanding upon completion of this offering will be, fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by California law, to provide for the issuance of shares of Preferred Stock in
one or more series, to establish from time to time the number of shares to be
included in each such series, to fix the rights, preferences and privileges of
the shares of each unissued series and any qualifications, limitations or
restrictions thereon, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then
outstanding), without any further vote or action by the shareholders. The
Board of Directors may authorize the issuance of Preferred Stock with voting
or conversion rights that could adversely affect the voting power or other
rights of the holders of Common Stock. Thus, the issuance of Preferred Stock
may have the effect of delaying, deferring or preventing a change in control
of the Company.
The Company has no current plans to issue any shares of Preferred Stock.
OTHER SECURITIES
Representatives' Warrants
In connection with this offering, the Company has authorized the issuance to
the Representatives of 85,000 Representatives' Warrants and has reserved
170,000 shares of Common Stock for issuance upon exercise of the
Representatives' Warrants and the warrants issuable upon exercise of the
Representatives' Warrants. Each Representatives' Warrant will entitle the
holder to purchase one share of Common Stock at a price of $ per share,
which is 120% of the IPO Price Per Share, and, upon payment of $ , which is
120% of the initial public offering price of the Warrants, to acquire one
Warrant. Each such Warrant will entitle the holder to purchase one share of
Common Stock at a price of $ per share, which is 150% of the IPO Price Per
Share.
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<PAGE>
The Representatives' Warrants will, subject to certain conditions, be
exercisable any time until the fifth anniversary of the date of this
Prospectus. See "Underwriting."
The Representatives' Warrants also contain provisions to protect the holder
against dilution by adjustment of the exercise price in certain events, such
as stock dividends and distributions, stock splits and recapitalizations. The
Company is not required to issue fractional shares upon the exercise of a
Representatives' Warrant, and the holder thereof will not possess any rights
as a shareholder of the Company until such holder exercises the
Representatives' Warrants. The other terms of the Representatives' Warrants
are similar in material respects to the Warrants, except that the
Representatives' Warrants (and the warrants included therein) will not be
publicly tradeable and will not be redeemable by the Company.
The foregoing discussion of certain terms and provisions of the
Representatives' Warrants is qualified in its entirety by reference to the
detailed provisions of the Representatives' Warrant Agreement, the form of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
The Warrants
The following is a brief summary of certain provisions of the Warrants.
Reference is made to the actual text of the Warrant Agreement between the
Company and Continental Stock Transfer & Trust Company (the "Warrant Agent"),
a copy of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part, for a more complete description of the
Warrants.
Exercise Price and Terms. Each Warrant entitles the registered holder
thereof to purchase, at any time during the five year period commencing on the
date of this Prospectus, one share of Common Stock at a price of $ per share
(150% of the IPO Price Per Share), subject to adjustment in accordance with
the anti-dilution and other provisions referred to below. The holder of any
Warrant may exercise such Warrant by surrendering the certificate representing
the Warrant to the Warrant Agent, with the subscription form thereon properly
completed and executed, together with payment of the exercise price. No
fractional shares will be issued upon the exercise of the Warrants.
Adjustments. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment upon
the occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock. Additionally, an
adjustment would be made in the case of an exchange of Common Stock,
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the surviving
corporation) or sale of all or substantially all of the assets of the Company,
in order to enable holders to acquire the kind and number of shares of stock
or other securities or property receivable in such event by a holder of the
number of shares of Common Stock that might have been purchased upon the
exercise of the Warrant.
Redemption Provisions. The Company may redeem the Warrants in whole or in
part, at any time upon at least 30 days prior written notice to the registered
holders thereof, at a price of $0.05 per Warrant, if the closing price of the
Common Stock as reported on the Nasdaq SmallCap Market equals or exceeds 200%
of the IPO Price Per Share (subject to adjustment for stock dividends, stock
splits, combinations or reclassifications of the Common Stock), for at least
20 consecutive trading days within a period of 30 consecutive trading days
ending immediately before the notice of redemption. If the Company exercises
the right to redeem the Warrants, the Warrants will be exercisable until the
close of business on the business day immediately preceding the date for
redemption fixed in such notice. If any Warrant called for redemption is not
exercised by such time, it will cease to be exercisable and the holder will be
entitled only to the redemption price.
Transfer, Exchange and Exercise. The Warrants are in registered form and,
subject to the Company's redemption rights therefor, may be presented to the
Warrant Agent for transfer, exchange or exercise at any time on or before
their expiration date five years from the date of this Prospectus, at which
time the Warrants become wholly void and of no value. If a market for the
Warrants develops, the holder may sell the Warrants instead of exercising
them. There can be no assurance, however, that a market for the Warrants will
develop or continue.
47
<PAGE>
Modification of Warrants. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do not
adversely affect the interests of the Warrant holders. The Company may, in its
sole discretion, lower 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
Warrant holders and the Representatives. Modification of the number of
securities purchasable upon the exercise of any Warrant, the exercise price
(except as described in the preceding sentence) and the expiration date with
respect to any Warrant requires the consent of holders of two-thirds of the
then outstanding Warrants. Except as described above, no other modifications
may be made to the Warrants, without the consent of holders of two-thirds of
the then outstanding Warrants.
The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered, qualified
or deemed to be exempt under the securities laws of the state of residence of
the exercising holder of the Warrants. Although the Company will use its best
efforts to have all of the shares of Common Stock issuable upon exercise of
the Warrants registered or qualified on or before the exercise date and to
maintain a current prospectus relating thereto until the expiration of the
Warrants, there can be no assurance that it will be able to do so.
The Warrants are separately transferable immediately upon issuance. Although
the Warrants will not knowingly be sold to purchasers in jurisdictions in
which the Warrants are not registered or otherwise qualified for sale,
purchasers may buy Warrants in the aftermarket or may move to jurisdictions in
which the shares of Common Stock underlying the Warrants are not so registered
or qualified during the period that Warrants are exercisable. In this event,
the Company would be unable to issue shares to those persons desiring to
exercise their Warrants, and those persons would have no choice but to attempt
to sell their Warrants in a jurisdiction where such sale is permissible or
allow them to expire unexercised.
For the life of the Representatives' Warrants, the Warrants, and the
Placement Warrants, respectively, the holders thereof have the opportunity to
profit from a rise in the market price of the Common Stock without assuming
the risk of ownership of the shares of Common Stock issuable upon the exercise
of such warrants, with the resulting potential for dilution in the interest of
the Company's shareholders by reason of the likely exercise of such warrants
at a time when the exercise price is less than the market price for the Common
Stock. Further, the terms on which the Company could obtain additional capital
during the life of such warrants may be adversely affected. The holders of
such warrants may be expected to exercise the rights thereunder at a time when
the Company would, in all likelihood, be able to obtain any needed capital
through an offering of Common Stock on terms more favorable than those
provided for by such warrants.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion sets forth certain federal income tax consequences,
under current law, relating to the purchase and ownership of the Units, the
Common Stock and the Warrants constituting the Units. The Company has not
requested and does not intend to request a ruling from the Internal Revenue
Service or a tax opinion from its counsel on any tax aspect of the offering.
This tax discussion does not purport to be a complete analysis or list of all
potential federal income tax consequences of the purchase, ownership and sale
of the Common Stock or Warrants. The discussion does not address the tax
treatment for certain unique taxpayers, such as insurance companies, tax
exempt organizations, financial institutions, and dealers in securities which
may be subject to special rules not discussed herein. This discussion presents
no analysis of the tax attributes of the Company either before or after this
offering. PROSPECTIVE PURCHASERS OF THE UNITS SHOULD CONSULT THEIR OWN TAX
ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE,
OWNERSHIP AND SALE OF SUCH SECURITIES AND THE APPLICABILITY OF FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS.
An investor must allocate the cost of each Unit between its two elements
(one Share and one Warrant to purchase one share of Common Stock) in
accordance with their relative fair market values at the time of issuance.
48
<PAGE>
The portion of the aggregate cost allocated to each element will constitute
the investor's initial federal income tax basis for that element.
No gain or loss will be recognized by a holder of a Warrant held for
investment on the holder's purchase of Common Stock for cash upon exercise of
the Warrant. The adjusted tax basis of the Common Stock so acquired will be
equal to the tax basis of the Warrant plus the exercise price. The holding
period of the Common Stock acquired upon the exercise of the Warrant will
begin on the date the Warrant is exercised and the Common Stock is purchased.
The sale of a share of Common Stock or the sale of a Warrant will result in
the recognition of gain or loss to the holder in an amount equal to the
difference between the amount realized (generally the cash and the fair market
value of any other property received) and the holder's adjusted tax basis for
the property sold. The sale of Common Stock will result in capital gain or
loss, provided the Common Stock is a capital asset in the hands of the holder.
The sale of a Warrant (other than a sale to the Company) will also result in a
capital gain or loss, provided the Warrant is a capital asset in the hands of
the holder and the Common Stock underlying the Warrant would be a capital
asset to the holder if acquired by the holder. Such capital gain or loss will
be long-term capital gain or loss if the Common Stock or Warrant being sold or
exchanged has been held for more than one year at the time of such sale or
exchange.
If the repurchase of a Warrant by the Company is treated as a sale or
exchange of a capital asset, any gain or loss recognized on the transaction
will be capital gain or loss and will be long-term capital gain or loss if the
holding period of the Warrant exceeds one year at the time of repurchase.
However, it is unclear whether the repurchase of a Warrant by the Company will
be treated as the sale or exchange of a capital asset, and if such repurchase
is not treated as the sale or exchange of a capital asset, the holder of a
Warrant could potentially recognize ordinary income on such repurchase because
of a constructive distribution recharacterization.
Long-term capital gains of individuals, trusts and estates are currently
taxed at a maximum rate of 28%, while ordinary income is currently taxed at a
maximum rate of 39.6%. Section 1202 of the Code in certain circumstances
allows certain noncorporate taxpayers to exclude from income one-half of the
gain (up to certain limits) from the sale or exchange of "qualified small
business stock" held for more than five years. In addition, 25% of such gain
(up to certain limits) is excluded for alternative minimum tax purposes. In
order for stock to be "qualified small business stock," the issuer of the
stock must meet certain requirements, some of which apply to the period after
the stock is issued. Consequently, it is unclear whether the Common Stock
acquired upon exercise of a Warrant will qualify as qualified small business
stock.
Under Section 305 of the Code, certain actual or constructive distributions
of stock (including warrants to purchase stock) with respect to such stock (or
warrants) may be taxable to the shareholders (or Warrant holders) of the
Company. Adjustments in the exercise price of the Warrants, or the number of
shares purchasable upon exercise of the Warrants, in each case made pursuant
to the anti-dilution provisions of the Warrants, among other things, may
result in a distribution which is taxable as a dividend to the holders of
Warrants. Distributions may be taxed as ordinary dividend income, return of
capital, or gain from the sale or exchange of stock, depending on the earnings
and profits of the Company and the tax basis of each of its shareholders or
Warrant holders.
A Warrant that expires unexercised will be deemed to have been sold or
exchanged for no consideration on the expiration date. The holder of an
expired Warrant would recognize loss to the extent of the holder's basis in
that Warrant. Any loss to the holder of an expired Warrant will be a capital
loss if the Warrant was held as a capital asset and if the Common Stock
underlying the Warrant would have been a capital asset had such Warrant been
exercised. Any capital loss will be long-term if the holding period of the
Warrant exceeds one year when it expires. The use of capital losses to offset
ordinary income is strictly limited for noncorporate shareholders and
prohibited for corporate shareholders.
No gain or loss will be recognized by the Company upon the acquisition,
exercise or expiration of any Warrants.
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<PAGE>
REGISTRATION RIGHTS
In connection with the Placement, the Company agreed to file a registration
statement no later than nine months after the date of this Prospectus to
register the resale of the Placement Shares. Issuable upon exercise of the
Placement Warrants. The Company has also agreed to keep such a registration
statement effective until such shares have been sold or until such shares can
be sold without restrictions pursuant to Rule 144. If such registration
statement does not remain effective, then the Private Investors have certain
additional demand registration rights. In addition, the Private Investors have
piggyback registration rights to require the Company to include the Placement
Shares in registration statements filed by the Company registering Common
Stock under the Securities Act, either for its own account or for the account
of any other stockholder. The Company has also agreed to register the shares
of Common Stock issuable upon exercise of a warrant granted to a law firm. See
"Management--Employment and Consulting Agreements."
As part of the Registration Statement of which this Prospectus forms a part,
the Company has registered the Warrants and the shares of Common Stock
obtainable upon exercise of the Representatives' Warrants (including shares
obtainable upon exercise of the Warrants included therein). The holders of the
Representatives' Warrants have the right to require the Company to file a
registration statement on two separate occasions, commencing one year after
the date of this Prospectus, to register the resale of the shares of Common
Stock issuable upon exercise of the Representatives' Warrants and the warrants
included therein. The Company is required to bear all registration expenses,
other than underwriting discounts and selling commissions, incurred in
connection with the first such registration of the shares underlying
Representatives' Warrants, and the second registration is at the expense of
the Representatives.
These registration rights could result in substantial future expense to the
Company and could adversely affect the Company's ability to complete future
equity or debt financings. Furthermore, the registration and sale of Common
Stock held by or issuable to the holders of registration rights, or even the
potential of such sales, could have an adverse effect on the market price of
the Common Stock or Warrants.
TRANSFER AGENT AND REGISTRAR AND WARRANT AGENT
The Transfer Agent and Registrar for the Company's Common Stock and the
Warrant Agent for the Warrants is Continental Stock Transfer & Trust Company.
LISTING
The Company has applied to list the Common Stock and Warrants on the Nasdaq
Service SmallCap Market under the trading symbols "ISNX" and "ISNXW,"
respectively.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock.
Future sales of substantial amounts of Common Stock in the public market could
adversely affect market prices prevailing from time to time.
Upon completion of this offering, and assuming the conversion of the
outstanding preferred stock and no exercises of options or warrants after
October 1, 1996, the Company will have outstanding approximately 2,765,576
shares of Common Stock. Of these shares, the 850,000 shares sold in this
offering and the shares obtainable upon exercise of the Warrants, if and when
such Warrants are exercised, will be freely tradeable without restriction
under the Securities Act, unless purchased by "affiliates" of the Company as
that term is defined in Rule 144 under the Securities Act. The remaining
1,915,576 shares of Common Stock held by existing shareholders were issued and
sold by the Company in reliance on exemptions from the registration
requirements of the Securities Act. These shares may be sold in the public
market only if registered or sold pursuant to an exemption from registration
such as Rule 144, 144(k) or 701 under the Securities Act. Substantially all of
the Company's securities holders have executed lock-up agreements providing
that they will not directly or indirectly sell, contract to sell, grant any
option to purchase or otherwise transfer or dispose of any securities of the
Company until one year from the initial closing of this offering (the "Lock-up
Period") without the consent of the Representatives.
As a result of the foregoing lock-up agreements and securities law
restrictions, assuming no exercises of options or warrants after October 1,
1996, no shares of Common Stock will be eligible for resale without
restriction on the effective date of this offering pursuant to Rules 144 or
144(k). All of the presently issued and outstanding 1,915,576 shares (except
for 259,852 shares which have been issued but are subject to rights of
repurchase) of Common Stock will be eligible for resale, pursuant to Rule 144
or Rule 701 and subject to the volume limit restrictions of Rule 144 or Rule
701, beginning one year from the closing of this offering. An additional
390,943 shares of Common Stock issuable upon exercise of the warrants issued
in connection with the Placement and Representatives' Warrants will become
eligible for public sale as a result of registration rights agreements with
the Company. "Description of Capital Stock--Registration Rights."
Shortly after this offering, the Company intends to file a registration
statement on Form S-8 covering approximately 547,134 shares of Common Stock
subject to certain outstanding options or reserved for issuance under the
Existing Plan (and the other Plans), thus permitting the resale of such shares
of Common Stock in the public market, except to the extent such shares are
subject to the Lock-up Period. Accordingly, shares registered under such
registration statement will, if and when issued, be available for sale in the
open market immediately following the expiration of the Lock-up Period.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted shares for at least two years (including
the holding period of any prior owner except an affiliate) is entitled to
sell, within any three-month period, a number of shares that does not exceed
the greater of (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 2,765,576 shares immediately after
this offering) or (ii) the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed
to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares to be sold for at
least three years (including the holding period of any prior owner except an
affiliate), is entitled to sell such shares without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule
144.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with the holding period requirements of Rule 144. Any employee,
officer or director of or consultant to the Company who purchased his or her
shares pursuant to a written compensatory plan or contract may be entitled to
rely on the resale provisions of Rule 701. Rule 701 further provides that non-
affiliates may sell such shares in reliance on Rule 144 without having to
comply with the holding period, public information, volume limitation or
notice provisions of Rule 144. Each holder of Rule 701 shares is required to
wait until 90 days after the date of this Prospectus before selling such
shares.
51
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among the
Company and the Underwriters named below, the Company has agreed to sell to
the Underwriters for whom Pryor, McClendon, Counts & Co., and National
Securities Corporation are acting as representatives (in such capacity, the
"Representatives"), and the Underwriters have severally and not jointly agreed
to purchase the Securities set forth below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER UNITS
----------- -----------
<S> <C>
Pryor, McClendon, Counts & Co., Inc. ............................
National Securities Corporation..................................
-----------
Total........................................................
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to the approval of certain legal matters by their
counsel and various other conditions. The maturing of the Underwriters'
obligations are such that they are committed to purchase all of the above
Securities if any are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the Securities to the public at the public offering price set
forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $ per Share and $ per
Warrant. The Underwriters may allow, and such dealers may allow, a concession
not in excess of $ per Share and $ per Warrant to certain other
dealers. After this offering, the public offering price and concessions and
discounts may be changed by the Representatives. The Company has granted to
the Underwriters an option exercisable during the 45-day period commencing on
the date of this Prospectus to purchase from the Company, at the initial
public offering price less underwriting discounts and the non-accountable
expense allowance, up to an aggregate of Shares and Warrants
(representing 15% of the Shares and Warrants to be sold in this offering) for
the sole purpose of covering over-allotments, if any. To the extent that the
Underwriters exercise the option, each Underwriter will have a firm
commitment, subject to certain conditions, to purchase the number of the
additional Securities proportionate to its initial commitment to purchase
under the Underwriting Agreement.
The Representatives have informed the Company that they do not expect sales
to discretionary accounts by the Underwriters to exceed five percent of the
Securities offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
agreed to pay to the Representatives a non-accountable expense allowance equal
to 3% of the gross proceeds derived from the sale of the Securities
underwritten, of which $25,000 has been advanced.
The Company has agreed to sell to the Representatives for $.0001 each the
Representatives' Warrants to purchase from the Company up to 10% of the Shares
and Warrants offered hereby. Each Representatives' Warrant will entitle the
holder to purchase one share of Common Stock at a price of $ per share,
which is 120% of the IPO Price Per Share and, upon payment of $ , which is
120% of the initial public offering price of the Warrants, to acquire one
Warrant at an exercise price equal to 150% of the IPO Price Per Share. The
Representatives' Warrants are, subject to certain conditions, exercisable at
any time until the fifth anniversary of the date of this Prospectus, and are
restricted from sale, transfer, assignment or hypothecation for a period of 12
months from the date of this Prospectus, except to officers of the
Representatives. The Representatives' Warrants provide for adjustment in the
exercise price of the Representatives' Warrants in the event of certain
mergers, acquisitions, stock dividends and capital changes. The
Representatives' Warrants grant to the holders thereof certain rights with
respect to the registration under the Securities Act of the securities
issuable upon exercise of the Representatives' Warrants.
52
<PAGE>
The offering price set forth on the cover page of this Prospectus should not
be considered an indication of the actual value of the Common Stock or the
Warrants. Such price is subject to change as a result of market conditions and
other factors and no assurance can be given that the Common Stock or Warrants
can be resold at the offering price.
The Company, its officers and directors and other shareholders and option
and warrant holders holding approximately 2,618,654 shares of Common Stock
have agreed that for a period of 12 months following the closing of this
offering, they will not offer, sell, contract to sell, grant any option for
the sale or otherwise dispose of any securities of the Company (other than
intra-family transfers or transfers to trust for estate planning purposes),
without the Representatives' consent. These restrictions do not apply to (i)
the issuance of shares of Common Stock pursuant to the Underwriters' over-
allotment option, or (ii) the issuance of shares of Common Stock upon the
exercise of options and warrants outstanding prior to the sale of the shares
of Common Stock offered hereby, and (iii) bona fide pledges of shares of James
E. Alexander or Boris Rubizhevsky to banks or other financial institutions as
collateral for loans.
The Company has agreed that for a period of five years from the closing of
the sale of shares of Common Stock offered hereby, it will nominate for
election as a director a person designated by the Representatives, and during
such time as the Representatives have not exercised such right, the
Representatives shall have the right to designate an observer, who shall be
entitled to attend all meetings of the Board of Directors and to receive all
correspondence and communications sent by the Company to the members of the
Board. Larry J. Wells, a director of the Company, has been appointed as such
designee of the Representatives. The Company has agreed to reimburse designees
of the Representatives for their out-of-pocket expenses incurred in connection
with their attendance of meetings of the Board.
Upon the exercise of any Warrants, which exercise was solicited by a
Representative, the Company has agreed to pay the Representative a commission
of 5% of the aggregate exercise price of such Warrants. Unless granted an
exemption by the Commission from Rule 10b-6 under the Exchange Act, the
Representative and any soliciting broker-dealers will be prohibited from
engaging in any market-making activities or solicited brokerage activities
with regard to the Company's securities for the periods prescribed by
exemption (xi) to Rule 10b-6 before the solicitation activity or the
termination (by waiver or otherwise) of any right that the Representative and
any soliciting broker-dealer may have to receive a fee for the exercise of the
Warrants following such solicitation. As a result, the Representative and any
soliciting broker-dealers may be unable to continue to provide a market for
the Common Stock or Warrants during certain periods while the Warrants are
exercisable. If the Representative has engaged in any of the activities
prohibited by Rule 10b-6 during the periods described above, the
Representative has undertaken to waive unconditionally its rights to receive a
commission on the exercise of such Warrants.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to
copies of each such agreement which are filed as exhibits to the Registration
Statement, of which this Prospectus forms a part. See "Additional
Information."
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Fenwick & West LLP, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Camhy, Karlinsky & Stein LLP, New York,
New York.
53
<PAGE>
EXPERTS
The balance sheets as of April 30, 1995 and 1996, and the statements of
operations, shareholders (deficit) equity, and cash flows for the years then
ended, have been audited by Grant Thornton LLP, independent certified public
accountants, as set forth in their report thereon appearing elsewhere herein
and in the Registration Statement, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Los Angeles, CA, a Registration Statement on Form SB-2 under
the Securities Act with respect to the shares of Common Stock and Warrants
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and its exhibits. For further information
with respect to the Company and the Units, Common Stock and Warrants offered
hereby, reference is made to the Registration Statement and exhibits.
Statements contained in this Prospectus regarding the contents of any contract
or any other document to which reference is made are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. A copy of the
Registration Statement, including the exhibits thereto, may be inspected
without charge at the Commission's principal office in Washington, D.C., and
copies of all or any part thereof may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
upon payment of certain prescribed rates.
54
<PAGE>
GLOSSARY OF TERMS
CELL GROWTH MEDIA: Substances used in a gel or solution that promote the
growth and multiplication of cells from simple or more complex organisms.
Organisms grown (fed) cell growth media labeled with enriched stable isotopes
result in new and more complex stable isotope labeled compounds.
CGMP (CURRENT GOOD MANUFACTURING PRACTICE): Part of quality assurance aimed at
ensuring that products are consistently manufactured to a quality appropriate
to their intended use; it incorporates manufacturing, engineering, quality
control and quality assurance activities.
CROSS SECTION: A fundamental property of the nucleus of an isotope, cross
section is a measure of the probability of interaction of the nucleus with
another nucleus, particle or photon.
DEPLETED STABLE ISOTOPE: An isotope of an element whose concentration or
"abundance" has been decreased with respect to that of the naturally occurring
element.
DEPLETED ZINC (DZ): Zinc oxide in which the stable isotope Zn-64 has been
depleted for application in nuclear power plants for corrosion control and the
mitigation of radiation fields.
DOPING: An impurity, such as boron, is added in small amounts to a pure
semiconductor to alter its conductive properties.
ENRICHED STABLE ISOTOPE: An isotope of an element whose concentration or
"abundance" has been increased with respect to that of the naturally occurring
element.
HIGH PURITY MATERIALS, CHEMICAL: Materials in which the relevant chemical
compound makes up more than >99.99% of the material.
H.PYLORI (Helicobacter pylori): A pathogenic bacterium found in the human
stomach, responsible for most peptic ulcers and some stomach cancers.
ISOTOPE: One of two or more naturally occurring species of atom having the
same atomic number, hence constituting the same element, but differing in mass
number. As atomic number is equivalent to the number of protons in the
nucleus, and mass number is the sum total of the protons plus the neutrons in
the nucleus, isotopes of the same element differ from one another only in the
number of neutrons in their nuclei. Isotopes may be radioactive or stable.
Isonics deals only with stable isotopes.
ISOTOPICALLY PURE MATERIALS: Materials in which a particular isotope has been
enriched to 99.5% abundance or greater in an element or in a compound.
ISOTOPICALLY ENGINEERED MATERIALS (IEM): Materials in which the natural
abundance of isotopes of constituent elements has been substantially altered
to enhance performance characteristics or provide unique properties.
MAGNETIC MOMENT: A fundamental property of the nucleus of an isotope, magnetic
moment is a vector quantity related to the intrinsic spin of a charged
particle. It is unique to each isotope and can be used to describe how a
spinning, charged particle will interact with an externally imposed magnetic
field (as in an NMR instrument or imaging scanner).
MASS SPECTROMETER: An apparatus that converts molecules and atoms into ions
and then separates the ions according to their mass-to-charge ratio. Mass
spectrometers are used to identify atoms and isotopes, and determine the
chemical composition of a sample.
55
<PAGE>
NUCLEAR MAGNETIC RESONANCE (NMR): A phenomenon exhibited by a large number of
atomic nuclei, in which nuclei in a static magnetic field absorb energy from a
radio-frequency field at certain characteristic frequencies. The frequency at
which resonance occurs is a function of the chemical form of the nuclei of
interest. This property is exploited in NMR instruments used to determine the
make-up and structure of chemicals. It is also employed in medicine to produce
3-dimensional images of the distribution of protons (the 1H isotope of
hydrogen) incorporated in the chemicals of the human body.
SPIN: A fundamental property of all elementary particles, spin is the
intrinsic angular momentum of a sub-atomic particle--present even if the
particle is not moving. If the particle is charged, the spin results in a
magnetic moment.
STABLE ISOTOPE LABELED COMPOUND (SILC): Also referred to as a "labeled
compound," a chemical which has been "tagged" by substitution of a common
isotope with a rare one (i.e., an enriched stable isotope).
X-RAY CRYSTALLOGRAPHY: The study of crystal lattices using diffraction
patterns of X-ray waves that reflect the atomic structure based on atomic size
and position in space.
56
<PAGE>
ISONICS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants......................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Shareholders' Equity (Deficit)............................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Isonics Corporation
We have audited the accompanying balance sheets of Isonics Corporation as of
April 30, 1995 and 1996, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the years then ended. 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 referred to above present fairly,
in all material respects, the financial position of Isonics Corporation as of
April 30, 1995 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Grant Thornton LLP
San Jose, California
May 10, 1996, (except for the first
paragraph of Note 8, as to which
the date is September 30, 1996)
F-2
<PAGE>
ISONICS CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30,
-------------- JULY 31,
1995 1996 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 38 $ 116 $ 147
Accounts receivable.............................. -- 2 13
Note receivable from shareholder................. 27 33 36
Inventories...................................... 283 1,006 1,354
Prepaid expenses................................. 4 10 12
Deferred income taxes............................ 216 114 52
------ ------ ------
Total current assets........................... 568 1,281 1,614
PROPERTY AND EQUIPMENT, net........................ 9 81 80
OTHER ASSETS....................................... 480 397 406
DEFERRED INCOME TAXES.............................. -- 29 38
------ ------ ------
TOTAL.............................................. $1,057 $1,788 $2,138
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt................ $ 122 $ 176 $ 232
Accounts payable................................. 414 792 1,299
Accrued liabilities.............................. 280 285 160
Income taxes payable............................. -- 89 57
------ ------ ------
Total current liabilities...................... 816 1,342 1,748
LONG-TERM DEBT..................................... 352 276 177
COMMITMENTS........................................ -- -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Class A Preferred Stock--no par value; 100,000
shares authorized; 6,250 issued and outstanding. 125 125 125
Common stock--$.001 par value; 14,513,788 shares
authorized; 1,499,419 shares issued and
outstanding..................................... 78 78 78
Retained earnings (deficit)...................... (314) (33) 10
------ ------ ------
Total stockholders' equity (deficit)........... (111) 170 213
------ ------ ------
TOTAL.............................................. $1,057 $1,788 $2,138
====== ====== ======
</TABLE>
See Notes to Financial Statements
F-3
<PAGE>
ISONICS CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
APRIL 30, JULY 31,
------------- --------------------
1995 1996 1995 1996
----- ------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues.............................. $ 738 $5,567 $ 1,190 $ 1,564
Cost of revenues.......................... 626 3,835 807 1,123
----- ------ --------- ---------
Gross margin............................ 112 1,732 383 441
Operating expenses:
Selling, general and administrative..... 293 902 186 266
Research and development................ 162 308 59 90
----- ------ --------- ---------
Total operating expenses.............. 455 1,210 245 356
----- ------ --------- ---------
Operating income (loss)................... (343) 522 138 85
Other income (expense)
Interest income......................... 2 1 1 1
Interest expense........................ (17) (67) (4) (13)
----- ------ --------- ---------
Total other expense, net.............. (15) (66) (3) (12)
----- ------ --------- ---------
Income (loss) before income taxes......... (358) 456 135 73
Income tax expense (benefit).............. (215) 175 52 30
----- ------ --------- ---------
NET INCOME (LOSS)......................... $(143) $ 281 $ 83 $ 43
===== ====== ========= =========
Net income (loss) per share............... $(.06) $ .12 $ .04 $ .02
===== ====== ========= =========
Shares used in computing per share
information.............................. 2,201 2,343 2,342 2,344
===== ====== ========= =========
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
ISONICS CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK RETAINED
----------------- ---------------- EARNINGS
SHARES AMOUNT SHARES AMOUNT (DEFICIT) TOTAL
-------- ------- --------- ------ --------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCES, May 1,1994....... 1,451,379 $18 $(171) $(153)
Issuance of preferred
stock................... 6,250 $ 125 125
Issuance of common stock
in connection with
acquisition............. 48,040 60 60
Net loss................. (143) (143)
-------- ------- --------- --- ----- -----
BALANCES, April 30, 1995... 6,250 125 1,499,419 78 (314) (111)
Net income............... 281 281
-------- ------- --------- --- ----- -----
BALANCES, April 30, 1996... 6,250 125 1,499,419 78 (33) 170
Net income *............. 43 43
-------- ------- --------- --- ----- -----
BALANCES, July 31, 1996 *.. 6,250 $ 125 1,499,419 $78 $ 10 $ 213
======== ======= ========= === ===== =====
</TABLE>
- --------
* Unaudited
See Notes to Financial Statements
F-5
<PAGE>
ISONICS CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
APRIL 30, ENDED JULY 31,
------------ ---------------
1995 1996 1995 1996
----- ----- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $(143) $ 281 $ 83 $ 43
Adjustments to reconcile net income (loss) to
net cash provided by
(used in) operating activities:
Depreciation and amortization................. 2 86 22 25
Deferred income taxes......................... (216) 73 52 53
Changes in assets and liabilities:
Accounts and notes receivable................ (27) (8) (9) (14)
Inventories.................................. (73) (723) (47) (348)
Prepaid expenses............................. (2) (6) (1) (2)
Other assets................................. 4 5 6 (29)
Accounts payable............................. 202 378 12 507
Accrued liabilities.......................... 157 5 6 (125)
Income taxes payable......................... -- 89 -- (32)
----- ----- ------ -------
Net cash provided by (used in) operating
activities................................. (96) 180 124 78
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Isoserve, Inc................... (50) -- -- --
Purchases of property and equipment............ (7) (7) (2) (4)
----- ----- ------ -------
Net cash used in investing activities....... (57) (7) (2) (4)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt....... 100 142 54 --
Payments on long-term debt..................... (38) (237) (103) (43)
Proceeds from issuance of preferred stock...... 125 -- -- --
----- ----- ------ -------
Net cash provided by (used in) financing
activities................................. 187 (95) (49) (43)
----- ----- ------ -------
NET INCREASE IN CASH AND EQUIVALENTS........ 34 78 73 31
Cash and cash equivalents at beginning of
period......................................... 4 38 38 116
----- ----- ------ -------
Cash and cash equivalents at end of period...... $ 38 $ 116 $ 111 $ 147
===== ===== ====== =======
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest...................................... $ 7 $ 67 $ 13 $ 15
Income taxes.................................. 1 14 -- 9
</TABLE>
See Notes to Financial Statements
F-6
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE MONTHS ENDED JULY 31, 1995
AND 1996 IS UNAUDITED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Isonics Corporation (the "Company") develops and markets products worldwide
based on enriched stable isotopes for applications in the energy, medical
research, diagnostic, pharmaceutical and semiconductor industries.
CASH EQUIVALENTS
Cash equivalents consist of money market investments with an original
maturity of less than ninety days.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash equivalents and trade accounts
receivable. Cash equivalents are maintained with high quality institutions and
are regularly monitored by management. The Company extends credit to its
customers, most of whom are large, established companies. Credit risk is
mitigated by performing ongoing credit evaluations of its customers' financial
condition and generally does not require collateral.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over five to seven years. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the lease term.
OTHER ASSETS
Other assets include goodwill of $472,000, $393,000 and $373,000 at April
30, 1995 and 1996 and July 31, 1996, respectively (net of accumulated
amortization of none, $79,000 and $99,000, respectively) arising from the
acquisition of Isoserve, Inc. (see Note 10). Goodwill is being amortized on a
straight-line basis over six years. The Company evaluates the realizability of
goodwill annually to determine potential impairment by comparing the
undiscounted future cash flows of the related assets. The Company modifies or
adjusts goodwill if an impairment is indicated. Based upon its most recent
evaluation, the Company believes that no material impairment of goodwill
exists as of April 30, 1996 and July 31, 1996.
INCOME TAXES
The Company accounts for income taxes using an asset and liability approach
for financial accounting and reporting purposes.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment. Product warranty
costs have not been material in any period.
F-7
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE MONTHS ENDED
JULY 31, 1995 AND 1996 IS UNAUDITED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
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, as well as revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of cash and equivalents approximates carrying value due to
the short maturity of such instruments. The fair value of long-term debt
approximates carrying value based on terms available for similar instruments.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares include convertible preferred stock (using the if-converted
method) and common stock options and warrants (using the treasury stock
method). Common equivalent shares are excluded from the computation in loss
periods as their effect is antidilutive, except that, pursuant to Securities
and Exchange Commission rules, all shares issuable from the exercise of
warrants issued and stock options granted by the Company at a price less than
the estimated initial public offering price during the twelve months preceding
the offering date have been included in the calculation (using the treasury
stock method) as if they had been outstanding for all periods.
UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited interim financial information as of July 31, 1996 and for the
three months ended July 31, 1995 and 1996 has been prepared on the same basis
as the audited financial statements. In the opinion of management, such
unaudited information includes all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of this interim
information. Operating results for the three months ended July 31, 1996 are
not necessarily indicative of the results that may be expected for the entire
year ending April 30, 1997.
NOTE 2--INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
----------- JULY 31,
1995 1996 1996
---- ------ --------
<S> <C> <C> <C>
Finished goods.......................................... $ 62 $ 892 $ 369
Work in process......................................... -- 107 983
Raw Materials........................................... 221 7 2
---- ------ ------
$283 $1,006 $1,354
==== ====== ======
</TABLE>
F-8
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE MONTHS ENDED
JULY 31, 1995 AND 1996 IS UNAUDITED)
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
---------- JULY 31,
1995 1996 1996
---- ---- --------
<S> <C> <C> <C>
Office furniture and equipment.......................... $10 $88 $91
Leasehold Improvements.................................. 1 3 4
--- --- ---
11 91 95
Accumulated depreciation and amortization............... (2) (10) (15)
--- --- ---
$ 9 $81 $80
=== === ===
</TABLE>
NOTE 4--ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
--------- JULY 31,
1995 1996 1996
---- ---- --------
<S> <C> <C> <C>
Compensation.............................................. $265 $268 $145
Other..................................................... 15 17 15
---- ---- ----
$280 $285 $160
==== ==== ====
</TABLE>
F-9
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE MONTHS ENDED
JULY 31, 1995 AND 1996 IS UNAUDITED)
NOTE 5--INCOME TAXES
Deferred tax assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
---------
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets
Accruals deductible in future periods........................... $216 $114
Goodwill amortization deductible in future periods.............. -- 29
---- ----
$216 $143
==== ====
</TABLE>
Income tax expense (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
------------
1995 1996
------ ----
<S> <C> <C>
Current
Federal....................................................... $ -- $ 78
State......................................................... 1 24
------ ----
1 102
Deferred
Federal....................................................... (179) 69
State......................................................... (37) 4
------ ----
(216) 73
------ ----
$(215) $175
====== ====
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
tax rate is as follows:
<TABLE>
<CAPTION>
1995 1996
----- ----
<S> <C> <C>
Statutory federal income tax rate.............................. (35.0)% 35.0%
State income taxes (net of federal income tax benefit)......... (5.0) 3.5
Other.......................................................... -- .3
Change in valuation allowance.................................. (20.1) --
----- ----
Effective tax rate............................................. (60.1)% 38.8%
===== ====
</TABLE>
The valuation allowance for deferred tax assets as of April 30, 1995 and
1996 was $72,000 and none, respectively. The decrease in the valuation
allowance resulted from the realization of temporary differences and loss
carryforwards during the year and the reevaluation during 1995 that it was
more likely than not that the Company would generate taxable income sufficient
to realize the tax benefit associated with future deductible temporary
differences.
F-10
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE MONTHS ENDED
JULY 31, 1995 AND 1996 IS UNAUDITED)
NOTE 6--LONG TERM DEBT
Long term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
--------- --------
1995 1996 1996
---- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Note payable, guaranteed by the SBA, payable in monthly
installments of $700 including interest at prime (8.25%
at April 30, 1996 and July 31, 1996) plus 2.75%, final
payment due January 2005................................ $ 49 $ 46 $ 45
Note payable, unsecured; payable in full in February 1997
plus 9% interest........................................ 50 85 85
Notes payable to shareholders............................ 12 -- --
Capital leases (see Note 7).............................. -- 69 65
Royalty payable to Isoserve, Inc. (see Note 10).......... 363 252 214
---- ---- ----
474 452 409
Less current maturities.................................. 122 176 232
---- ---- ----
$352 $276 $177
==== ==== ====
</TABLE>
Maturities of long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
AS OF
------------------
APRIL 30, JULY 31,
1996 1996
--------- --------
<S> <C> <C>
First three months of 1997................................ $ 43 $--
Remaining nine months of 1997............................. 133 232
1998...................................................... 111 121
1999...................................................... 115 28
2000...................................................... 12 5
2001...................................................... 13 5
Thereafter................................................ 25 18
---- ----
$452 $409
==== ====
</TABLE>
F-11
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE MONTHS ENDED
JULY 31, 1995 AND 1996 IS UNAUDITED)
NOTE 7--LEASE COMMITMENTS
Furniture and equipment with a cost and accumulated amortization of $68,000
and $5,000, at April 30, 1996 ($68,000 and $8,000 at July 31, 1996) has been
acquired under capital leases. The Company also rents office and research
facilities, equipment and vehicles under operating leases expiring through
1999.
Future minimum annual operating and capital lease commitments are as follows
(in thousands):
<TABLE>
<CAPTION>
APRIL 30, 1996 JULY 31, 1996
----------------- -------------
OPERATING CAPITAL CAPITAL
--------- ------- -------------
<S> <C> <C> <C>
First three months of 1997................... $ 9 $ 9 $ --
Remaining nine months of 1997................ 26 23 23
1998......................................... 35 31 31
1999......................................... 4 25 25
--- --- -----
Total minimum lease payments............... $74 87 79
===
Amount representing interest................. (18) (14)
--- -----
Present value of minimum lease payments...... 69 65
Current portion.............................. (18) (22)
--- -----
Long-term portion............................ $51 $ 43
=== =====
</TABLE>
Rent expense for operating leases was approximately $6,000, $19,000, $1,000
and $13,000 for the years ended April 30, 1995 and 1996 and for the three
months ended July 31, 1995 and 1996, respectively.
NOTE 8--STOCKHOLDERS' EQUITY
On September 30, 1996, the Board of Directors approved a 1 for 6.89 reverse
stock split of its common shares. All per share amounts, number of shares,
stock options and warrant data have been restated to reflect the reverse stock
split.
CONVERTIBLE PREFERRED STOCK
The Articles of Incorporation authorize the issuance of 100,000 shares of
nonvoting Series A and B convertible preferred stock of which 6,250 shares
were outstanding at April 30, 1995 and 1996, respectively. Each 10 shares of
Series A preferred stock along with $5 is convertible at the option of the
stockholder into 161 shares of common stock. Preferred shares can be redeemed
at the option of the Company for $40 per share.
The stockholders of Series A convertible preferred stock are entitled to
quarterly noncumulative dividends of $1.60 per share, if and when declared by
the Company's Board of Directors. At April 30, 1995 and 1996, no such
dividends had been declared.
In the event of liquidation or winding up of the Company, stockholders of
Series A preferred stock shall have a liquidation preference of $5 per share,
plus declared and unpaid dividends, over holders of common shares.
F-12
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE MONTHS ENDED
JULY 31, 1995 AND 1996 IS UNAUDITED)
COMMON STOCK
<TABLE>
<CAPTION>
JULY 31,
1996
--------
<S> <C>
Conversion of outstanding convertible preferred stock............ 100,780
Exercise of stock options........................................ 725,689
-------
826,470
=======
</TABLE>
STOCK OPTION PLAN
The Company's 1996 Stock Option Plan authorizes the granting of 725,689
incentive and nonqualified stock options to key employees, directors or
consultants of the Company. Incentive stock options are granted at a price not
less than fair market value, and nonqualified stock options are granted at a
price not less than 85% of the fair market value, as determined by the Board
of Directors. Options generally become exercisable upon issuance and are
subject to redemption rights typically over three years and generally expire
ten years after the date of grant.
Option activity for the Plan is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
--------- -------------
<S> <C> <C>
Outstanding, May 1, 1995............................. -- --
Granted............................................ 417,271 $1.38 - $1.52
Exercised.......................................... -- --
Canceled........................................... -- --
-------
Outstanding, April 30, 1996.......................... 417,271 $1.38 - $1.52
Granted............................................ 72,569 $2.07
Exercised.......................................... -- --
Canceled........................................... -- --
-------
Outstanding, July 31, 1996........................... 489,840 $1.38 - $2.07
=======
</TABLE>
Options to purchase 14,514 and 33,563 shares of common stock were not
subject to rights of repurchase at April 30, 1996 and July 31, 1996,
respectively.
RECENTLY ISSUED ACCOUNTING STANDARD
In October, 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation. The new standard establishes
financial accounting and reporting standards for stock-based compensation,
including stock-based employee compensation plans. The Statement defines a
fair value-based method of accounting for an employee stock option or similar
equity instrument. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value-based method of
accounting prescribed by APB Opinion No, 25, Accounting for Stock Issued to
Employees. Entities electing to remain with the accounting in Opinion No. 25
must make pro forma disclosures of net income and earnings per share, as if
the fair value-based method of accounting defined in the Statement had been
applied. The Company will be required to adopt SFAS No. 123 for its year ended
April 30, 1997. Management of the Company has elected to make the pro forma
disclosure as allowed by SFAS No. 123.
F-13
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE MONTHS ENDED
JULY 31, 1995 AND 1996 IS UNAUDITED)
NOTE 9--SIGNIFICANT CUSTOMERS AND SUPPLIERS
In 1995, three customers accounted for approximately 59%, 26%, and 11% of
net revenues. In 1996, two customers accounted for 88% and 11% of net
revenues. In the three months ended July 31, 1996, three customers accounted
for 66%, 20%, and 10% of net revenues. Export sales were 14%, 13%, 18% and 20%
of net revenues in 1995 and 1996 and for the three months ended July 31, 1995
and 1996, respectively. Export sales are principally to Asia.
The Company currently uses a single source processor in its manufacturing
process; a disruption of this relationship could have an adverse impact on the
operating results of the Company. The Company has not experienced a
disruption; however, the Company recognizes the risks and is actively pursuing
alternative sources.
NOTE 10--BUSINESS ACQUISITION
In March 1995, the Company acquired certain assets and assumed certain
liabilities of Isoserve, Inc., a stable isotope supplier. The acquisition was
accounted for as a purchase in the accompanying financial statements for the
year ending April 30, 1995, and include the operations related to Isoserve
from March 28, 1995.
The fair value of the consideration paid is summarized as follows (in
thousands):
<TABLE>
<S> <C>
Cash................................................................ $ 50
Acquisition debt.................................................... 110
Assumed liabilities................................................. 100
Future royalties payable............................................ 363
Common stock........................................................ 60
----
$683
====
</TABLE>
The purchase price was allocated $211,000 to inventory and $472,000 to
goodwill. The Company is required to make royalty payments to Isoserve, Inc.,
of $0.50 per gram of depleted zinc metal sold during the five years following
the acquisition. Minimum annual royalty payments of $100,000 are required
regardless of sales volume until the Company has paid $500,000 in aggregate.
The maximum royalty payments under the agreement are $1,000,000. The Company
has accrued a liability for the present value of the expected royalty
payments. The royalty payments are secured by the assets of the Company. The
Company paid royalties of $196,000 and $45,000 for the year ended April 30,
1996 and the three month period ended July 31, 1996, respectively.
F-14
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE MONTHS ENDED
JULY 31, 1995 AND 1996 IS UNAUDITED)
NOTE 11--SUBSEQUENT EVENTS (UNAUDITED)
In August and September 1996, the Company issued $1,261,000 in
nonconvertible promissory notes, collateralized by the Company's assets.
Interest is payable monthly at 12%. The principal is due the earlier of five
business days after the Company receives funds from an initial public offering
or May 1, 1998. If the notes are not paid in full by May 1, 1998, principal
and interest at 15% is payable in equal monthly payments from June 1997
through May 1998. In connection with the issuance of the promissory notes, the
Company issued warrants to the noteholders to purchase a total of 263,222
shares of common stock, exercisable for a period of five years commencing in
August 1996. Of the warrants issued, 131,611 are exercisable at $0.4217 per
share and 131,611 are exercisable at $3.3727 per share. If the Company
defaults in its payment obligations, then additional warrants totaling 325,500
are exercisable at $.0689 per share. In conjunction with the financing, the
Company issued warrants to purchase 127,721 shares of common stock exercisable
for a period of five years, at $1.38 per share to a financial advisor. The
aggregate fair value of the warrants issued in connection with the financing
was $373,000 and will be amortized to operations as additional interest
expense over the term of the promissory notes.
F-15
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 12
Dividend Policy........................................................... 12
Capitalization............................................................ 13
Dilution.................................................................. 15
Selected Financial Data................................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 17
Business.................................................................. 21
Management................................................................ 37
Certain Transactions...................................................... 44
Principal Shareholders.................................................... 45
Description of Capital Stock.............................................. 46
Shares Eligible for Future Sale........................................... 51
Underwriting.............................................................. 52
Legal Matters............................................................. 53
Experts................................................................... 54
Additional Information.................................................... 54
Index to Financial Statements............................................. F-1
</TABLE>
---------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OR WARRANTS OFFERED HEREBY,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
850,000 SHARES OF
COMMON STOCK AND
850,000 REDEEMABLE
COMMON STOCK
PURCHASE WARRANTS
[LOGO OF ISONICS CORPORATION APPEARS HERE]
---------------
PROSPECTUS
---------------
PRYOR, MCCLENDON, COUNTS
& CO., INC.
NATIONAL SECURITIES
CORPORATION
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24 INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation include a provision that eliminates
to the fullest extent permitted by law the personal liability of its directors
to the Company and its shareholders for monetary damages for breach of the
directors fiduciary duties. This limitation has no effect on a director's
liability (i) for acts or omissions that involve intentional misconduct or a
knowing and culpable violation of law, (ii) for acts or omissions that a
director believes to be contrary to the best interests of the Company or its
shareholders or that involved the absence of good faith on the part of the
director, (iii) for any transaction from which the director derived an
improper personal benefit, (iv) for acts or omissions that show a reckless
disregard for the director's duty to the Company or its shareholders in
circumstances in which the director was aware, or should have been aware, in
the ordinary course of performing a director's duties, of a risk of serious
injury to the Company or its shareholders, (v) for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication
of the director's duty to the Company or its shareholders, (vi) under Section
310 of the California Corporations Code (the "California Code") concerning
contracts or transactions between the Company and a director or (vii) under
Section 316 of the California Code concerning directors liability for improper
dividends, loans and guarantees. The provision does not extend to acts or
omissions of a director in his capacity as an officer. Further, the provision
will not affect the availability of injunctions and other equitable remedies
available to the Company's shareholders for any violation of a director's
fiduciary duty to the Company or its shareholders.
The Company's Articles of Incorporation further authorize the Company to
indemnify its agents (as defined in Section 317(a) of the Code which includes
directors and officers) through Bylaw provisions, agreements with agents,
votes of shareholders or disinterested directors or otherwise, to the fullest
extent permissible under California law. Pursuant to this provision, the
Company's Bylaws provide for indemnification of directors and officers. The
Bylaws also permit the Company to enter into indemnity agreements with
individual directors, officers, employees and other agents. The Company
intends to enter into such agreements with its directors and executive
officers effective upon the closing of this offering. These Agreements,
together with the Company's Bylaws and Articles, may require the Company,
among other things, to indemnify directors or officers against certain
liabilities that may arise by reason of their status or service as directors
(other than liabilities resulting from willful misconduct of a culpable
nature), to advance expenses to them as they are incurred, provided that they
undertake to repay the amount advanced if it is ultimately determined by a
court that they are not entitled to indemnification, and to obtain and
maintain directors and officers' insurance if available on reasonable terms.
In addition to the rights to indemnification provided under California law,
in the Articles of Incorporation and in the Bylaws, the 1996 Stock Option Plan
provides indemnification to members of the Board of Directors, officers, or
employees of the Company to whom authority to act for the Board in connection
with the Existing Plan is delegated shall be indemnified against all
reasonable expenses, including attorneys' fees, actually and necessarily
incurred in defense of any proceeding to which he or she is made a party
because of any action allegedly taken or alleged failure to act in connection
with the Plan., and against amounts paid in settlement (if approved by
independent legal counsel), or in satisfaction of any judgment in such
proceeding, unless the director, officer, or employee, as the case may be, is
adjudged to have behaved in bad faith, in a grossly negligent manner, or with
intentional misconduct as to duties.
The Company currently has directors and officers' liability insurance. At
present, there is no pending litigation or proceeding involving a director,
officer or employee of the Company pursuant to which indemnification is
sought, nor is the Company aware of any threatened litigation that may result
in claims for indemnification.
II-1
<PAGE>
Section 317 of the Code and the Company's Bylaws make provision for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons, under certain circumstances, for
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
-------- --------------
<S> <C>
Underwriting Agreement ....................................... 1.01
Registrant's Certificate of Incorporation..................... 3.01
Registrant's Bylaws........................................... 3.02
Form of Indemnity Agreement................................... 10.09
</TABLE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses to be paid in
connection with the sale of the shares of Common Stock being registered
hereby. All amounts are estimates except for the Securities and Exchange
Commission registration fee, the NASD filing fee and the Nasdaq SmallCap
National Market filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 7,322
NASD filing fee.................................................... 2,643
Nasdaq SmallCap Market filing fee.................................. 10,000
Accounting fees and expenses....................................... 75,000
Legal fees and expenses............................................ 165,000
Printing fees and expenses......................................... 100,000
Blue sky fees and expenses......................................... 50,000
Transfer agent and registrar fees and expenses..................... 50,000
Miscellaneous...................................................... 40,035
--------
Total.............................................................. $500,000
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
<TABLE>
<CAPTION>
NUMBER AGGREGATE FORM OF
CLASS OF PURCHASERS DATE OF SALE TITLE OF SECURITIES OF SHARES PURCHASE PRICE CONSIDERATION
- ------------------- ------------ ------------------- --------- -------------- -------------
<S> <C> <C> <C> <C> <C>
2 Founders 5/10/93 Common Stock 1,378,810 $ 12,000 Property
1 Investor 11/20/93 Common Stock 72,569 $ 6,000 Cash
2 Investors 12/1/94 and 12/7/94 Preferred Stock 6,250 $125,000 Cash
1 Acquired Entity 3/31/95 Common Stock 48,041 $ 60,000 Property
1 Advisor 9/96 Warrants 127,721 $141,000 Services
Lenders 9/96 Warrants 263,222 $232,000 Loans
</TABLE>
All sales of Common Stock, Preferred Stock and warrants were made in
reliance on Section 4(2) of the Securities Act. The purchasers were
sophisticated investors who represented to the Registrant that the shares were
being acquired for investment. All issuances of shares and options under the
Company's existing plan were made in reliance on Section 4(2) or Rule 701.
Between January 1996 and the date of this registration statement, the
Company issued options under the Company's Existing Plan to purchase a total
of 587,511 shares of Common Stock at exercise prices ranging from $1.38 to
$2.07 per share, to a limited number of employees. No consideration was paid
to the Company by any recipient of any of the foregoing options for the grant
of any such options. As of the date of this Prospectus, such options have been
exercised to acquire a total of 315,376 shares of Common Stock.
II-2
<PAGE>
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.01 Form of Underwriting Agreement.
3.01 Registrant's Restated Articles of Incorporation.
3.02 Registrant's Bylaws.
4.01 Specimen Common Stock Certificate.*
4.02 Form of Representatives' Warrant Agreement.*
4.03 Form of Warrant Agreement between the Registrant and Continental Stock
Transfer & Trust Company, National Securities Corporation and Pryor,
McClendon, Counts & Co, Inc.*
4.04 Specimen Warrant Certificate.*
5.01 Form of Opinion of Fenwick & West LLP.*
10.01 Registrant's 1996 Stock Option Plan.
10.02 Form of Employment Agreement between the registrant and certain
officers of the Registrant.
10.03 Registrant's 1996 Executives Equity Incentive Plan.
10.04 Registrant's 1996 Equity Incentive Plan.
10.05 Memorandum of Agreement between Electrochemical Plant, AO
Techsnabexport, Co., Ltd. and Registrant.
10.06 Option Agreement between the Registrant and Yale University.**
10.07 Office Lease Agreement between Paulsen Properties and the Registrant
as of January 1, 1996, as amended.
10.08 Letter from Yale University to Registrant dated February 10, 1996.
10.09 Form of Indemnity Agreement to be entered into by Registrant with each
of its directors and executive officers.
10.10 Warrant Agreement dated as of September 27, 1996 by and among
Registrant and certain investors.
10.11 Registration Rights Agreement dated as of September 27, 1996 by and
among Registrant and certain investors.*
10.12 Employment Agreement between the Registrant and James E. Alexander.*
10.13 Employment Agreement between the Registrant and Boris Rubizhevsky.*
11.01 Statement regarding computation of per share earnings.
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of Grant Thornton LLP, independent certified public
accountants.
24.01 Power of Attorney (see Page II-5 of this Registration Statement).
</TABLE>
- --------
*To be supplied.
**Confidential Treatment Requested.
II-3
<PAGE>
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes the following:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to: (i) include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect
in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration
statement; and (iii) include any additional or changed material information
of the plan of distribution.
(2) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.
(3) For determining liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the
time the Commission declared it effective.
(4) For determining liability under the Securities Act, each post-
effective amendment that contains a form of prospectus shall be deemed as a
new registration statement for the securities offered therein, and that
offering of the securities at that time shall be deemed to be the initial
bona fide offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 24 above, 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 Securities 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 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 counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
IN ACCORDANCE WITH TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENT FOR FILING ON FORM SB-2 AND AUTHORIZED THIS REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN THE CITY OF SAN JOSE, STATE
OF CALIFORNIA, ON OCTOBER 1, 1996.
Isonics Corporation
By: /s/ James E. Alexander
---------------------------------
JAMES E. ALEXANDER, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS THAT EACH INDIVIDUAL WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS JAMES E. ALEXANDER AND PAUL CATUNA, AND
EACH OF THEM, HIS OR HER TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH
FULL POWER OF SUBSTITUTION, FOR HIM OR HER AND IN HIS OR HER NAME, PLACE AND
STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING
POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT, AND TO SIGN ANY
REGISTRATION STATEMENT FOR THE SAME OFFERING COVERED BY THE REGISTRATION
STATEMENT THAT IS TO BE EFFECTIVE UPON FILING PURSUANT TO RULE 462(B)
PROMULGATED UNDER THE SECURITIES ACT, AND ALL POST-EFFECTIVE AMENDMENTS
THERETO, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO AND ALL DOCUMENTS IN
CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING
UNTO SAID ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND
AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND
NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND
PURPOSES AS HE OR SHE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND
CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR HIS,
HER OR THEIR SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY
VIRTUE HEREOF.
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT WAS SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES STATED.
SIGNATURES TITLE DATE
---------- ----- ----
PRINCIPAL EXECUTIVE OFFICER:
/s/ James E. Alexander President, Chief October 1, 1996
- ------------------------------- Executive Officer
JAMES E. ALEXANDER
PRINCIPAL FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER:
/s/ Paul J. Catuna Chief Financial October 1, 1996
- ------------------------------- Officer and
PAUL J. CATUNA Director of
Administration
ADDITIONAL DIRECTORS
/s/ Boris Rubizhevsky Senior Vice October 1, 1996
- ------------------------------- President and
BORIS RUBIZHEVSKY Director
/s/ Lindsay A. Gardner Director October 1, 1996
- -------------------------------
LINDSAY A. GARDNER
/s/ Larry J. Wells Director October 1, 1996
- -------------------------------
LARRY J. WELLS
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE PAGE
------- ------------- ----
<C> <S> <C>
1.01 Form of Underwriting Agreement.
3.01 Registrant's Restated Articles of Incorporation.
3.02 Registrant's Bylaws.
4.01 Specimen Common Stock Certificate.*
4.02 Form of Representatives' Warrant Agreement.*
4.03 Form of Warrant Agreement between the Registrant and
Continental Stock Transfer & Trust Company, National Securities
Corporation and Pryor, McClendon, Counts & Co, Inc.*
4.04 Specimen Warrant Certificate.*
5.01 Form of Opinion of Fenwick & West LLP.*
10.01 Registrant's 1996 Stock Option Plan.
10.02 Form of Employment Agreement between the registrant and certain
officers of the Registrant.
10.03 Registrant's 1996 Executives Equity Incentive Plan.
10.04 Registrant's 1996 Equity Incentive Plan.
10.05 Memorandum of Agreement between Electrochemical Plant, AO
Techsnabexport, Co., Ltd. and Registrant.
10.06 Option Agreement between the Registrant and Yale University.**
10.07 Office Lease Agreement between Paulsen Properties and the
Registrant as of January 1, 1996, as amended.
10.08 Letter from Yale University to Registrant dated February 10,
1996.
10.09 Form of Indemnity Agreement to be entered into by Registrant
with each of its directors and executive officers.
10.10 Warrant Agreement dated as of September 27, 1996 by and among
Registrant and certain investors.
10.11 Registration Rights Agreement dated as of September 27, 1996 by
and among Registrant and certain investors.*
10.12 Employment Agreement between the Registrant and James E.
Alexander.*
10.13 Employment Agreement between the Registrant and Boris
Rubizhevsky.*
11.01 Statement regarding computation of per share earnings.
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of Grant Thornton LLP, independent certified public
accountants.
24.01 Power of Attorney (see Page II-5 of this Registration
Statement).
</TABLE>
- --------
*To be supplied.
**Confidential Treatment Requested.
<PAGE>
EXHIBIT 1.1
___________________ Shares of Common Stock
and ______________________Redeemable Warrants
ISONICS CORPORATION
UNDERWRITING AGREEMENT
San Jose, California
September ___, 1996
Pryor, McClendon, Counts & Co., Inc.
National Securities Corporation
As Representatives of the Several Underwriters
c/o Pryor, McClendon, Counts & Co., Inc.
3 Penn Plaza
1515 Market Street, Suite 819
Philadelphia, Pennsylvania 19102
Ladies and Gentlemen:
Isonics Corporation, a California corporation (the "Company"), hereby
agrees with Pryor, McClendon, Counts & Co., Inc. ("Pryor, McClendon") and
National Securities Corporation ("National") and each of the underwriters named
in Schedule A hereto (collectively, the "Underwriters," which term shall also
include any underwriter substituted as hereinafter provided in Section 11), for
whom Pryor, McClendon and National are acting as representatives (in such
capacity, Pryor, McClendon and National shall hereinafter be referred to jointly
as "you" or the "Representatives") with respect to the sale by the Company and
the purchase by the Underwriters, acting severally and not jointly, of the
respective amount of shares (the "Shares") set forth in said Schedule A of the
Company's common stock, par value $.001 per share (the "Common Stock"), and
redeemable common stock purchase warrants (the "Warrants"), each to purchase one
share of Common Stock, set forth in Schedule A hereto. The aggregate
__________________ Shares and __________________ Warrants will be separately
tradeable upon issuance and are hereinafter referred to as the "Firm
Securities." Each Warrant is exercisable commencing on _________, 1996 and
until 5:30 p.m., New York City time on ________________________, 2001, unless
previously redeemed by the Company, at an initial exercise price of $_______ per
share of Common Stock. The Warrants may be redeemed by the Company at a
redemption price of $.05 per Warrant at any time after _________, 1997 on thirty
(30) days' prior written notice, provided that the closing sale price of the
Common Stock equals or exceeds $_________ per share (subject to adjustment under
certain circumstances), for any twenty (20) consecutive
<PAGE>
trading days immediately preceding the date of the notice of redemption, all in
accordance with the terms and conditions of the Warrant Agreement (herein
defined).
Upon your request, as provided in Section 2(b) of this Agreement, the
Company shall also issue and sell to the Underwriters, acting severally and not
jointly, up to an additional __________________________ shares of Common Stock
and ____________________ Warrants for the purpose of covering over-allotments,
if any. Such _________________ shares of Common Stock and ___________________
Warrants are hereinafter collectively to as the "Option Securities." The
Company also proposes to issue and sell to you warrants (the "Representatives'
Warrants") pursuant to the Representatives' Warrant Agreement (the
"Representatives' Warrant Agreement") for the purchase of an additional
________________ shares of Common Stock and/or ___________________ Warrants.
The shares of Common Stock and Warrants issuable upon exercise of the
Representatives' Warrants are hereinafter referred to as the "Representative's
Securities." The Firm Securities, the Option Securities, the Representatives'
Warrants and the Representative's Securities (collectively, hereinafter referred
to as the "Securities") are more fully described in the Registration Statement
and the Prospectus referred to below.
1. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to, and agrees with, each of the Underwriters as of the
date hereof, and as of the Closing Date and the Option Closing Date, if any, as
follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form SB-2 (No. _____________________),
including any related preliminary prospectus (the "Preliminary Prospectus"), for
the registration of the Firm Securities, the Option Securities and the
Representative's Securities under the Securities Act of 1933, as amended (the
"Act"), which registration statement and amendment or amendments have been
prepared by the Company in conformity with the requirements of the Act, and the
Regulations (as defined below) of the Commission under the Act. The Company
will not file any other amendment thereto to which the Underwriters shall have
objected in writing after having been furnished with a copy thereof. Except as
the context may otherwise require, such registration statement, as amended, on
file with the Commission at the time the registration statement becomes
effective (including the prospectus, financial statements, schedules, exhibits
and all other documents filed as a part thereof or incorporated therein and all
information deemed to be a part thereof as of such time pursuant to paragraph
(b) of Rule 430(A) of the Regulations), is hereinafter called the "Registration
Statement," and the form of prospectus in the form first filed with the
Commission pursuant to Rule 424(b) of the Regulations, is hereinafter called the
"Prospectus." For purposes hereof, "Regulations" mean the rules and regulations
adopted by the Commission under either the Act or the Securities Exchange Act of
1934, as amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any preliminary prospectus,
the Registration Statement or the Prospectus and no proceedings for a stop order
suspending the effectiveness of the
-2-
<PAGE>
Registration Statement have been instituted, or, to the Company's knowledge, are
threatened. Each of any preliminary prospectus, the Registration Statement and
the Prospectus at the time of filing thereof conformed in all material respects
with the requirements of the Act and Regulations, and none of any preliminary
prospectus, the Registration Statement or the Prospectus at the time of filing
thereof contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein and necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except that this representation and warranty does not apply to
statements made in reliance upon and in conformity with written information
furnished to the Company with respect to the Underwriters by or on behalf of the
Underwriters expressly for use in such preliminary prospectus, Registration
Statement or Prospectus.
(c) When the Registration Statement becomes effective and at all times
subsequent thereto up to the Closing Date (as defined in Section 2(c) hereof)
and each Option Closing Date (as defined in Section 2(b) hereof), if any, and
during such longer period as the Prospectus may be required to be delivered in
connection with sales by the Underwriters or a dealer, the Registration
Statement and the Prospectus, as amended or supplemented as required, will
contain all statements which are required to be stated therein in accordance
with the Act and the Regulations, and will conform in all material respects to
the requirements of the Act and the Regulations; neither the Registration
Statement nor the Prospectus, nor any amendment or supplement thereto, will
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading,
provided, however, that this representation and warranty does not apply to
- -------- -------
statements made or statements omitted in reliance upon and in conformity with
information furnished to the Company in writing by or on behalf of any
Underwriter expressly for use in the Registration Statement or the Prospectus or
any amendment thereof or supplement thereto.
(d) The Company and each of its subsidiaries have been duly organized
and are validly existing as corporations in good standing under the laws of the
respective states of their incorporation. The Company does not own or control,
directly or indirectly, any corporation, partnership, trust, joint venture or
other business entity other than the subsidiaries listed in Exhibit 21 of the
Registration Statement. Each of the Company and its subsidiaries is duly
qualified and licensed and in good standing as a foreign corporation in each
jurisdiction in which its ownership or leasing of any properties or the
character of its operations require such qualification or licensing, except
where the failure to be so qualified or licensed would not have a material and
adverse effect on the condition, financial or otherwise, or the business
affairs, operations, properties, or results of operations of the Company and its
subsidiaries, taken as a whole (the "Business"). Each of the Company and its
subsidiaries has all requisite power and authority (corporate and other), and
has obtained any and all necessary authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental or regulatory
officials and bodies (including, without limitation, those having jurisdiction
over environmental or similar matters), to own or lease its properties and
conduct its business as described in the Prospectus; the Company and each of its
subsidiaries have been doing business in compliance
-3-
<PAGE>
in all material respects with all such authorizations, approvals, orders,
licenses, certificates, franchises and permits and all federal, state, local and
foreign laws, rules and regulations; and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the revocation
or modification of any such authorization, approval, order, license,
certificate, franchise, or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would materially and
adversely affect the Business. The disclosures in the Registration Statement
concerning the effects of federal, state, local, and foreign laws, rules and
regulations on the Company's business as currently conducted and as contemplated
are correct in all material respects and do not omit to state a material fact
necessary to make the statements contained therein not misleading in light of
the circumstances in which they were made.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under the headings
"Capitalization" and "Description of Capital Stock" and will have the adjusted
capitalization set forth therein on the Closing Date and the Option Closing
Date, if any, based upon the assumptions set forth therein, and the Company is
not a party to or bound by any instrument, agreement or other arrangement
providing for it to issue any capital stock, rights, warrants, options or other
securities, except for this Agreement and as described in the Prospectus. The
Securities and all other securities issued or issuable by the Company conform
or, when issued and paid for, will conform, in all material respects to all
statements with respect thereto contained in the Registration Statement and the
Prospectus. All issued and outstanding shares of capital stock of each
subsidiary of the Company have been duly authorized and validly issued and are
fully paid and nonassessable. Except as disclosed in or contemplated by the
Prospectus and the financial statements of the Company and the related notes
thereto included in the Prospectus, neither the Company nor any subsidiary has
outstanding any options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The
description of the Company's stock option, stock bonus and other stock plans or
arrangements and the options or other rights granted and exercised thereunder as
set forth in the Prospectus conforms in all material respects with the
requirements of the Act. All issued and outstanding securities of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable, and the holders thereof have no rights of rescission with respect
thereto and are not subject to personal liability by reason of being such
holders; and none of such securities were issued in violation of the preemptive
rights of any holders of any security of the Company or similar contractual
rights granted by the Company.
(f) The Securities are not and will not be subject to any preemptive
or other similar rights of any stockholder, have been duly authorized and, when
issued, paid for and delivered in accordance with the terms hereof, will be
validly issued, fully paid and nonassessable and will conform in all material
respects to the description thereof contained in the Prospectus; the holders
thereof will not be subject to any liability solely as such holders; all
corporate action required to be taken for the authorization, issue and sale of
the Securities has been duly and validly taken; and the certificates
representing the Securities will be in due and proper form. Upon the issuance
and delivery pursuant to the terms hereof of the Securities to
-4-
<PAGE>
be sold by the Company hereunder, the Underwriters or the Representatives, as
the case may be, will acquire good and marketable title to such Securities free
and clear of any lien, charge, claim, encumbrance, pledge, security interest,
defect, or other restriction or equity of any kind whatsoever. No stockholder
of the Company has any right which has not been waived in writing to require the
Company to register the sale of any shares owned by such stockholder under the
Act in the public offering contemplated by this Agreement. No further approval
or authority of the stockholders or the Board of Directors of the Company will
be required for the issuance and sale of the Shares, the Option Shares and the
Representatives' Warrants to be sold by the Company as contemplated herein.
(g) The consolidated financial statements of the Company and its
consolidated subsidiaries, together with the related notes and schedules
thereto, included in the Registration Statement, each Preliminary Prospectus and
the Prospectus fairly present the consolidated financial position, changes in
stockholders' equity and the results of operations of the Company and its
consolidate subsidiaries at the respective dates and for the respective periods
to which they apply and such financial statements have been prepared in
conformity with generally accepted accounting principles and the Regulations,
consistently applied throughout the periods involved. There has been no
material adverse change or development involving a material prospective change
in the Business, whether or not arising in the ordinary course of business since
the date of the financial statements included in the Registration Statement and
the Prospectus and the outstanding debt, the property, both tangible and
intangible, and the business of the Company and its subsidiaries taken as a
whole conform in all material respects to the descriptions thereof contained in
the Registration Statement and the Prospectus. Financial information set forth
in the Prospectus under the headings "Prospectus Summary - Selected Financial
Data," "Capitalization," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," fairly present, on the basis stated in the
Prospectus, the information set forth therein and have been derived from or
compiled on a basis consistent with that of the audited consolidated financial
statements included in the Prospectus.
(h) The Company (i) has paid all federal, state, local, franchise, and
foreign taxes for which it is liable, including, but not limited to, withholding
taxes and amounts payable under Chapters 21 through 24 of the Internal Revenue
Code of 1986, as amended (the "Code"), and has furnished all information returns
it is required to furnish pursuant to the Code, (ii) has established adequate
reserves for such taxes which are not due and payable, and (iii) does not have
any tax deficiency or claims outstanding, proposed or assessed against it.
(i) No transfer tax, stamp duty or other similar tax is payable by or
on behalf of the Underwriters in connection with (i) the issuance by the Company
of the Securities, (ii) the purchase by the Underwriters of the Firm Securities
and the Option Securities from the Company and the purchase by the
Representatives of the Representatives' Warrants from the Company, (iii) the
consummation by the Company of any of its obligations under this Agreement, or
(iv) resales of the Firm Securities and the Option Securities in connection with
the distribution contemplated hereby.
-5-
<PAGE>
(j) There is no action, suit, proceeding, inquiry, arbitration,
mediation, investigation, litigation or governmental proceeding (including,
without limitation, any involving environmental or similar matters), domestic or
foreign, pending or threatened against (or circumstances that may give rise to
the same), or involving the properties or businesses of, the Company which
(i) questions the validity of the capital stock of the Company, this Agreement
or the Representatives' Warrant Agreement, or of any action taken or to be taken
by the Company pursuant to or in connection with this Agreement or the
Representatives' Warrant Agreement, (ii) is required to be disclosed in the
Registration Statement which is not so disclosed (and such proceedings as are
summarized in the Registration Statement are accurately summarized in all
material respects), or (iii) might materially and adversely affect the
condition, financial or otherwise, or the business, affairs, position,
stockholders' equity, operation, properties, or results of operations of the
Company and its subsidiaries taken as a whole.
(k) The Company has the corporate power and authority to authorize,
issue, deliver, and sell the Securities and to enter into this Agreement, the
Warrant Agreement, and the Representatives' Warrant Agreement, and to consummate
the transactions provided for in such agreements; and this Agreement, the
Warrant Agreement and the Representatives' Warrant Agreement have each been duly
and properly authorized, executed, and delivered by the Company. Each of this
Agreement, the Warrant Agreement and the Representatives' Warrant Agreement
constitutes a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its respective terms (except as the
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law), and none of the issue and
sale of the Securities, execution, delivery or performance by the Company of
this Agreement, the Warrant Agreement, and the Representatives' Warrant
Agreement, the consummation by the Company of the transactions contemplated
herein and therein, or the conduct of the Company's businesses as described in
the Registration Statement, the Prospectus, and any amendments or supplements
thereto, conflicts with or will conflict with or results or will result in any
breach or violation of any of the terms or provisions of, or constitutes or will
constitute a default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or assets
(tangible or intangible) of the Company pursuant to the terms of (i) the
articles of incorporation or by-laws of the Company, as amended and restated,
(ii) any license, contract, indenture, mortgage, deed of trust, voting trust
agreement, stockholders agreement, note, loan or credit agreement or any other
agreement or instrument to which the Company is a party or by which it is or may
be bound or to which its properties or assets (tangible or intangible) is or may
be subject, or (iii) any statute, judgment, decree, order, rule or regulation
applicable to the Company of any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, having jurisdiction over the Company or any of its
activities or properties.
-6-
<PAGE>
(l) No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance and sale of the Securities pursuant
hereto, to the Prospectus and the Registration Statement, the performance of
this Agreement, the Warrant Agreement, and the Representatives' Warrant
Agreement, and the transactions contemplated hereby and thereby, including
without limitation, any waiver of any preemptive, first refusal or other rights
that any entity or person may have for the issue and/or sale of any of the
Securities, except such as have been or may be obtained under the Act or may be
required under state securities or Blue Sky laws in connection with the
Underwriters' purchase and distribution of the Firm Securities, the Option
Securities, and the Representatives' Warrants to be sold by the Company
hereunder.
(m) All executed agreements, contracts or other documents or copies of
executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company is a party or by which it may be
bound or to which its assets, properties or businesses may be subject have been
duly and validly authorized, executed and delivered by the Company and
constitute the legal, valid and binding agreements of the Company enforceable
against the Company in accordance with their respective terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law). The descriptions in the
Registration Statement of such agreements, contracts and other documents are
accurate in all material respects and fairly present the information required to
be shown with respect thereto by Form SB-2, and there are no contracts or other
documents which are required by the Act to be described in the Registration
Statement or filed as exhibits to the Registration Statement which are not
described or filed as required, and the exhibits which have been filed are
complete and correct copies of the documents of which they purport to be copies.
(n) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus (i) the Company has not incurred any
material liabilities or obligations, indirect, direct or contingent, or entered
into any material verbal or written agreement or other transaction which is not
in the ordinary course of business or which could result in a material reduction
in the future earnings of the Company; (ii) the Company has not sustained any
material loss or interference with its business or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered by insurance;
(iii) the Company has not paid or declared any dividends or other distributions
with respect to its capital stock, and the Company is not in default in the
payment of principal or interest on any outstanding debt obligations; (iv) there
has not been any change in the capital stock (other than upon the sale of the
Firm Securities, the Option Securities and the Representatives' Warrants
hereunder and upon the exercise of options and warrants described in the
Registration Statement) of, or indebtedness material to, the Company (other than
in the ordinary course of business); (v) the Company has not issued any
securities or incurred any liability or obligation, primary or contingent, for
borrowed money;
-7-
<PAGE>
and (vi) there has not been any material adverse change in the condition
(financial or otherwise), business, properties, results of operations, or
prospects of the Company and its subsidiaries.
(o) Except as disclosed in or specifically contemplated by the
Prospectus, and subject to the risks and uncertainties described in the
Prospectus under the headings entitled "Risk Factors - Protection of
Intellectual Property" and "Business - Patents and Proprietary Rights," (i) the
Company has sufficient trademarks, trade names, patent rights, copyrights,
licenses, approvals and governmental authorizations to conduct its business as
now conducted; (ii) the expiration of any trademarks, trade names, patent
rights, copyrights, licenses, approvals or governmental authorizations would not
have a material adverse effect on the condition (financial or otherwise),
business, results of operations or prospects of the Company; (iii) the Company
has no knowledge of any infringement by it or its subsidiaries of trademark,
trade name rights, patent rights, copyrights, licenses, trade secret or other
similar rights of others; and (iv) there is no claim being made against the
Company regarding trademark, trade name, patent, copyright, license, trade
secret or other infringement which could have a material adverse effect on the
condition (financial or otherwise), business, results of operations or prospects
of the Company.
(p) No default exists in the due performance and observance of any
term, covenant or condition of any material license, contract, indenture,
mortgage, installment sale agreement, lease, deed of trust, voting trust
agreement, stockholders agreement, note, loan or credit agreement, or any other
material agreement or instrument evidencing an obligation for borrowed money, or
any other material agreement or instrument to which the Company is a party or by
which the Company may be bound or to which the property or assets (tangible or
intangible) of the Company are subject or affected, except for such defaults, if
any, which individually and in the aggregate would not have a material adverse
effect on the Business.
(q) To the Company's knowledge, there are no investigations involving
the Company by any governmental agency. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or to its knowledge threatened against or involving the Company. No
representation question exists respecting the employees of the Company. No
collective bargaining agreement, or modification thereof is currently being
negotiated by the Company. No grievance or arbitration proceeding is pending
under any expired or existing collective bargaining agreements of the Company.
No labor dispute with the employees of the Company exists or to its knowledge is
imminent.
(r) Except as described in the Prospectus, the Company does not
maintain, sponsor or contribute to any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan," or a
"multiemployer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") ("ERISA Plans"). The Company does not maintain or contribute to a
defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or
any trust created thereunder) has engaged in a "prohibited transaction" within
the meaning of
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<PAGE>
Section 406 of ERISA or Section 4975 of the Code, which could subject the
Company to any tax penalty on prohibited transactions and which has not
adequately been corrected. Each ERISA Plan is in compliance with all material
reporting, disclosure and other requirements of the Code and ERISA as they
relate to any such ERISA Plan. Determination letters have been received from
the Internal Revenue Service with respect to each ERISA Plan which is intended
to comply with Code Section 401(a), stating that such ERISA Plan and the
attendant trust are qualified thereunder. The Company has never completely or
partially withdrawn from a "multiemployer plan."
(s) Neither the Company nor any of its employees, directors,
stockholders, or affiliates (within the meaning of the Regulations) of any of
the foregoing has taken or will take, directly or indirectly, any action
designed to or which has constituted or which might be expected to cause or
result in unlawful stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Securities.
(t) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in the Prospectus to be owned or leased by it, free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, or other
restrictions or equities of any kind whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable.
(u) Grant Thornton ("Grant Thornton"), whose report is filed with the
Commission as a part of the Registration Statement, is an independent certified
public accountant as required by the Act and the Regulations.
(v) The Company has caused to be duly executed legally binding and
enforceable agreements pursuant to which all persons or entities, other than
David Ross who has entered into a modified agreement as described in the
Prospectus, and Lee Millard who has refused to sign any such agreement, that
directly or beneficially own Common Stock, as of the effective date of the
Registration Statement, have agreed not to, directly or indirectly, offer, offer
to sell, sell, grant any option for the sale of, transfer, assign, pledge,
hypothecate or otherwise encumber or dispose of any shares of Common Stock or
securities convertible into Common Stock, exercisable or exchangeable for or
evidencing any right to purchase or subscribe for any shares of Common Stock
(either pursuant to Rule 144 of the Regulations or otherwise) or dispose of any
interest therein for a period from the date of the Prospectus until and
including the day of like number in the twelfth consecutive month next following
the date that the Registration Statement becomes effective, without the prior
written consent of Pryor, McClendon (the "Lock-up Agreements"). The Company
will cause the Transfer Agent (as defined herein) to place "stop transfer"
orders on the Company's stock ledgers in order to effect the Lock-up Agreements.
(w) There are no claims, payments, arrangements or understandings,
whether oral or written, for services in the nature of a finder's or origination
fee with respect to the sale of the Securities hereunder or any other
arrangements, agreements, understandings, payments
-9-
<PAGE>
or issuance with respect to the Company or any of its officers, directors,
stockholders, employees or affiliates that may affect the Underwriters'
compensation as determined by the Commission and the National Association of
Securities Dealers, Inc. (the "NASD").
(x) The Securities have been approved for quotation on the Nasdaq
SmallCap Market.
(y) Neither the Company nor any of its officers, employees,
agents or any other person acting on behalf of the Company has, directly or
indirectly, given or agreed to give any money, gift or similar benefit (other
than legal price concessions to customers in the ordinary course of business) to
any customer, supplier, employee or agent of a customer or supplier, or official
or employee of any governmental agency (domestic or foreign) or instrumentality
of any government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or other person who was, is, or may be in a
position to help or hinder the business of the Company (or assist the Company in
connection with any actual or proposed transaction) which might subject the
Company or any other such person to any damage or penalty in any civil, criminal
or governmental litigation or proceeding (domestic or foreign). The Company's
internal accounting controls are sufficient to cause the Company to comply with
the Foreign Corrupt Practices Act of 1977, as amended.
(z) Except as set forth in the Prospectus, no officer, director
or stockholder of the Company, or any "affiliate" or "associate" (as these terms
are defined in Rule 405 of the Regulations) of any of the foregoing persons or
entities has or has had, either directly or indirectly, (i) an interest in any
person or entity which (A) furnishes or sells services or products which are
furnished or sold or are proposed to be furnished or sold by the Company, or (B)
purchases from or sells or furnishes to the Company any goods or services, or
(ii) a beneficial interest in any contract or agreement to which the Company is
a party or by which it may be bound or affected. Except as set forth in the
Prospectus, there are no existing agreements, arrangements, understandings or
transactions, or proposed agreements, arrangements, understandings or
transactions, between or among the Company, and any officer, director, principal
shareholder (as such term is used in the Prospectus) of the Company, or any
affiliate or associate of any of the foregoing persons or entities which are
required to be disclosed in the Prospectus.
(aa) The Company is not, and does not intend to conduct its
business in a manner in which it would become an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
(ab) Any certificate signed by any officer of the Company and
delivered to the Underwriters or to the Underwriters' Counsel (as defined in
Section 4(d) herein) shall be deemed a representation and warranty by the
Company to the Underwriters as to the matters covered thereby.
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<PAGE>
(ac) The minute books of the Company have been made available to
the Underwriters and contain a complete summary of all meetings and actions of
the directors and stockholders of the Company since the time of its
incorporation, and reflect all transactions referred to in such minutes
accurately in all material respects.
(ad) The Company has not distributed and will not distribute any
offering material in connection with the offering and sale of the Shares in this
offering other than the Prospectus, the Registration Statement and the other
materials permitted by the Act. Except as described in the Prospectus, no
holders of any securities of the Company or of any options, warrants or other
convertible or exchangeable securities of the Company have the right to include
any securities issued by the Company as part of the Registration Statement or to
require the Company to file a registration statement under the Act and no person
or entity holds any anti-dilution rights with respect to any securities of the
Company.
(ae) Each of the Company and its subsidiaries maintains insurance
by insurers of recognized financial responsibility of the types and in the
amounts as the Company believes are prudent and adequate for the business in
which it is engaged, including, but not limited to, insurance covering real and
personal property owned or leased by the Company and its subsidiaries against
theft, damage, destruction, acts of vandalism and all other risks customarily
insured against, all of which insurance is in full force and effect. The Company
has delivered to the Underwriter's Counsel satisfactory summaries of these
insurance policies. The Company has no reason to believe that it will not be
able to renew existing insurance coverage with respect to the Company as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business, in either case, at a cost that
would not have a material adverse effect on the financial condition, operations,
business, assets or properties of the Company. The Company has not failed to
file any material claims, has no material disputes with its insurance company
regarding any claims submitted under its insurance policies, and has complied in
material respects with all material provisions contained in its insurance
policies.
2. Purchase, Sale and Delivery of the Securities.
----------------------------------------------
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to sell to each Underwriter, and each Underwriter,
severally and not jointly agrees to purchase from the Company, at a price equal
to $_______________ per Share and $_____________ per Warrant, that number of
Firm Securities set forth in Schedule A opposite the name of such Underwriter,
subject to such adjustment as the Representatives in their discretion shall make
to eliminate any sales or purchases of fractional shares, plus any additional
numbers of Shares which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 11 hereof.
(b) In addition, on the basis of the representations, warran-
ties, covenants and agreements, herein contained, but subject to the terms
and conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase all
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<PAGE>
or any part of an additional _______________ shares of Common Stock at a price
of $__________ per share of Common Stock and an additional ___________________
Warrants at a price of $__________ per Warrant. The option granted hereby will
expire 45 days after (i) the date the Registration Statement becomes effective,
if the Company has elected not to rely on Rule 430A under the Regulations, or
(ii) the date of this Agreement if the Company has elected to rely upon Rule
430A under the Regulations, and may be exercised in whole or in part from time
to time (but not on more than two (2) occasions) only for the purpose of
covering over-allotments which may be made in connection with the offering and
distribution of the Firm Securities upon notice by the Representatives to the
Company setting forth the number of Option Securities as to which the several
Underwriters are then exercising the option and the time and date of payment and
delivery for any such Option Securities. Any such time and date of delivery (an
"Option Closing Date") shall be determined by the Representatives, but shall not
be later than three full business days after the exercise of said option, nor in
any event prior to the Closing Date, as hereinafter defined, unless otherwise
agreed upon by the Representatives and the Company. Nothing herein contained
shall obligate the Underwriters to exercise the over-allotment option described
above. No Option Securities shall be delivered unless the Firm Securities shall
be simultaneously delivered or shall theretofore have been delivered as herein
provided.
(c) Payment of the purchase price for, and delivery of
certificates for, the Firm Securities shall be made at the offices of Pryor,
McClendon, Counts & Co., Inc., 3 Penn Plaza, 1515 Market Street, Suite 819,
Philadelphia, Pennsylvania, or at such other place as shall be agreed upon by
the Representatives and the Company. Such delivery and payment shall be made at
9:00 a.m. (New York time) on ______________, 1996, or at such other time and
date as shall be agreed upon by the Representatives and the Company, but no more
than four (4) business days after the date hereof (such time and date of payment
and delivery being herein called the "Closing Date"). In addition, in the event
that any or all of the Option Securities are purchased by the Underwriters,
payment of the purchase price for, and delivery of certificates for, such Option
Securities shall be made at the above mentioned office of Pryor, McClendon or at
such other place as shall be agreed upon by the Representatives and the Company
on each Option Closing Date as specified in the notice from the Representatives
to the Company. Delivery of the certificates for the Firm Securities and the
Option Securities, if any, shall be made to the Underwriters against payment by
the Underwriters of the purchase price for the Firm Securities and the Option
Securities, if any, to the order of the Company. In the event Option Securities
are to be purchased by the Underwriters, each of the Underwriters, acting
severally and not jointly, shall purchase that proportion of the total number of
Option Securities then being purchased which the number of Firm Securities set
forth in Schedule A hereto opposite the name of such Underwriter bears to the
total number of Firm Securities, subject in each case to such adjustments as the
Representatives in their discretion shall make to eliminate any sales or
purchases of fractional shares. Certificates for the Firm Securities and the
Option Securities, if any, shall be in definitive, fully registered form, shall
bear no restrictive legends and shall be in such denominations and registered in
such names as the Underwriters may request in writing at least three (3)
business days prior to Closing Date or the relevant Option Closing Date, as the
case may be. The certificates for the Firm Securities and the Option Securities,
if any, shall be made available to the Representatives at such office or such
other
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<PAGE>
place as the Representatives may designate for inspection, checking and
packaging no later than 9:30 a.m. on the last business day prior to Closing Date
or the relevant Option Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell the
Representatives' Warrants to the Representatives at a purchase price of $0.0001
per warrant, which warrants shall entitle the holders thereof to purchase an
aggregate of _________________ shares of Common Stock and _________________
Warrants. The Representatives' Warrants shall expire five (5) years after the
effective date of the Registration Statement and shall be exercisable for a
period of four (4) years commencing on the first anniversary of the effective
date of the Registration Statement at a price equaling one hundred twenty
percent (120%) of the initial public offering price of the Shares. The
Representatives' Warrant Agreement and form of Warrant Certificate shall be
substantially in the form filed as Exhibit 4.2 to the Registration Statement.
Payment for the Representatives' Warrants shall be made on the Closing Date.
3. Public Offering of the Shares and the Warrants. As soon after the
----------------------------------------------
Registration Statement becomes effective as the Representatives deem advisable,
the Underwriters shall make a public offering of the Shares and the Warrants
(other than to residents of or in any jurisdiction in which qualification of the
Shares and the Warrants is required and has not become effective) at the price
and upon the other terms set forth in the Prospectus. The Representatives may
from time to time increase or decrease the public offering price to such extent
as the Representatives, in their sole discretion, deem advisable and as
permitted by the Act and Regulations. The Underwriters may enter into one or
more agreements as the Underwriters, in each of their sole discretion, deem
advisable with one or more broker-dealers who shall act as dealers in connection
with such public offering.
4. Covenants of the Company. The Company covenants and agrees with
------------------------
each of the Underwriters as follows:
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable and will not at any time, whether before or after the
effective date of the Registration Statement, file any amendment to the
Registration Statement or supplement to the Prospectus or file any document
under the Act or Exchange Act before termination of the offering of the Shares
and the Warrants by the Underwriters of which the Representatives shall not
previously have been advised and furnished with a copy, or to which the
Representatives shall have objected or which is not in compliance with the Act,
the Exchange Act or the Regulations.
(b) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Representatives and confirm the notice in
writing, (i) when the Registration Statement, as amended, becomes effective, if
the provisions of Rule 430A promulgated under the Act will be relied upon, when
the Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective, (ii)
of the issuance by the Commission of any stop order or of the initiation,
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<PAGE>
or the threatening, of any proceeding, suspending the effectiveness of the
Registration Statement or any order preventing or suspending the use of any
preliminary prospectus or the Prospectus, or any amendment or supplement
thereto, or the institution of proceedings for that purpose, (iii) of the
issuance by the Commission or by any state securities commission of any
proceedings for the suspension of the qualification of any of the Securities for
offering or sale in any jurisdiction or of the initiation, or the threatening,
of any proceeding for that purpose, (iv) of the receipt of any comments from the
Commission; and (v) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information. If the Commission or any state securities commission
shall enter a stop order or suspend such qualification at any time, the Company
will use its best efforts to obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Representatives) in accordance with the requirements of the
Act.
(d) The Company will give the Representatives notice of its
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or supplement to the
Prospectus (including any revised prospectus which the Company proposes for use
by the Underwriters in connection with the offering of the Securities which
differs from the corresponding prospectus on file at the Commission at the time
the Registration Statement becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) of the Regulations),
and will furnish the Representatives with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file any such amendment or supplement to which the
Representatives or Camhy Karlinsky & Stein LLP ("Underwriters' Counsel") shall
reasonably object.
(e) The Company shall endeavor in good faith, in cooperation with
the Representatives, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Representatives may reasonably designate to
permit the sales and dealings therein for as long as may be necessary to
complete the distribution, and shall make such applications, file such documents
and furnish such information as may be required for such purpose; provided,
--------
however, the Company shall not be required to qualify as a foreign corporation
- -------
or become subject to service of process in any such jurisdiction. In each
jurisdiction where such qualification shall be effected, the Company will,
unless the Representatives agree that such action is not at the time necessary
or advisable, use all reasonable efforts to file and make such statements or
reports at such times as are required by the laws of such jurisdiction to
continue such qualification.
(f) During the time when a prospectus is required to be delivered
under the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act, as now and hereafter amended, and by
the Regulations, as from time to time in force, so far as necessary to permit
the continuance of sales of or dealings in the Securities in
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<PAGE>
accordance with the provisions hereof and the Prospectus, or any amendments or
supplements thereto. If at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event shall have
occurred as a result of which, in the opinion of counsel for the Company or
Underwriters' Counsel, the Prospectus, as then amended or supplemented, includes
an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, or if
it is necessary at any time to amend or supplement the Prospectus to comply with
the Act, the Company will notify the Representatives promptly and prepare and
file with the Commission an appropriate amendment or supplement in accordance
with Section 10 of the Act, each such amendment or supplement to be satisfactory
to Underwriters' Counsel, and the Company will furnish to the Underwriters
copies of such amendment or supplement as soon as available and in such
quantities as the Underwriters may request.
(g) As soon as practicable, but in any event not later than 45
days after the end of the 12-month period beginning on the day after the end of
the fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) of the Regulations, and to the Representatives, an earnings statement
which will be in the detail required by, and will otherwise comply with, the
provisions of Section 11(a) of the Act and Rule 158(a) of the Regulations, which
statement need not be audited unless required by the Act, covering a period of
at least 12 consecutive months after the effective date of the Registration
Statement.
(h) During a period of five (5) years after the date hereof,
until and including the like day and month in 2001, the Company will furnish to
its stockholders, as soon as practicable, annual reports (including consolidated
financial statements of the Company and its consolidated subsidiaries audited by
independent public accountants) and will make available to its stockholders
consolidated unaudited quarterly reports (except for the last quarter of each
fiscal year) of earnings of the Company and its consolidated subsidiaries, and
will deliver to the Representatives:
(i) concurrently with furnishing such quarterly reports to
its stockholders, a consolidated statement of income of the Company and
its consolidated subsidiaries for each quarter in the form furnished to
the Company's stockholders;
(ii) concurrently with furnishing such annual reports to its
stockholders, a consolidated balance sheet of the Company and its
consolidated subsidiaries as at the end of the preceding fiscal year,
together with statements of consolidated operations, stockholders'
equity, and cash flows of the Company and its consolidated
subsidiaries for such fiscal year, accompanied by a copy of the report
thereon of independent certified public accountants;
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<PAGE>
(iii) as soon as they are available, copies of all other
reports (financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all reports
and financial statements furnished to or filed with the Commission,
Nasdaq or any securities exchange;
(v) every press release and every material news item or
article of interest to the financial community in respect of the
Company or its affairs which was released or prepared by or on behalf
of the Company; and
(vi) any additional information of a public nature
concerning the Company and its Businesses which the Representatives
may reasonably request.
During such five-year period, the foregoing financial statements will
be accompanied by similar financial statements for any significant subsidiary
which is not consolidated.
(i) The Company will maintain a transfer agent (the "Transfer
Agent") and, if necessary under the jurisdiction of incorporation of the
Company, a registrar (which may be the same entity as the transfer agent)
for the Securities and the Representatives' Warrants.
(j) The Company will furnish to the Representatives, without
charge, at such place as the Representatives may designate, copies of each
preliminary prospectus, the Registration Statement, the Prospectus and any pre-
effective or post-effective amendments thereto (two of which copies will be
signed and will include all financial statements and exhibits), in each case as
soon as available and in such quantities as the Representatives may reasonably
request.
(k) On or before the effective date of the Registration
Statement, the Company shall provide the Representatives with true copies of
duly executed Lock-up Agreements. On or before the Closing Date, the Company
shall deliver instructions to the Transfer Agent authorizing it to place
appropriate stop transfer orders on the Company's ledgers.
(l) The Company shall use its best efforts to cause its officers,
directors, stockholders or affiliates (within the meaning of the Regulations)
not to take, directly or indirectly, any action designed to, or which might in
the future reasonably be expected to cause or result in, unlawful stabilization
or manipulation of the price of any securities of the Company.
(m) The Company shall apply the net proceeds from the sale of the
Securities substantially in the manner, and subject to the conditions, set forth
under "Use of Proceeds" in the Prospectus.
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<PAGE>
(n) The Company shall timely file all such reports, forms or
other documents as may be required (including, but not limited to, a Form SR as
may be required pursuant to Rule 463 under the Act) from time to time, under the
Act, the Exchange Act, and the Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Exchange Act, and the Regulations.
(o) The Company shall use its best efforts to cause the
Securities to be quoted on the Nasdaq SmallCap Market, and for a period of two
(2) years from the date hereof shall use its best efforts to maintain the
quotation of the Securities to the extent outstanding.
(p) For a period of two (2) years from the Closing Date, the
Company shall furnish to the Representatives, at the Company's sole expense,
monthly transfer sheets relating to the Common Stock and Warrants.
(q) For a period of five (5) years after the effective date of
the Registration Statement the Company shall, at the Company's sole expense,
take all necessary and appropriate action to qualify the Common Stock and
Warrants in all jurisdictions of the United States which do not require the
Company to qualify as a foreign corporation or to file a general consent to
service of process in order to permit secondary sales of such securities
pursuant to the Blue Sky laws of those jurisdictions.
(r) The Company (i) prior to the effective date of the
Registration Statement has filed a Form 8-A with the Commission providing for
the registration of the Common Stock and Redeemable Warrants under the Exchange
Act and (ii) as soon as practicable will use its best efforts to take all
necessary and appropriate actions to be included in Standard and Poor's
Corporation Descriptions and Moody's OTC Manual and to continue such inclusion
for a period of not less than five (5) years.
(s) The Company agrees that for a period of twelve (12) months
following the effective date of the Registration Statement it will not, without
the prior written consent of Pryor, McClendon, offer, issue, sell, contract to
sell, grant any option for the sale of or otherwise dispose of any Common Stock
or securities convertible into Common Stock, except for the issuance of shares
of Common Stock registered under the Act pursuant to the registration Statement.
(t) Until the completion of the distribution of the Securities,
the Company shall not without the prior written consent of Pryor, McClendon or
Underwriters' Counsel, issue, directly or indirectly any press release or other
communication or hold any press conference with respect to the Company or its
activities or the offering contemplated hereby, other than trade releases issued
in the ordinary course of the Company's business consistent with past practices.
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<PAGE>
(u) For a period equal to the lesser of (i) five (5) years from
the date hereof, and (ii) the sale to the public of the Representatives's
Securities, the Company will not take any action or actions which may prevent or
disqualify the Company's use of an appropriate form for the registration under
the Act of the Representatives's Securities.
(v) The Company agrees that it shall use its best efforts, which
shall include, but shall not be limited to, the solicitation of proxies, to
elect one (1) designee of Pryor, McClendon and National to the Company's Board
of Directors for a period of five (5) years following the Closing Date, provided
that such designee is reasonably acceptable to the Company and that such
director may be excluded from consideration of certain confidential matters
which, in the good faith judgment of a majority of the other directors, make
such director's presence not appropriate.
(w) The Company agrees that within forty-five (45) days after the
Closing Date it shall retain a public relations firm which is reasonably
acceptable to Pryor, McClendon and National. The Company shall keep such public
relations firm and any replacement for a total period of two (2) years from the
Closing Date. Any replacement public relations firm shall be retained only with
the consent of Pryor, McClendon and National, which shall not be unreasonably
withheld.
(x) The Company agrees that any and all future transactions
between the Company and any of its officers, directors, principal stockholders
and the affiliates of the foregoing persons will be on terms no less favorable
to the Company than could reasonably be obtained in arm's length transactions
with independent third parties, and that any such transactions also be approved
by a majority of the Company's outside independent directors disinterested in
the transaction.
(y) The Company shall prepare and deliver, at the Company's sole
expense, to Pryor, McClendon and National within the one hundred and twenty
(120) day period after the later of the effective date of the Registration
Statement and the latest Option Closing Date, as the case may be, one bound
volume each containing all correspondence with regulatory officials, agreements,
documents and all other materials in connection with the offering to which such
Registration Statement relates as requested by the Underwriters' Counsel.
5. Payment of Expenses.
-------------------
(a) The Company hereby agrees to pay on each of the Closing Date
and each Option Closing Date (to the extent not previously paid) all expenses
and fees (other than fees of Underwriters' Counsel, except as provided in (iv)
below of this Section 5) incident to the performance of the obligations of the
Company under this Agreement, the Warrant Agreement, and the Representatives'
Warrant Agreement, including, without limitation, (i) the fees and expenses of
accountants and counsel for the Company, (ii) all costs and expenses incurred in
connection with the preparation, duplication, printing, filing, delivery and
mailing (including the payment of postage with respect thereto) of the
Registration Statement and the Prospectus and
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any amendments and supplements thereto and the duplication, mailing (including
the payment of postage with respect thereto) and delivery of this Agreement, the
Warrant Agreement, the Agreement Among Underwriters, the Selected Dealers
Agreements, the Powers of Attorney, and related documents, including the cost of
all copies thereof and of the preliminary prospectuses and of the Prospectus and
any amendments thereof or supplements thereto supplied to the Underwriters and
such dealers as the Underwriters may request, in quantities as hereinabove
stated, (iii) the printing, engraving, issuance and delivery of the
certificates representing the Securities, (iv) the qualification of the
Securities under state or foreign securities or "Blue Sky" laws and
determination of the status of such securities under legal investment laws,
including the costs of word processing and mailing the "Preliminary Blue Sky
Memorandum," the "Supplemental Blue Sky Memorandum" and "Legal Investments
Survey," if any, and reasonable disbursements and fees of counsel in connection
therewith, (v) advertising costs and expenses, including but not limited to the
costs and expenses incurred by the Company and the Representatives in connection
with the "road show," information meetings and presentations, bound volumes and
prospectus memorabilia and reasonable "tombstone" advertisement expenses, (vi)
experts, (vii) the fees and expenses of the transfer agent and registrar, (viii)
the fees payable to the Commission and the NASD, (ix) issue and transfer taxes,
if any and (x) the fees and expenses incurred in connection with the listing of
the Securities on the Nasdaq Small Cap Market and any other market or exchange.
(b) If this Agreement is terminated by the Underwriters in
accordance with the provisions of Section 6, Section 10(a) or Section 11, the
Company shall reimburse and indemnify the Representatives for all of their
actual out-of-pocket expenses on an accountable basis, including the fees and
disbursements of Underwriters' Counsel, less any amounts already paid pursuant
to Section 5(c) hereof provided that Pryor, McClendon and National shall notify
the Company of any single expense or any series of similar expenses which in the
aggregate exceed $5,000 (provided further that such notice requirement shall not
apply to Pryor, McClendon's and National's actual out-of-pocket legal expenses).
(c) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 5, it will pay to the
Representatives on the Closing Date by certified or bank cashier's check or, at
the election of the Representatives, by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds received by the Company from the sale of the
Firm Securities, $30,000 of which has been paid to date. In the event the
Representatives elect to exercise the over-allotment option described in Section
2(b) hereof, the Company further agrees to pay to the Representatives on each
Option Closing Date (by certified or bank cashier's check or, at the
Representatives's election, by deduction from the proceeds of the offering) a
non-accountable expense allowance equal to three percent (3%) of the gross
proceeds received by the Company from the sale of the Option Securities.
6. Conditions of the Underwriters' Obligations. The obligations of
-------------------------------------------
the Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each
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Option Closing Date, if any, as if they had been made on and as of the Closing
Date or each Option Closing Date, as the case may be; the accuracy on and as of
the Closing Date or Option Closing Date, if any, of the statements of officers
of the Company made pursuant to the provisions hereof; and the performance by
the Company on and as of the Closing Date and each Option Closing Date, if any,
of its covenants and obligations hereunder and to the following further
conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 p.m., New York City time, on the date prior to the date of this
Agreement or such later date and time as shall be consented to in writing by the
Representatives, and, at the Closing Date and each Option Closing Date, if any,
no stop order suspending the effectiveness of the Registration Statement shall
have been issued and no proceedings for that purpose shall have been instituted
or shall be pending or threatened by the Commission and any request on the part
of the Commission for additional information shall have been complied with to
the reasonable satisfaction of Underwriters' Counsel. If the Company has
elected to rely upon Rule 430A of the Regulations, the price of the Shares and
Warrants and any price-related information previously omitted from the effective
Registration Statement pursuant to such Rule 430A shall have been transmitted to
the Commission for filing pursuant to Rule 424(b) of the Regulations within the
prescribed time period, and prior to the Closing Date the Company shall have
provided evidence satisfactory to the Representatives of such timely filing, or
a post-effective amendment providing such information shall have been promptly
filed and declared effective in accordance with the requirements of Rule 430A of
the Regulations.
(b) The Representatives shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representatives's opinion, is material, or omits to state
a fact which, in the Representatives's opinion, is material and is required to
be stated therein or is necessary to make the statements therein not misleading,
or that the Prospectus, or any supplement thereto, contains an untrue statement
of fact which, in the Representatives's reasonable opinion, is material, or
omits to state a fact which, in the Representatives's reasonable opinion, 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.
(c) On or prior to the Closing Date, the Underwriters shall have
received from Underwriters' Counsel such opinion or opinions with respect to the
organization of the Company, the validity of the Securities, the Registration
Statement, the Prospectus and other related matters as the Representatives may
request and Underwriters' Counsel shall have received from the Company such
papers and information as they request to enable them to pass upon such matters.
(d) At the Closing Date, the Underwriters shall have received the
favorable opinion of Fenwick & West LLP ("Fenwick & West"), counsel to the
Company, dated the Closing Date, addressed to the Underwriters and in form and
substance satisfactory to Underwriters' Counsel, to the effect that:
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(i) the Company (A) has been duly organized and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, (B) is duly qualified and licensed
and in good standing as a foreign corporation in each jurisdiction
in which its ownership or leasing of any properties or the
character of its operations requires such qualification or
licensing, and (C) to the best of such counsel's knowledge, has
all requisite corporate power and authority and has obtained any
and all necessary authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental
or regulatory officials and bodies (including, without limitation,
those having jurisdiction over environmental or similar matters),
to own or lease its properties and conduct its business as
described in the Prospectus.
(ii) except as described in the Prospectus, and to the best
of such counsel's knowledge after reasonable investigation, the
Company does not own an interest in any corporation, limited
liability company, partnership, joint venture, trust or other
business entity;
(iii) the Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, and any
amendment or supplement thereto, under "Capitalization" and
"Description of Capital Stock," and to the knowledge of such
counsel, the Company is not a party to or bound by any instrument,
agreement or other arrangement providing for it to issue any
capital stock, rights, warrants, options or other securities,
except for this Agreement, the Warrant Agreement, the
Representatives' Warrant Agreement, and as described in the
Prospectus. The Securities and all other securities issued or
issuable by the Company conform in all material respects to the
statements with respect thereto contained in the Registration
Statement and the Prospectus. All issued and outstanding
securities of the Company have been duly authorized and validly
issued and are fully paid and nonassessable; the holders thereof
are not subject to personal liability by reason of being such
holders; and none of such securities were issued in violation of
the preemptive rights of any holders of any security of the
Company. The Securities to be sold by the Company hereunder,
under the Warrant Agreement, and under the Representatives'
Warrant Agreement are not and will not be subject to any
preemptive or other similar rights of any stockholder, have been
duly authorized and, when issued, paid for and delivered in
accordance with their terms, will be validly issued, fully paid
and nonassessable and will conform in all material respects to the
description thereof contained in the Prospectus; the holders
thereof will not be subject to any liability solely as such
holders; all corporate action required to be taken for the
authorization, issue and sale of the Securities has been duly and
validly taken; and the certificates representing the Securities
are in due and proper form. The
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Representatives' Warrants and the Warrants constitute valid,
binding and enforceable obligations of the Company to issue and
sell, upon exercise thereof and payment therefor, the number and
type of securities of the Company called for thereby (except as
such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors'
rights and the application of equitable principles in any action,
legal or equitable, and except as rights to indemnity or
contribution may be limited by applicable law). Upon the issuance
and delivery pursuant to this Agreement of the Securities to be
sold by the Company, the Company will convey, against payment
therefor as provided herein, to the Underwriters and the
Representatives, respectively, good and marketable title to the
Securities free and clear of all liens and other encumbrances;
(iv) the Registration Statement is effective under the Act,
and, if applicable, filing of all pricing information has been
timely made in the appropriate form under Rule 430A, and no stop
order suspending the use of any preliminary prospectus, the
Registration Statement or Prospectus or any part of any thereof or
suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been
instituted or are pending or, to the best of such counsel's
knowledge, threatened or contemplated under the Act;
(v) each of any preliminary prospectus, the Registration
Statement, and the Prospectus and any amendments or supplements
thereto (other than the financial statements and other financial
and statistical data included therein as to which no opinion need
be rendered) comply as to form in all material respects with the
requirements of the Act and the Regulations. Such counsel shall
state that such counsel has participated in conferences with
officers and other representatives of the Company and the
Representatives and representatives of the independent public
accountants for the Company, at which conferences the contents of
any preliminary prospectus, the Registration Statement, the
prospectus, and any amendments or supplements thereto were
discussed, and, although such counsel is not passing upon and does
not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the preliminary
prospectus, the Registration Statement and Prospectus, and any
amendments or supplements thereto, on the basis of the foregoing,
no facts have come to the attention of such counsel which lead
them to believe that either the Registration Statement or any
amendment thereto, at the time such Registration Statement or
amendment became effective or the Preliminary Prospectus or
Prospectus or amendment or supplement thereto as of the date of
such opinion contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the
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<PAGE>
statements therein not misleading (it being understood that such
counsel need express no opinion with respect to the financial
statements and schedules and other financial and statistical data
included in the Preliminary Prospectus, the Registration Statement
or Prospectus, and any amendments or supplements thereto);
(vi) to the best of such counsel's knowledge after reasonable
investigation, (A) there are no agreements, contracts or other
documents required by the Act to be described in the Registration
Statement and the Prospectus and filed as exhibits to the
Registration Statement other than those described in the
Registration Statement and the Prospectus and filed as exhibits
thereto; (B) the descriptions in the Registration Statement and
the Prospectus and any supplement or amendment thereto of
contracts and other documents to which the Company is a party or
by which it is bound are accurate in all material respects and
fairly represent the information required to be shown by Form SB-
2; (C) there is not pending or threatened against the Company any
action, arbitration, suit, proceeding, litigation, governmental or
other proceeding (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or
foreign, which (x) is required to be disclosed in the Registration
Statement which is not so disclosed (and such proceedings as are
summarized in the Registration Statement are accurately summarized
in all material respects), (y) questions the validity of the
capital stock of the Company or this Agreement, the Warrant
Agreement, or the Representatives' Warrant Agreement, or of any
action taken or to be taken by the Company pursuant to or in
connection with any of the foregoing; and (D) there is no action,
suit or proceeding pending or threatened against the Company
before any court or arbitrator or governmental body, agency or
official in which there is a reasonable possibility of an adverse
decision which may result in a material adverse change in the
financial condition, business, affairs, stockholders' equity,
operations, properties, business or results of operations of the
Company, which could adversely affect the present or prospective
ability of the Company to perform its obligations under this
Agreement, the Warrant Agreement, or the Representatives' Warrant
Agreement, or which in any manner draws into question the validity
or enforceability of this Agreement, the Warrant Agreement or the
Representatives' Warrant Agreement;
(vii) the Company has the corporate power and authority to
enter into each of this Agreement, the Warrant Agreement, and the
Representatives' Warrant Agreement and to consummate the
transactions provided for therein; and each of this Agreement, the
Warrant Agreement, and the Representatives' Warrant Agreement has
been duly authorized, executed and delivered by the Company. Each
of this Agreement, the Warrant
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<PAGE>
Agreement, and the Representatives' Warrant Agreement, assuming
due authorization, execution and delivery by each other party
thereto, constitutes a legal, valid and binding obligation of the
Company enforceable against the Company in accordance with its
terms (except as the enforceability thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application relating to or affecting
enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights
to indemnity or contribution may be limited by applicable law),
and none of the Company's execution, delivery or performance of
this Agreement, the Warrant Agreement, and the Representatives'
Warrant Agreement, the consummation by the Company of the
transactions contemplated herein or therein, or the conduct of the
Company's business as described in the Registration Statement, the
Prospectus, and any amendments or supplements thereto conflicts
with or results in any breach or violation of any of the terms or
provisions of, or constitutes a default under, or result in the
creation or imposition of any lien, charge, claim, encumbrance,
pledge, security interest, defect or other restriction or equity
of any kind whatsoever upon, any property or assets (tangible or
intangible) of the Company pursuant to the terms of (A) the
articles of incorporation or by-laws of the Company, as amended,
(B) any license, contract, indenture, mortgage, deed of trust,
voting trust agreement, stockholders' agreement, note, loan or
credit agreement or any other agreement or instrument known to
such counsel to which the Company is a party or by which it is
bound, or (C) any federal, state or local statute, rule or
regulation applicable to the Company or any judgment, decree or
order known to such counsel of any arbitrator, court, regulatory
body or administrative agency or other governmental agency or body
(including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or
properties;
(viii) no consent, approval, authorization or order, and no
filing with, any court, regulatory body, government agency or
other body (other than such as may be required under Blue Sky
laws, as to which no opinion need be rendered or under federal
securities laws, as to which no opinion need be rendered pursuant
to this subsection (viii)) is required in connection with the
issuance of the Securities pursuant to the Prospectus and the
Registration Statement, the performance of this Agreement, the
Warrant Agreement, and the Representatives' Warrant Agreement, and
the transactions contemplated hereby and thereby;
(ix) to the best of such counsel's knowledge after reasonable
investigation, the properties and business of the Company conform
in all
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material respects to the description thereof contained in the
Registration Statement and the Prospectus;
(x) to the best knowledge of such counsel, and except as
disclosed in the Registration Statement and the Prospectus, the
Company is not in breach of, or in default under, any term or
provision of any license, contract, indenture, mortgage,
installment sale agreement, deed of trust, lease, voting trust
agreement, stockholders' agreement, note, loan or credit agreement
or any other agreement or instrument evidencing an obligation for
borrowed money, or any other agreement or instrument to which the
Company is a party or by which the Company is bound or to which
the property or assets (tangible or intangible) of the Company is
subject; and the Company is not in violation of any term or
provision of its articles of incorporation or by-laws, as amended,
and to the best of such counsel's knowledge after reasonable
investigation, not in violation of any franchise, license, permit,
judgment, decree, order, statute, rule or regulation;
(xi) the statements in the Prospectus under "Dividend Policy,"
"Description of Capital Stock," and "Shares Eligible for Future
Sale" have been reviewed by such counsel, and insofar as they
refer to statements of law, descriptions of statutes, licenses,
rules or regulations or legal conclusions, are correct in all
material respects;
(xii) the Common Stock has been accepted for quotation on the
Nasdaq SmallCap Market;
(xiii) to the best of such counsel's knowledge and based upon
a review of the outstanding securities and the contracts furnished
to such counsel by the Company, no person, corporation, trust,
partnership, association or other entity has the right to include
and/or register any securities of the Company in the Registration
Statement, require the Company to file any registration statement
or, if filed, to include any security in such registration
statement;
(xiv) assuming due execution by the parties thereto other than
the Company, each Lock-up Agreement is a legal, valid and binding
obligation of the party thereto, enforceable against the party and
any subsequent holder of the securities subject thereto in
accordance with its terms (except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and except
as rights to indemnity or contribution may be limited by
applicable law);
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<PAGE>
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws, rules and regulations of
the United States and the laws, rules and regulations of the State of Delaware,
to the extent such counsel deems proper and to the extent specified in such
opinion, if at all, upon an opinion or opinions (in form and substance
satisfactory to Underwriters' Counsel) of other counsel acceptable to
Underwriters' Counsel, familiar with the applicable laws; (B) as to matters of
fact, to the extent they deem proper, on certificates and written statements of
responsible officers of the Company and certificates or other written statements
of officers of departments of various jurisdictions having custody of documents
respecting the corporate existence or good standing of the Company, provided
that copies of any such statements or certificates shall be delivered to
Underwriters' Counsel if requested. The opinion of such counsel shall state
that knowledge shall not include the knowledge of a director or officer of the
Company who is affiliated with such firm in his or her capacity as an officer or
director of the Company. The opinion of such counsel for the Company shall
state that the opinion of any such other counsel is in form satisfactory to such
counsel.
At each Option Closing Date, if any, the Underwriters shall have
received the favorable opinion of Fenwick & West, counsel to the Company, dated
the Option Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel confirming as of such Option Closing Date
the statements made by Fenwick & West in its opinion delivered on the Closing
Date.
(e) On or prior to each of the Closing Date and the Option Closing
Date, if any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company or herein contained.
(f) Prior to each of the Closing Date and each Option Closing Date, if
any, (i) there shall have been no material adverse change nor development
involving a prospective material adverse change in the condition, financial or
otherwise, prospects, stockholders' equity or the business activities of the
Company, whether or not in the ordinary course of business, from the latest
dates as of which such condition is set forth in the Registration Statement and
Prospectus; (ii) there shall have been no transaction, not in the ordinary
course of business, entered into by the Company, from the latest date as of
which the financial condition of the Company is set forth in the Registration
Statement and Prospectus which is adverse to the Company; (iii) the Company
shall not be in default under any provision of any instrument relating to any
outstanding indebtedness which default has not been waived; (iv) the Company
shall not have issued any securities (other than the Securities) or declared or
paid any dividend or made any distribution in respect of its capital stock of
any class and there has not been any change in the capital stock, or any
material increase in the debt (long or short term) or liabilities or obligations
of the Company (contingent or otherwise) except for the issuance of the Option
Securities, the Representatives' Warrants, and shares of Common Stock issued
upon the exercise
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of currently outstanding warrants or options, or options and warrants granted in
the ordinary course of business consistent with prior practice; (v) no material
amount of the assets of the Company shall have been pledged or mortgaged, except
as set forth in the Registration Statement and Prospectus; (vi) no action, suit
or proceeding, at law or in equity, shall have been pending or threatened (or
circumstances giving rise to same) against the Company, or affecting any of its
respective properties or businesses before or by any court or federal, state or
foreign commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding may materially adversely affect the business,
operations, prospects or financial condition or income of the Company, except as
set forth in the Registration Statement and Prospectus; and (vii) no stop order
shall have been issued under the Act and no proceedings therefor shall have been
initiated, threatened or contemplated by the Commission.
(g) At each of the Closing Date and each Option Closing Date, if any,
the Underwriters shall have received a certificate of the Company signed on
behalf of the Company by the principal executive officer of the Company, dated
the Closing Date or Option Closing Date, as the case may be, to the effect that
such executive has carefully examined the Registration Statement, the Prospectus
and this Agreement, and that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the
Closing Date or the Option Closing Date, as the case may be, and
the Company has complied with all agreements and covenants and
satisfied all conditions contained in this Agreement on its part
to be performed or satisfied at or prior to such Closing Date or
Option Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no
proceedings for that purpose have been instituted or are pending
or, to the best of each of such person's knowledge after due
inquiry, are contemplated or threatened under the Act;
(iii) The Registration Statement and the Prospectus and, if
any, each amendment and each supplement thereto, contain all
statements and information required by the Act to be included
therein, and none of the Registration Statement, the Prospectus
nor any amendment or supplement thereto includes any untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading and neither the Preliminary Prospectus or
any supplement, as of their respective dates, thereto included any
untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which
they were made, not misleading; and
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(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, (a) the Company has not incurred up to and including
the Closing Date or the Option Closing Date, as the case may be,
other than in the ordinary course of its business, any material
liabilities or obligations, direct or contingent; (b) the Company
has not paid or declared any dividends or other distributions on
its capital stock; (c) the Company has not entered into any
transactions not in the ordinary course of business; (d) there has
not been any change in the capital stock as described in the
Registration Statement and Prospectus or material increase in
long-term debt or any increase in the short-term borrowings (other
than any increase in the short-term borrowings in the ordinary
course of business) of the Company, (e) the Company has not
sustained any loss or damage to its property or assets, whether or
not insured, (f) there is no litigation which is pending or
threatened (or circumstances giving rise to same) against the
Company or any affiliated party of any of the foregoing which is
required to be set forth in an amended or supplemented Prospectus
which has not been set forth, and (g) there has occurred no event
required to be set forth in an amended or supplemented Prospectus
which has not been set forth.
References to the Registration Statement and the Prospectus in this subsection
(g) are to such documents as amended and supplemented at the date of such
certificate.
(h) By the Closing Date, the Underwriters will have received clearance
from the NASD as to the amount of compensation allowable or payable to the
Underwriters.
(i) At the time this Agreement is executed, the Underwriters shall
have received a letter, dated such date, addressed to the Underwriters in form
and substance satisfactory in all respects (including the non-material nature of
the changes or decreases, if any, referred to in clause (iii) below) to the
Underwriters and Underwriters' Counsel, from Grant Thornton:
(i) confirming that they are independent certified public
accountants with respect to the Company within the meaning of the
Act and the applicable Rules and Regulations;
(ii) stating that it is their opinion that the financial
statements and supporting schedules of the Company included in the
Registration Statement comply as to form in all material respects
with the applicable accounting requirements of the Act and the
Regulations thereunder and that the Representatives may rely upon
the opinion of Grant Thornton with respect to the financial
statements and supporting schedules included in the Registration
Statement;
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(iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim
financial statements of the Company (with an indication of the
date of the latest available unaudited interim financial
statements), a reading of the latest available minutes of the
stockholders and board of directors and the various committees of
the board of directors of the Company, consultations with officers
and other employees of the Company responsible for financial and
accounting matters and other specified procedures and inquiries,
nothing has come to their attention which would lead them to
believe that (A) the unaudited financial statements and supporting
schedules of the Company included in the Registration Statement,
if any, do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the Regulations
or are not fairly presented in conformity with generally accepted
accounting principles applied on a basis substantially consistent
with that of the audited financial statements of the Company
included in the Registration Statement, or (B) at a specified date
not more than five (5) days prior to the effective date of the
Registration Statement, there has been any change in the capital
stock or material increase in long-term debt of the Company, or
any material decrease in the stockholders' equity or net current
assets or net assets of the Company as compared with amounts shown
in the most recent balance sheet included in the Registration
Statement, other than as set forth in or contemplated by the
Registration Statement, or, if there was any change or decrease,
setting forth the amount of such change or decrease.
(iv) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings,
statements and other financial information pertaining to the
Company set forth in the Prospectus in each case to the extent
that such amounts, numbers, percentages, statements and
information may be derived from the general accounting records,
including work sheets, of the Company and excluding any questions
requiring an interpretation by legal counsel, with the results
obtained from the application of specified readings, inquiries and
other appropriate procedures (which procedures do not constitute
an examination in accordance with generally accepted auditing
standards) set forth in the letter and found them to be in
agreement; and
(v) statements as to such other material matters incident to
the transaction contemplated hereby as the Representatives may
reasonably request.
(j) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from Grant Thornton a letter, dated as of the
Closing Date or the Option Closing Date, as the case may be, to the effect that
they reaffirm that statements made in the letter furnished pursuant to
Subsection (i) of this Section 6, except that the specified
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date referred to shall be a date not more than five (5) days prior to the
Closing Date or the Option Closing Date, as the case may be, and, if the Company
has elected to rely on Rule 430A of the Rules and Regulations, to the further
effect that they have carried out procedures as specified in clause (iv) of
Subsection (i) of this Section 6 with respect to certain amounts, percentages
and financial information as specified by the Representatives and deemed to be a
part of the Registration Statement pursuant to Rule 430A(b) and have found such
amounts, percentages and financial information to be in agreement with the
records specified in such clause (iv).
(k) On each of Closing Date and Option Closing Date, if any, there
shall have been duly tendered to the Representatives for the several
Underwriters' accounts the appropriate number of Securities.
(l) No order suspending the sale of the Securities in any jurisdiction
designated by the Representatives pursuant to subsection (e) of Section 4 hereof
shall have been issued on either the Closing Date or the Option Closing Date, if
any, and no proceedings for that purpose shall have been instituted or shall be
contemplated.
(m) On or before the Closing Date, the Company shall have executed and
delivered to the Representatives, (i) the Representatives' Warrant Agreement,
substantially in the form filed as Exhibit 4(b), to the Registration Statement,
in final form and substance satisfactory to the Representatives, and (ii) the
Representatives' Warrants in such denominations and to such designees as shall
have been provided to the Company.
(n) On or before the Closing Date, the Common Stock shall have been
duly approved for quotation on the Nasdaq SmallCap Market.
(o) On or before the Closing Date, there shall have been delivered to
the Representatives all of the Lock-up Agreements in final form and substance
satisfactory to Underwriters' Counsel.
If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Representatives may terminate this
Agreement or, if the Representatives so elect, they may waive any such
conditions which have not been fulfilled or extend the time for their
fulfillment.
7. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each of the
Underwriters (for purposes of this Section 7 "Underwriters" shall include the
officers, directors, partners, employees, agents and counsel of the
Underwriters, including specifically each person who may be substituted for an
Underwriter as provided in Section 11 hereof), and each person, if any, who
controls the Underwriter ("controlling person") within the meaning of Section 15
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of the Act or Section 20(a) of the Exchange Act, from and against any and all
loss, liability, claim, damage, and expense whatsoever (including, but not
limited to, reasonable attorneys' fees and any and all reasonable expense
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever and any and all
amounts paid in settlement of any claim or litigation provided that the
indemnified persons may not agree to any such settlement without the prior
written consent of the Company), as and when incurred, arising out of, based
upon or in connection with (i) any untrue statement or alleged untrue statement
of a material fact contained (A) in any preliminary prospectus, the Registration
Statement or the Prospectus (as from time to time amended and supplemented); or
(B) in any application or other document or communication (in this Section 7
collectively called "application") executed by or on behalf of the Company or
based upon written information furnished by or on behalf of the Company in any
jurisdiction in order to qualify the Securities under the securities laws
thereof or filed with the Commission, any state securities commission or agency,
The Nasdaq Stock Market, Inc. or any securities exchange; or any omission or
alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading (in the case of the
Prospectus, in the light of the circumstances under which they were made),
unless such statement or omission was made in reliance upon and in conformity
with written information furnished to the Company with respect to any
Underwriter by or on behalf of such Underwriter expressly for use in any
preliminary prospectus, the Registration Statement or Prospectus, or any
amendment thereof or supplement thereto, or in any application, as the case may
be; or (ii) any breach of any representation, warranty, covenant or agreement of
the Company contained in this Agreement. The indemnity agreement in this
subsection (a) shall be in addition to any liability which the Company may have
at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company, within the meaning of the Act, to the same extent
as the foregoing indemnity from the Company to the Underwriters but only with
respect to statements or omissions, if any, made in any preliminary prospectus,
the Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished to the Company with respect to any
Underwriter by such Underwriter or the Representatives expressly for use in such
preliminary prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any such application, provided
that such written information or omissions only pertain to disclosures in the
preliminary prospectus, the Registration Statement or Prospectus directly
relating to the transactions effected by the Underwriters in connection with
this Offering. The Company acknowledges that the statements with respect to the
public offering of the Securities set forth under the heading "Underwriting" and
the stabilization legend in the Prospectus have been furnished by the
Underwriters expressly for use therein and constitute the only information
furnished in writing by or on behalf of the Underwriters or the Representatives
for inclusion in the Prospectus.
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<PAGE>
(c) Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against one
or more indemnifying parties under this Section 7, notify each party against
whom indemnification is to be sought in writing of the commencement thereof (but
the failure to so notify an indemnifying party shall not relieve it from any
liability which it may have otherwise or which it may have under this Section 7,
except to the extent that it has been prejudiced in any material respect by such
failure). In case any such action is brought against any indemnified party, and
it notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense of such action at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
the reasonable fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
Anything in this Section 7 to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent; provided, however, that such consent was not
-------- -------
unreasonably withheld.
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification pursuant
to this Section 7, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Securities or (B) if the allocation provided by clause (A) above is not
permitted by applicable law, in such proportion as is
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<PAGE>
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each of the contributing parties, on the
one hand, and the party to be indemnified on the other hand in connection with
the statements or omissions that resulted in such losses, claims, damages,
expenses or liabilities, as well as any other relevant equitable considerations.
In any case where the Company is a contributing party and the Underwriters are
the indemnified party, the relative benefits received by the Company on the one
hand, and the Underwriters, on the other, shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Securities (before
deducting expenses other than underwriting discounts and commissions) bear to
the total underwriting discounts received by the Underwriters hereunder, in each
case as set forth in the table on the Cover Page of the Prospectus. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or by the Underwriters, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, expenses or liabilities (or actions in respect thereof)
referred to above in this subdivision (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. Notwithstanding the
provisions of this subdivision (d) the Underwriters shall not be required to
contribute any amount in excess of the underwriting discount applicable to the
Securities purchased by the Underwriters hereunder. No person guilty of
fraudulent misrepresentation (within the meaning of Section 12(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 7, each person, if
any, who controls the Company within the meaning of the Act, each officer of the
Company who has signed the Registration Statement, and each director of the
Company shall have the same rights to contribution as the Company, subject in
each case to this subparagraph (d). Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect to which a claim for contribution may
be made against another party or parties under this subparagraph (d), notify
such party or parties from whom contribution may be sought, but the omission so
to notify such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have hereunder or
otherwise than under this subparagraph (d), or to the extent that such party or
parties were not adversely affected by such omission. The contribution
agreement set forth above shall be in addition to any liabilities which any
indemnifying party may have at common law or otherwise.
8. Representations and Agreements to Survive Delivery. All
--------------------------------------------------
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations, warranties and agreements of the Company
at the Closing Date and the Option Closing Date, as the case may be, and such
representations, warranties and agreements of the Company and the respective
indemnity and contribution agreements contained in Section 7 hereof shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any Underwriter, the Company, any controlling person of either
the Underwriter or the Company, and shall
-33-
<PAGE>
survive termination of this Agreement or the issuance and delivery of the
Securities to the Underwriters and the Representatives, as the case may be.
9. Effective Date.
--------------
(a) This Agreement shall become effective at 5:00 p.m., New York
City time, on the date hereof. For purposes of this Section 9, the Securities to
be purchased hereunder shall be deemed to have been so released upon the earlier
of dispatch by the Representatives of telegrams to securities dealers releasing
such shares for offering or the release by the Representatives for publication
of the first newspaper advertisement which is subsequently published relating to
the Securities.
10. Termination.
-----------
(a) Subject to subsection (b) of this Section 10, the
Representatives shall have the right to terminate this Agreement, if between the
date of this Agreement and the Closing Date or the Option Closing Date, as the
case may be, (i) if any domestic or international event or act or occurrence has
materially disrupted, or in the Representatives's reasonable opinion will in the
immediate future materially disrupt the financial markets; or (ii) any material
adverse change in the financial markets shall have occurred; or (iii) if trading
on the New York Stock Exchange, the American Stock Exchange, or in the
over-the-counter market shall have been suspended, or minimum or maximum prices
for trading shall have been fixed, or maximum ranges for prices for securities
shall have been required on the over-the-counter market by the NASD or by order
of the Commission or any other government authority having jurisdiction; or
(iv) if the United States shall have become involved in a war or major
hostilities, or if there shall have been an escalation in an existing war or
major hostilities or a national emergency shall have been declared in the United
States; or (v) if a banking moratorium has been declared by a state or federal
authority; or (vi) if the Company shall have sustained a loss material or
substantial to the Company by fire, flood, accident, hurricane, earthquake,
theft, sabotage or other calamity or malicious act which, whether or not such
loss shall have been insured, will, in the Representatives's opinion, make it
inadvisable to proceed with the delivery of the Securities; or (viii) if there
shall have been such a material adverse change in the prospects or conditions of
the Company, or such material adverse change in the general market, political or
economic conditions, in the United States or elsewhere as in the
Representatives's judgment would make it inadvisable to proceed with the
offering, sale and/or delivery of the Securities.
(b) If this Agreement is terminated by the Representatives in
accordance with any of the provisions of Section 6, Section 10(a) or Section 11,
the Company shall promptly reimburse and indemnify the Underwriters pursuant to
Section 5(b) hereof. Notwithstanding any contrary provision contained in this
Agreement, any election hereunder or any termination of this Agreement
(including, without limitation, pursuant to Sections 6, 10, 11 and 12 hereof),
and whether or not this Agreement is otherwise carried out, the provisions of
Section 5 and Section 7 shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
-34-
<PAGE>
11. Substitution of Underwriters. If one or more of the Underwriters
----------------------------
shall fail (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 6, Section 10 or Section 12
hereof) to purchase the Securities which it or they are obligated to purchase on
such date under this Agreement (the "Defaulted Securities"), the Representatives
shall have the right, within 24 hours thereafter, to make arrangement for one or
more of the non-defaulting Underwriters, or any other underwriters, to purchase
all, but not less than all, of the Defaulted Securities in such amounts as may
be agreed upon and upon the terms herein set forth. If, however, the
Representatives shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10%
of the total number of Firm Securities to be purchased on such date, the non-
defaulting Underwriters shall be obligated to purchase the full amount thereof
in the proportions that their respective underwriting obligations hereunder bear
to the underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
total number of Firm Securities to be purchased on such date, this Agreement
shall terminate without liability on the part of any nondefaulting Underwriters.
No action taken pursuant to this Section shall relieve any
defaulting Underwriter from liability in respect of any default by such
Underwriter under this Agreement.
In the event of any such default which does not result in a
termination of this Agreement, the Representatives shall have the right to
postpone the Closing Date for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
12. Default by the Company. If the Company shall fail at the Closing
----------------------
Date or any Option Closing Date, as applicable, to sell and deliver the number
of Securities which it is obligated to sell hereunder on such date, then this
Agreement shall terminate (or, if such default shall occur with respect to any
Option Securities to be purchased on an Option Closing Date, the Underwriters
may at the Representatives's option, by notice from the Representatives to the
Company, terminate the Underwriters' obligation to purchase Option Securities
from the Company on such date) without any liability on the part of any non-
defaulting party other than pursuant to Section 5, Section 7 and Section 10
hereof. No action taken pursuant to this Section shall relieve the Company from
liability, if any, in respect of such default.
13. Notices. All notices and communications hereunder, except as
-------
herein otherwise specifically provided, shall be in writing and shall be deemed
to have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representatives, c/o Pryor, McClendon, Counts & Co., Inc., 3 Penn Plaza, 1515
market Street, Suite 819, Philadelphia, Pennsylvania 19102, with a copy, which
shall not constitute notice, to Camhy Karlinsky & Stein LLP, 1740 Broadway, 16th
-35-
<PAGE>
Floor, New York, New York 10019, Attention: Daniel I. De Wolf, Esq. Notices to
the Company shall be directed to the Company at James E. Alexander, Isonics
Corporation, 4010 Moorpark Avenue, Suite 119, San Jose, California 95117, with a
copy, which shall not constitute notice, to Fenwick & West LLP, Two Palo Alto
Square, Palo Alto, California 94306, Attention: C. Kevin Kelso, Esq.
14. Parties. This Agreement shall inure solely to the benefit of and
-------
shall be binding upon the Underwriters, the Company and the controlling persons,
directors and officers referred to in Section 7 hereof and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained.
No purchaser of Securities from any Underwriter shall be deemed to be a
successor by reason merely of such purchase.
15. Construction. This Agreement shall be governed by and construed
------------
and enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.
16. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
17. Entire Agreement; Amendments. This Agreement, the Warrant
----------------------------
Agreement, and the Representatives' Warrant Agreement constitute the entire
agreement of the parties hereto and supersede all prior written or oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may not be amended except in a writing, signed by the
Representatives and the Company.
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<PAGE>
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
ISONICS CORPORATION
By:
------------------------------------
Name: James E. Alexander
Title: Chief Executive Officer
CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN:
PRYOR, McCLENDON, COUNTS & CO., INC.
By:
------------------------------------
Name:
Title:
NATIONAL SECURITIES CORPORATION
By:
------------------------------------
Name: Steven A. Rothstein
Title: Chairman
For themselves and as Representatives respectively of the Underwriters named in
Schedule A hereto.
-37-
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of Shares of Common Number of Warrants
Name of Underwriters Stock to be Purchased to be Purchased
-------------------- -------------------------- ------------------
<S> <C> <C>
Pryor, McClendon, Counts &
Co., Inc.
National Securities Corporation
TOTAL
</TABLE>
SCH. A-1
<PAGE>
EXHIBIT 3.01
RESTATED ARTICLES OF INCORPORATION
OF
A&R MATERIALS, INC.
James E. Alexander and Joe Friscia certify that:
1. They are the President and the Secretary, respectively of A&R
Materials, Inc., a California Corporation.
2. The Articles of Incorporation of this corporation are amended and
restated to read as set forth in Annex "A" hereto.
---------
3. The foregoing amendment and restatement of the Articles of
Incorporation has been duly approved by the board of directors.
4. The foregoing amendment and restatement of the Articles of
Incorporation has been duly approved by the required vote of shareholders in
accordance with Sections 902 and 903 of the California Corporations Code. The
total number of outstanding shares of the corporation entitled to vote is
10,664,333 shares of Common Stock. The number of shares voting in favor of the
amendment and restatement equaled or exceeded the vote required. The percentage
vote required was more than fifty percent (50%) of the outstanding shares of
Common Stock.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our knowledge.
Dated: September , 1996
- -----------------------------
James E. Alexander, President
- -----------------------------
Joe Friscia, Secretary
<PAGE>
Annex A
RESTATED ARTICLES OF INCORPORATION
ARTICLE I
The name of this corporation is: Isonics Corporation.
ARTICLE II
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
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
The aggregate number of shares of capital stock which this corporation
shall be authorized to issue is One Hundred Million Two Hundred Thousand
(100,200,000), which shall consist of:
(a) One Hundred Million (100,000,000) shares which shall be designated
as Common Stock, $1.00 par value per share;
(b) One Hundred Thousand (100,000) shares which shall be designated as
Class A Preferred Stock; and
(c) One Hundred Thousand (100,000) shares which shall be designated as
Class B Preferred Stock.
ARTICLE IV
(a) The shares of each and any class of this corporation's preferred
stock may be issued from time to time in one or more series, and the board of
directors is authorized to fix the number of shares of any such series and to
determine the designation of any such series. The board of directors may
determine or alter the rights, preferences, privileges and restrictions granted
to or imposed on any wholly unissued series of any class of preferred stock. As
to any series of any class of preferred stock, the board of directors may
increase or decrease (but not below the number of shares then outstanding) the
number of shares of such series subsequent to the issuance of shares of that
series.
2
<PAGE>
(b) A series of Class A Non-Voting Preferred Stock is hereby
authorized as set forth in this subparagraph (b) with the following rights,
preferences, restrictions and other terms:
I. Title of Series and Number of Shares.
------------------------------------
A. Title of Series. The series of the Class A Preferred Stock shall be
---------------
designated and known as the "Class A, Series 1 Nonvoting Preferred Stock"
(hereinafter referred to as the "Class A, Series 1 Preferred Stock").
B. Number of Shares in the Series. The number of shares constituting the
------------------------------
Class A, Series 1 Preferred Stock shall be an aggregate of 3,750 shares.
II. Rights, Preferences, Restrictions and Other Matters.
---------------------------------------------------
A. Dividends. The holders of record of the outstanding shares of Class
---------
A, Series 1 Preferred Stock on the date 30 days prior to each dividend payment
date shall be entitled to receive, out of any funds legally available therefor,
noncumulative dividends at a rate per annum equal to $1.60 per share, which
dividends shall be payable in cash quarter-annually in advance on the 31st day
of March, the 30th day of June, the 30th day of September and the 31st day of
December in each year, when and as declared by the Board of Directors,
commencing January 1, 1995. Such dividends shall be non-cumulative and shall
not accrue; provided, however, that, with respect to any particular calendar
year, such dividends shall be paid or set apart for payment before the payment
of any dividends on the Common Stock of the Corporation.
B. Redemption. The Class A, Series 1 Preferred Stock may be redeemed, in
----------
whole or in part, at the option of the Corporation, out of funds legally
available therefor, by resolution of its Board of Directors, at any time and
from time to time on or after January 1, 1996, at $40.00 per share.
(1) If less than the entire amount of Class A, Series 1 Preferred
Stock outstanding is to be redeemed at any one time, the Corporation shall
select the shares to be redeemed by lot such that, to the maximum extent
feasible, all shares of Class A, Series 1 Preferred Stock owned by a particular
holder will be redeemed if any are redeemed.
(2) Not less than thirty (30) days nor more than sixty (60) days
prior to the date fixed for redemption of the Class A, Series 1 Preferred Stock
or any part thereof, a notice specifying the time, place and redemption price
thereof shall be given by first class mail, postage prepaid, to the holders of
record of the shares of Class A, Series 1 Preferred Stock to be redeemed at
their respective addresses as the same shall appear on the stock books of the
Corporation. No defect in such notice nor any defect in the mailing thereof
shall in and of itself affect the validity of the proceedings for redemption,
except as to any
3
<PAGE>
holder to whom the Corporation has failed to mail such notice, or as to whom the
notice was defective.
(3) If, on or prior to the date fixed for such redemption, the
Corporation shall deposit with any bank or trust company in the State of
California as a trust fund a sum sufficient to redeem the shares of Class A,
Series 1 Preferred Stock thus called for redemption, with irrevocable
instructions and authority to such bank or trust company to pay, on and after
the date fixed for redemption, the redemption price of the Class A, Series 1
Preferred Stock thus called for redemption to the respective holders thereof
upon the surrender of their share certificates, then from and after the later of
the date of such deposit or the date fixed for redemption, the Class A, Series 1
Preferred Stock so called shall be deemed to be redeemed. The deposit shall be
deemed to constitute full payment for the shares of Class A, Series 1 Preferred
Stock thus called for redemption and from and after the later of the date of
such deposit or the date fixed for redemption, such shares shall be deemed to be
no longer outstanding, and the holders thereof (to whom notice has been given in
accordance with subparagraph (2) of this Paragraph B) shall cease to be
shareholders of the Corporation with respect to such shares and shall have no
rights with respect thereto except the right to receive from the bank or trust
company payment of the redemption price of such shares without interest, upon
surrender of their certificates therefor. No interest shall be allowed or paid
to the holders of the redeemed Class A, Series 1 Preferred Stock on the funds so
deposited, and any such interest earned thereon shall be paid by such bank or
trust company from time to time on demand to the Corporation.
(4) All shares of Class A, Series 1 Preferred Stock redeemed pursuant
to this Paragraph B shall assume the status of authorized but unissued shares of
Class A, Series 1 Preferred Stock, subject to reissuance by the Corporation as
shares of Class A, Series 1 Preferred Stock.
C. Voting Rights. The holders of the Class A, Series 1 Preferred Stock
-------------
shall not be entitled to vote on any matter, except as otherwise required by law
in effect at the time of such vote.
D. Liquidation Preference. In the event of the liquidation, dissolution
----------------------
or winding up of the affairs of the Corporation, whether voluntary or otherwise,
the rights, powers, designations and preferences, and the qualifications,
restrictions and limitations thereof, of the holders of Class A, Series 1
Preferred Stock shall be as follows:
(1) The holders of Class A, Series 1 Preferred Stock shall be
entitled to receive out of the assets of the Corporation, except as otherwise
provided hereinafter, before any assets of the Corporation shall be distributed
among or paid over to the holders of the Common Stock of the Corporation,
whether such liquidation, dissolution or winding up is voluntary or involuntary,
the amount of $5.00 per share.
4
<PAGE>
(2) If the assets of the Corporation available for distribution with
respect to the Class A, Series 1 Preferred Stock are not sufficient to provide
to the holders of Class A, Series 1 Preferred Stock the full payment specified
in subparagraph (1) above (the "liquidation preference" of each share of Class
A, Series 1 Preferred Stock) and to provide to the holders of any other series
of Class A Preferred Stock having liquidation rights in parity with the
liquidation rights of the Class A, Series 1 Preferred Stock the full amounts
payable for shares of such series upon such liquidation, dissolution or winding
up as specified for such series by the Board of Directors in connection with the
creation of such series (the "liquidation preference" of each share of such
series of Class A Preferred Stock), then such assets shall be distributed pro
rata, according to their respective liquidation preferences, to the holders of
all such series of Class A Preferred Stock. If, after distributing or providing
to the holders of all such series of Class A Preferred Stock the full
liquidation preference of each share of each such series of Class A Preferred
Stock, the Corporation has assets available for distribution with respect to its
Common Stock, then such assets shall be distributed pro rata, according to the
number of shares held, to the holders of Common Stock and the holders of all
such series of Class A Preferred Stock.
(3) Neither the merger nor the consolidation of this Corporation with
or into another corporation, nor the merger or consolidation of any other
corporation with or into this Corporation, nor the sale, lease or conveyance of
all or part of this Corporation's assets, shall be deemed to be a liquidation,
dissolution or winding up of this Corporation within the meaning of this
Paragraph D.
E. Conversion Rights:
------------------
(1) The holder of record of all, but not less than all, of the then-
outstanding shares of Class A, Series 1 Preferred Stock shall have the right, at
his option at any time on or after January 1, 1996 (except that conversion
rights with respect to shares called for redemption shall terminate at the close
of business on the fifth day prior to the specified redemption date), to convert
all, but not less than all, of the then-outstanding shares of Class A, Series 1
Preferred Stock into fully paid and non assessable shares of Common Stock of the
Corporation, at the conversion rate of ten (10) shares of Class A, Series 1
Preferred Stock for one thousand one hundred eleven (1,111) shares of Common
Stock (the "Conversion Rate"), upon payment to the Corporation of an amount
equal to $5.00 per share of Class A, Series 1 Preferred Stock to be converted;
provided, however, that the Conversion Rate shall be subject to adjustment, as
provided in subparagraph (2) below.
(a) In order to convert shares of Class A, Series 1 Preferred Stock
into Common Stock, the holder thereof shall (i) surrender the certificate or
certificates representing all then-outstanding shares of Class A, Series 1
Preferred Stock, duly endorsed to the Corporation, at the Corporation's
principal office, (ii) deliver to the Corporation, at such office, cash or a
bank cashier's check payable to the Corporation in an amount (hereinafter
referred to as the "Conversion Price") equal to the product of (x)
5
<PAGE>
$5.00 times (y) the aggregate number of shares of Class A, Series 1 Preferred
Stock then outstanding, and (iii) give written notice to the Corporation at said
office that he elects to convert all then-outstanding shares of Class A, Series
1 Preferred Stock, setting forth his name and tax identification number.
(b) The Corporation shall make no payment or adjustment on account of
declared and unpaid dividends, if any, on the shares of Class A, Series 1
Preferred Stock surrendered for conversion, but if the holder surrenders Class
A, Series 1 Preferred Stock for conversion between the record date for the
payment of a dividend and the next dividend payment date (unless a redemption
date with respect thereto occurs during such period), such Class A, Series 1
Preferred Stock when surrendered for conversion must be accompanied by payment
of an amount equal to the dividend thereon which the holder of record on such
record date is to receive.
(c) As promptly as practicable after the surrender for conversion of
all then-outstanding shares of Class A, Series 1 Preferred Stock, the
Corporation shall deliver or cause to be delivered at its principal office to
the holder of such shares of Class A, Series 1 Preferred Stock, a certificate or
certificates representing the shares of Common Stock issuable upon such
conversion, issued in the name of such holder, subject to the right of the
Corporation, at its option, to pay cash in lieu of the issuance of any fraction
of a share of Common Stock as provided in subparagraph (d) hereof. Shares of
Class A, Series 1 Preferred Stock shall be deemed to have been converted as of
the close of business on the date on which the Corporation receives the
surrender of such shares for conversion and the payment of the Conversion Price
as provided above, if the stock books of the Corporation are open on that date,
and if they are not, then as of the close of business on the first date on which
they are open after the surrender of such shares for conversion and the payment
of the Conversion Price. At and after the time when the shares of Class A,
Series 1 Preferred Stock shall be deemed to have been converted, the person who
surrendered such shares shall no longer have any rights to such Class A, Series
1 Preferred Stock (except to receive dividends if such shares are surrendered
between the record date for the payment of a dividend and the next dividend
payment date) and such person shall be treated for all purposes as having become
the record holder of Common Stock at such time.
(d) The Corporation may, but shall not be obligated to, issue
fractions of shares of Common Stock upon the conversion of shares of Class A,
Series 1 Preferred Stock. If any interest in a fractional share of Common Stock
would otherwise be deliverable upon conversion of shares of Class A, Series 1
Preferred Stock, the Corporation may, at its option, as determined from time to
time by the Board of Directors, make adjustment for such fractional share
interest by payment of an amount of cash equal to the same fraction of the
market value of a full share of Common Stock of the Corporation. For such
purpose, the market value of a share of Common Stock shall be the closing sale
price of a share of Common Stock (or, if not available, the last quoted bid
price per share of the Common Stock) on the last day preceding the date of the
conversion of such shares of Class A, Series 1 Preferred Stock of the Common
Stock is
6
<PAGE>
then quoted on the NASDAQ, or if the Common Stock is then listed or admitted to
trading on a national securities exchange, the last recorded sale price regular
way of a share of such stock on such exchange on the last trading day preceding
the date of the conversion of such shares of Class A, Series 1 Preferred Stock,
or if there were no such sales or bids on such day, or if the Common Stock is
neither listed on a national securities exchange nor quoted on NASDAQ, such
market value of the Common Stock shall be that value which the Board of
Directors determines (in good faith in accordance with generally accepted
valuation principles and such other factors as the Board of Directors deems
relevant) to be the market value of the Common Stock, which determination shall
be conclusive.
(e) The Corporation shall at all times reserve for issuance such
number of shares of Common Stock, either authorized but unissued or treasury
shares, as shall be issuable upon the conversion of all outstanding shares of
Class A, Series 1 Preferred Stock.
(2) The Conversion Rate shall be adjusted, rounded to the nearest
one-thousandth (.001) of a share, from time to time, only to the following
extent:
(a) Whenever the Corporation shall, at any time, (i) declare or pay a
dividend to the holders of it shares of Common Stock in shares of its Common
Stock, or in other securities convertible into shares of Common Stock, (ii)
split the outstanding shares of its Common Stock into a greater number of
outstanding shares of Common Stock, (iii) combine the outstanding shares of its
Common Stock into a smaller number of outstanding shares of Common Stock, (iv)
pursuant to a reclassification of the outstanding shares of Common Stock issue
any shares of capital stock of the Corporation in exchange for the outstanding
shares of Common Stock (all shares so issued being included in the term "Common
Stock" as used in this Paragraph E), the Conversion Rate in effect immediately
prior to the effective date of such action shall be adjusted effective at the
opening of business on the next following business day, so that a holder of all
then-outstanding shares of Class A, Series 1 Preferred Stock shall thereafter be
entitled to receive upon the conversion of such shares the number of shares of
Common Stock which he would have held had such shares of Class A, Series 1
Preferred Stock been converted immediately prior to the effective date of such
action. For purposes of this subparagraph (a), the effective date for any stock
dividend referred to in clause (i) above shall be deemed to be the record date
fixed for the determination of the holders of Common Stock entitled to receive
such dividend.
(b) If the Corporation shall, at any time, issue rights or warrants
to all holders of its Common Stock entitling them to subscribe for or purchase
shares of Common Stock (or securities convertible into Common Stock) at a price
per share (or having a conversion price per share) less than the "current market
price" per share of the Common Stock (as determined pursuant to subparagraph (d)
below on the date of issuance of such rights or warrants), then the Conversion
Rate shall be adjusted so that the same shall equal the Conversion Rate
determined by multiplying the Conversion Rate
7
<PAGE>
in effect immediately prior to the date of issuance of such rights or warrants
by a fraction whose numerator shall be the sum of (x) the number of shares of
Common Stock outstanding on such date of issuance plus (y) the number of shares
of Common Stock so offered for subscription or purchase (or into which the
convertible securities so offered are convertible) and whose denominator shall
be the sum of (x) the number of shares of Common stock outstanding on such date
of issuance plus (z) the number of shares of Common Stock which the aggregate of
the offering price of the total number of shares of Common Stock so offered for
subscription or purchase (or the aggregate offering price of the convertible
securities so offered) would purchase at such "current market price." Subject to
this subparagraph (b), such adjustment shall be made whenever such rights or
warrants are issued and shall be retroactively effective as of immediately after
the record date for the determination of stockholders entitled to receive such
rights or warrants. If any of such rights or warrants are not exercised prior to
the expiration thereof, then as of such expiration the Conversion Rate shall be
readjusted pursuant to this subparagraph (b) to the Conversion Rate determined
on the basis of the number of rights or warrants actually exercised.
(c) If the corporation shall, at any time, distribute to all holders
of its Common Stock evidences of its indebtedness or assets or rights to
subscribe for or warrants to purchase (excluding those referred to in the
immediately preceding subparagraph) shares of Common Stock, then in each such
case the Conversion Rate shall be adjusted so that the same shall equal the
Conversion Rate determined by multiplying the Conversion Rate in effect
immediately prior to the date of such distribution by a fraction whose numerator
shall be the "current market price" per share of the Common Stock on the date of
distribution and whose denominator shall be the difference of (x) the "current
market price" per share of the Common Stock on such date of distribution less
(y) the then fair market value (as determined by the Board of Directors, whose
determination shall be conclusive and evidenced by a Board resolution) of the
portion of the assets or evidences of indebtedness so distributed or of such
subscription rights or warrants applicable to one share of Common Stock.
Subject to this subparagraph (c), such adjustment shall be made whenever any
such distribution is made and shall be retroactively effective as of immediately
after the record date for the determination of stockholders entitled to receive
such distribution.
(d) For purposes of any computation under (b) and (c) of this
subparagraph E(2), the "current market price" per share of Common Stock on any
date shall be deemed to be the average of the daily closing sale prices of a
share of Common Stock (or, if not available, the average of the daily last
quoted bid prices per share of the Common Stock) for the 30 consecutive business
days selected by the Corporation commencing not more than 45 business days
before the day in question if the Common Stock is then quoted on the NASDAQ, or
if the Common Stock is then listed or admitted to trading on a national
securities exchange, the average of the daily last recorded sale prices regular
way of a share of such stock on such exchange for the 30 consecutive business
days selected by the Corporation commencing not more than 45 business days
before the day in question, or if there were not 30 consecutive business days of
sales or
8
<PAGE>
bids during such 45 business day period, or if the Common Stock is neither
listed on a national securities exchange nor quoted on NASDAQ, such market value
of the Common Stock shall be that value which the Board of Directors determines
(in good faith in accordance with generally accepted valuation principles and
such other factors as the Board of Directors deems relevant) to be the market
value of the Common Stock, which determination shall be conclusive.
(e) In addition to the adjustments described in the foregoing
subparagraphs, the Corporation may make such adjustments in the Conversion Rate
as the Board of Directors, in its discretion, may determine so as to increase
the number of shares issuable on conversion in order that any event treated for
federal income tax purposes as a dividend shall not be taxable to the
recipients.
(f) Notwithstanding any other provision hereof, no adjustment in the
Conversion Rate shall be made unless such adjustment would require an increase
or decrease of at least one-thousandth (.001) of a share; provided, however,
that any adjustments which by reason of this sentence are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment.
(g) Whenever there is an adjustment in the Conversion Rate, as
provided herein, the Corporation shall promptly cause a notice disclosing such
adjustment to be mailed to the holder of record of all then-outstanding shares
of Class A, Series 1 Preferred Stock at the close of business on the day
preceding the effective date of such adjustment.
F. Additional Notice Provisions.
----------------------------
(1) In case:
(a) the Corporation shall propose to pay any dividend on its Common
Stock in stock or to make any other distribution other than cash dividends, to
the holders of its Common Stock; or
(b) the Corporation shall propose to offer to the holders of its
Common Stock rights to subscribe to any additional shares of any class or any
other rights or options; or
(c) the Corporation shall propose to effect any reclassification of
its Common Stock or to effect any capital reorganization, or shall propose to
consolidate with or merge into another corporation, or to sell, transfer or
otherwise dispose of all or substantially all of its property, assets or
business; or
(d) the Corporation shall propose to liquidate, dissolve or wind-up,
9
<PAGE>
then in each such case, the Corporation shall mail to the holder of all then-
outstanding shares of Class A, Series 1 Preferred Stock, at such holder's
address then appearing on the record books of the Corporation (x) at least 10
days' prior written notice of the date on which the books of the corporation
shall close or a record shall be taken for such dividend, distribution or
subscription rights and (y) in the case of any such reclassification,
reorganization, consolidation, merger, sale, disposition, liquidation,
dissolution or winding up, at least 10 days' prior written notice of the date or
the estimated date when the same shall take place. Such notice in accordance
with the foregoing clause (x) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the holders of
Common Stock shall be entitled thereto, and such notice in accordance with the
foregoing clause (y) shall also specify the date on which the holders of Common
Stock shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reclassification, reorganization, consolidation,
merger, sale, disposition, liquidation, dissolution or winding up, as the case
may be.
The notice required by this Paragraph F shall not be applicable to shares
or rights issued to any person in connection with his employment nor to shares
issued to shareholders of the Corporation in accordance with any dividend
reinvestment plan.
No defect in such notice nor any defect in the mailing thereof shall in and
of itself affect the validity of the proceedings applicable thereto.
(c) A series of Class A Non-Voting Preferred Stock is hereby authorized as
set forth in this subparagraph (c) with the following rights, preferences
restrictions and other terms:
I. Title of Series and Number of Shares.
-------------------------------------
A. The series of the Class A Preferred Stock shall be designated and
known as the "Class A, Series 2 Nonvoting Preferred Stock" (hereinafter referred
to as the "Class A, Series 2 Preferred Stock").
B. Number of Shares in the Series. The number of shares constituting the
------------------------------
Class A, Series 2 Preferred Stock shall be an aggregate of 2,500 shares.
II. Rights, Preferences, Restrictions and Other Matters.
---------------------------------------------------
A. Dividends. The holders of record of the outstanding shares of Class
---------
A, Series 2 Preferred Stock on the date 30 days prior to each dividend payment
date shall be entitled to receive, out of any funds legally available therefor,
noncumulative dividends at a rate per annum equal to $1.60 per share, which
dividends shall be payable in cash quarter-annually in advance on the 31st day
of March, the 30th day of June, the 30th day of September and the 31st day of
December in each year, when and as declared by the Board of Directors,
commencing January 1, 1995. Such dividends shall be non-
10
<PAGE>
cumulative and shall not accrue; provided, however, that, with respect to any
particular calendar year, such dividends shall be paid or set apart for payment
before the payment of any dividends on the Common Stock of the Corporation.
B. Redemption. The Class A, Series 2 Preferred Stock may be redeemed, in
----------
whole or in part, at the option of the Corporation, out of funds legally
available therefor, by resolution of its Board of Directors, at any time and
from time to time on or after January 1, 1996, at $40.00 per share.
(1) If less than the entire amount of Class A, Series 2 Preferred
Stock outstanding is to be redeemed at any one time, the Corporation shall
select the shares to be redeemed by lot such that, to the maximum extent
feasible, all shares of Class A, Series 2 Preferred Stock owned by a particular
holder will be redeemed if any are redeemed.
(2) Not less than thirty (30) days nor more than sixty (60) days
prior to the date fixed for redemption of the Class A, Series 2 Preferred Stock
or any part thereof, a notice specifying the time, place and redemption price
thereof shall be given by first class mail, postage prepaid, to the holders of
record of the shares of Class A, Series 2 Preferred Stock to be redeemed at
their respective addresses as the same shall appear on the stock books of the
Corporation. No defect in such notice nor any defect in the mailing thereof
shall in and of itself affect the validity of the proceedings for redemption,
except as to any holder to whom the Corporation has failed to mail such notice,
or as to whom the notice was defective.
(3) If, on or prior to the date fixed for such redemption, the
Corporation shall deposit with any bank or trust company in the State of
California as a trust fund a sum sufficient to redeem the shares of Class A,
Series 2 Preferred Stock thus called for redemption, with irrevocable
instructions and authority to such bank or trust company to pay, on and after
the date fixed for redemption, the redemption price of the Class A, Series 2
Preferred Stock thus called for redemption to the respective holders thereof
upon the surrender of their share certificates, then from and after the later of
the date of such deposit or the date fixed for redemption, the Class A, Series 2
Preferred Stock so called shall be deemed to be redeemed. The deposit shall be
deemed to constitute full payment for the shares of Class A, Series 2 Preferred
Stock thus called for redemption and from and after the later of the date of
such deposit or the date fixed for redemption, such shares shall be deemed to be
no longer outstanding, and the holders thereof (to whom notice has been given in
accordance with subparagraph (2) of this Paragraph B) shall cease to be
shareholders of the Corporation with respect to such shares and shall have no
rights with respect thereto except the right to receive from the bank or trust
company payment of the redemption price of such shares without interest, upon
surrender of their certificates therefor. No interest shall be allowed or paid
to the holders of the redeemed Class A, Series 2 Preferred Stock on the funds so
deposited, and any such interest earned thereon shall be paid by such bank or
trust company from time to time on demand to the Corporation.
11
<PAGE>
(4) All shares of Class A, Series 2 Preferred Stock redeemed pursuant
to this Paragraph B shall assume the status of authorized but unissued shares of
Class A, Series 2 Preferred Stock, subject to reissuance by the Corporation as
shares of Class A, Series 2 Preferred Stock.
C. Voting Rights. The holders of the Class A, Series 2 Preferred Stock
-------------
shall not be entitled to vote on any matter, except as otherwise required by law
in effect at the time of such vote.
D. Liquidation Preference. In the event of the liquidation, dissolution
----------------------
or winding up of the affairs of the Corporation, whether voluntary or otherwise,
the rights, powers, designations and preferences, and the qualifications,
restrictions and limitations thereof, of the holders of Class A, Series 2
Preferred Stock shall be as follows:
(1) The holders of Class A, Series 2 Preferred Stock shall be
entitled to receive out of the assets of the Corporation, except as otherwise
provided hereinafter, before any assets of the Corporation shall be distributed
among or paid over to the holders of the Common Stock of the Corporation,
whether such liquidation, dissolution or winding up is voluntary or involuntary,
the amount of $5.00 per share. The foregoing liquidation rights shall be deemed
to be in parity with the liquidation rights of the Corporation's Class A, Series
1 Nonvoting Preferred Stock.
(2) If the assets of the Corporation available for distribution with
respect to the Class A, Series 2 Preferred Stock are not sufficient to provide
to the holders of Class A, Series 2 Preferred Stock the full payment specified
in subparagraph (1) above (the "liquidation preference" of each share of Class
A, Series 2 Preferred Stock) and to provide to the holders of any other series
of Class A Preferred Stock having liquidation rights in parity with the
liquidation rights of the Class A, Series 2 Preferred Stock the full amounts
payable for shares of such series upon such liquidation, dissolution or winding
up as specified for such series by the Board of Directors in connection with the
creation of such series (the "liquidation preference" of each share of such
series of Class A Preferred Stock), then such assets shall be distributed pro
rata, according to their respective liquidation preferences, to the holders of
all such series of Class A Preferred Stock. If, after distributing or providing
to the holders of all such series of Class A Preferred Stock the full
liquidation preference of each share of each such series of Class A Preferred
Stock, the Corporation has assets available for distribution with respect to its
Common Stock, then such assets shall be distributed pro rata, according to the
number of shares held, to the holders of Common Stock and the holders of all
such series of Class A Preferred Stock.
(3) Neither the merger nor the consolidation of this Corporation with
or into another corporation, nor the merger or consolidation of any other
corporation with or into this Corporation, nor the sale, lease or conveyance of
all or part of this Corporation's
12
<PAGE>
assets, shall be deemed to be a liquidation, dissolution or winding up of this
Corporation within the meaning of this Paragraph D.
E Conversion Rights.
-----------------
(1) The holder of record of all, but not less than all, of the then-
outstanding shares of Class A, Series 2 Preferred Stock shall have the right, at
his option at any time on or after January 1, 1996 (except that conversion
rights with respect to shares called for redemption shall terminate at the close
of business on the fifth day prior to the specified redemption date), to convert
all, but not less than all, of the then-outstanding shares of Class A, Series 2
Preferred Stock into fully paid and non assessable shares of Common Stock of the
Corporation, at the conversion rate of ten (10) shares of Class A, Series 2
Preferred Stock for one thousand one hundred eleven (1,111) shares of Common
Stock (the "Conversion Rate"), upon payment to the Corporation of an amount
equal to $5.00 per share of Class A, Series 2 Preferred Stock to be converted;
provided, however, that the Conversion Rate shall be subject to adjustment, as
provided in subparagraph (2) below.
(a) In order to convert shares of Class A, Series 2 Preferred Stock
into Common Stock, the holder thereof shall (i) surrender the certificate or
certificates representing all then-outstanding shares of Class A, Series 2
Preferred Stock, duly endorsed to the Corporation, at the Corporation's
principal office, (ii) deliver to the Corporation, at such office, cash or a
bank cashier's check payable to the Corporation in an amount (hereinafter
referred to as the "Conversion Price") equal to the product of (x) $5.00 times
(y) the aggregate number of shares of Class A, Series 2 Preferred Stock then
outstanding, and (iii) give written notice to the Corporation at said office
that he elects to convert all then-outstanding shares of Class A, Series 2
Preferred Stock, setting forth his name and tax identification number.
(b) The Corporation shall make no payment or adjustment on account of
declared and unpaid dividends, if any, on the shares of Class A, Series 2
Preferred Stock surrendered for conversion, but if the holder surrenders Class
A, Series 2 Preferred Stock for conversion between the record date for the
payment of a dividend and the next dividend payment date (unless a redemption
date with respect thereto occurs during such period), such Class A, Series 2
Preferred Stock when surrendered for conversion must be accompanied by payment
of an amount equal to the dividend thereon which the holder of record on such
record date is to receive.
(c) As promptly as practicable after the surrender for conversion of
all then-outstanding shares of Class A, Series 2 Preferred Stock, the
Corporation shall deliver or cause to be delivered at its principal office to
the holder of such shares of Class A, Series 2 Preferred Stock, a certificate or
certificates representing the shares of Common Stock issuable upon such
conversion, issued in the name of such holder, subject to the right of the
Corporation, at its option, to pay cash in lieu of the issuance of any fraction
of a share of Common Stock as provided in subparagraph (d) hereof. Shares of
13
<PAGE>
Class A, Series 2 Preferred Stock shall be deemed to have been converted as of
the close of business on the date on which the Corporation receives the
surrender of such shares for conversion and the payment of the Conversion Price
as provided above, if the stock books of the Corporation are open on that date,
and if they are not, then as of the close of business on the first date on which
they are open after the surrender of such shares for conversion and the payment
of the Conversion Price. At and after the time when the shares of Class A,
Series 2 Preferred Stock shall be deemed to have been converted, the person who
surrendered such shares shall no longer have any rights to such Class A, Series
2 Preferred Stock (except to receive dividends if such shares are surrendered
between the record date for the payment of a dividend and the next dividend
payment date) and such person shall be treated for all purposes as having become
the record holder of Common Stock at such time.
(d) The Corporation may, but shall not be obligated to, issue
fractions of shares of Common Stock upon the conversion of shares of Class A,
Series 2 Preferred Stock. If any interest in a fractional share of Common Stock
would otherwise be deliverable upon conversion of shares of Class A, Series 2
Preferred Stock, the Corporation may, at its option, as determined from time to
time by the Board of Directors, make adjustment for such fractional share
interest by payment of an amount of cash equal to the same fraction of the
market value of a full share of Common Stock of the Corporation. For such
purpose, the market value of a share of Common Stock shall be the closing sale
price of a share of Common Stock (or, if not available, the last quoted bid
price per share of the Common Stock) on the last day preceding the date of the
conversion of such shares of Class A, Series 2 Preferred Stock of the Common
Stock is then quoted on the NASDAQ, or if the Common Stock is then listed or
admitted to trading on a national securities exchange, the last recorded sale
price regular way of a share of such stock on such exchange on the last trading
day preceding the date of the conversion of such shares of Class A, Series 2
Preferred Stock, or if there were no such sales or bids on such day, or if the
Common Stock is neither listed on a national securities exchange nor quoted on
NASDAQ, such market value of the Common Stock shall be that value which the
Board of Directors determines (in good faith in accordance with generally
accepted valuation principles and such other factors as the Board of Directors
deems relevant) to be the market value of the Common Stock, which determination
shall be conclusive.
(e) The Corporation shall at all times reserve for issuance such
number of shares of Common Stock, either authorized but unissued or treasury
shares, as shall be issuable upon the conversion of all outstanding shares of
Class A, Series 2 Preferred Stock.
(2) The Conversion Rate shall be adjusted, rounded to the nearest
one-thousandth (.001) of a share, from time to time, only to the following
extent:
(a) Whenever the Corporation shall, at any time, (i) declare or pay a
dividend to the holders of it shares of Common Stock in shares of its Common
Stock, or
14
<PAGE>
in other securities convertible into shares of Common Stock, (ii) split the
outstanding shares of its Common Stock into a greater number of outstanding
shares of Common Stock, (iii) combine the outstanding shares of its Common Stock
into a smaller number of outstanding shares of Common Stock, (iv) pursuant to a
reclassification of the outstanding shares of Common Stock issue any shares of
capital stock of the Corporation in exchange for the outstanding shares of
Common Stock (all shares so issued being included in the term "Common Stock" as
used in this Paragraph E), the Conversion Rate in effect immediately prior to
the effective date of such action shall be adjusted effective at the opening of
business on the next following business day, so that a holder of all then-
outstanding shares of Class A, Series 2 Preferred Stock shall thereafter be
entitled to receive upon the conversion of such shares the number of shares of
Common Stock which he would have held had such shares of Class A, Series 2
Preferred Stock been converted immediately prior to the effective date of such
action. For purposes of this subparagraph (a), the effective date for any stock
dividend referred to in clause (i) above shall be deemed to be the record date
fixed for the determination of the holders of Common Stock entitled to receive
such dividend.
(b) If the Corporation shall, at any time, issue rights or warrants
to all holders of its Common Stock entitling them to subscribe for or purchase
shares of Common Stock (or securities convertible into Common Stock) at a price
per share (or having a conversion price per share) less than the "current market
price" per share of the Common Stock (as determined pursuant to subparagraph (d)
below on the date of issuance of such rights or warrants), then the Conversion
Rate shall be adjusted so that the same shall equal the Conversion Rate
determined by multiplying the Conversion Rate in effect immediately prior to the
date of issuance of such rights or warrants by a fraction whose numerator shall
be the sum of (x) the number of shares of Common Stock outstanding on such date
of issuance plus (y) the number of shares of Common Stock so offered for
subscription or purchase (or into which the convertible securities so offered
are convertible) and whose denominator shall be the sum of (x) the number of
shares of Common stock outstanding on such date of issuance plus (z) the number
of shares of Common Stock which the aggregate of the offering price of the total
number of shares of Common Stock so offered for subscription or purchase (or the
aggregate offering price of the convertible securities so offered) would
purchase at such "current market price." Subject to this subparagraph (b), such
adjustment shall be made whenever such rights or warrants are issued and shall
be retroactively effective as of immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants. If
any of such rights or warrants are not exercised prior to the expiration
thereof, then as of such expiration the Conversion Rate shall be readjusted
pursuant to this subparagraph (b) to the Conversion Rate determined on the basis
of the number of rights or warrants actually exercised.
(c) If the corporation shall, at any time, distribute to all holders
of its Common Stock evidences of its indebtedness or assets or rights to
subscribe for or warrants to purchase (excluding those referred to in the
immediately preceding subparagraph) shares of Common Stock, then in each such
case the Conversion Rate shall
15
<PAGE>
be adjusted so that the same shall equal the Conversion Rate determined by
multiplying the Conversion Rate in effect immediately prior to the date of such
distribution by a fraction whose numerator shall be the "current market price"
per share of the Common Stock on the date of distribution and whose denominator
shall be the difference of (x) the "current market price" per share of the
Common Stock on such date of distribution less (y) the then fair market value
(as determined by the Board of Directors, whose determination shall be
conclusive and evidenced by a Board resolution) of the portion of the assets or
evidences of indebtedness so distributed or of such subscription rights or
warrants applicable to one share of Common Stock. Subject to this subparagraph
(c), such adjustment shall be made whenever any such distribution is made and
shall be retroactively effective as of immediately after the record date for the
determination of stockholders entitled to receive such distribution.
(d) For purposes of any computation under (b) and (c) of this
subparagraph E(2), the "current market price" per share of Common Stock on any
date shall be deemed to be the average of the daily closing sale prices of a
share of Common Stock (or, if not available, the average of the daily last
quoted bid prices per share of the Common Stock) for the 30 consecutive business
days selected by the Corporation commencing not more than 45 business days
before the day in question if the Common Stock is then quoted on the NASDAQ, or
if the Common Stock is then listed or admitted to trading on a national
securities exchange, the average of the daily last recorded sale prices regular
way of a share of such stock on such exchange for the 30 consecutive business
days selected by the Corporation commencing not more than 45 business days
before the day in question, or if there were not 30 consecutive business days of
sales or bids during such 45 business day period, or if the Common Stock is
neither listed on a national securities exchange nor quoted on NASDAQ, such
market value of the Common Stock shall be that value which the Board of
Directors determines (in good faith in accordance with generally accepted
valuation principles and such other factors as the Board of Directors deems
relevant) to be the market value of the Common Stock, which determination shall
be conclusive.
(e) In addition to the adjustments described in the foregoing
subparagraphs, the Corporation may make such adjustments in the Conversion Rate
as the Board of Directors, in its discretion, may determine so as to increase
the number of shares issuable on conversion in order that any event treated for
federal income tax purposes as a dividend shall not be taxable to the
recipients.
(f) Notwithstanding any other provision hereof, no adjustment in the
Conversion Rate shall be made unless such adjustment would require an increase
or decrease of at least one-thousandth (.001) of a share; provided, however,
that any adjustments which by reason of this sentence are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment.
(g) Whenever there is an adjustment in the Conversion Rate, as
provided herein, the Corporation shall promptly cause a notice disclosing such
adjustment to be
16
<PAGE>
mailed to the holder of record of all then-outstanding shares of Class A, Series
2 Preferred Stock at the close of business on the day preceding the effective
date of such adjustment.
F. Additional Notice Provisions.
----------------------------
(1) In case:
(a) the Corporation shall propose to pay any dividend on its Common
Stock in stock or to make any other distribution other than cash dividends, to
the holders of its Common Stock; or
(b) the Corporation shall propose to offer to the holders of its
Common Stock rights to subscribe to any additional shares of any class or any
other rights or options; or
(c) the Corporation shall propose to effect any reclassification of
its Common Stock or to effect any capital reorganization, or shall propose to
consolidate with or merge into another corporation, or to sell, transfer or
otherwise dispose of all or substantially all of its property, assets or
business; or
(d) the Corporation shall propose to liquidate, dissolve or wind-up,
then in each such case, the Corporation shall mail to the holder of all then-
outstanding shares of Class A, Series 2 Preferred Stock, at such holder's
address then appearing on the record books of the Corporation (x) at least 10
days' prior written notice of the date on which the books of the corporation
shall close or a record shall be taken for such dividend, distribution or
subscription rights and (y) in the case of any such reclassification,
reorganization, consolidation, merger, sale, disposition, liquidation,
dissolution or winding up, at least 10 days' prior written notice of the date or
the estimated date when the same shall take place. Such notice in accordance
with the foregoing clause (x) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the holders of
Common Stock shall be entitled thereto, and such notice in accordance with the
foregoing clause (y) shall also specify the date on which the holders of Common
Stock shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reclassification, reorganization, consolidation,
merger, sale, disposition, liquidation, dissolution or winding up, as the case
may be.
The notice required by this Paragraph F shall not be applicable to shares
or rights issued to any person in connection with his employment nor to shares
issued to shareholders of the Corporation in accordance with any dividend
reinvestment plan.
No defect in such notice nor any defect in the mailing thereof shall in and
of itself affect the validity of the proceedings applicable thereto.
17
<PAGE>
ARTICLE V
(a) The liability of directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California Law.
(b) The corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the California Corporations Code) through Bylaw
provisions, agreements with agents, votes of shareholders or disinterested
directors, or otherwise, to the fullest extent permissible under California law.
(c) Any amendment, repeal or modification of any provision of this
Article V shall not adversely affect any right or protection of an agent of this
corporation existing at the time of such amendment, repeal or modification.
18
<PAGE>
EXHIBIT 3.02
BYLAWS
OF
A & R MATERIALS, INC.
History of Actions Taken
Related to Bylaws Date
- ------------------------ ----
Bylaws Adopted April 14, 1993
Bylaws Amended and Restated in Entirety October 3, 1994
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<PAGE>
BYLAWS OF
A & R MATERIALS, INC.
TABLE OF CONTENTS
Page
----
ARTICLE I
CORPORATE OFFICES.................................................1
1.1 PRINCIPAL OFFICE............................................1
1.2 OTHER OFFICES...............................................1
ARTICLE II
MEETINGS OF SHAREHOLDERS..........................................1
2.1 PLACE OF MEETINGS...........................................1
2.2 ANNUAL MEETING..............................................1
2.3 SPECIAL MEETING.............................................1
2.4 NOTICE OF SHAREHOLDERS' MEETINGS............................2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE................2
2.6 QUORUM......................................................3
2.7 ADJOURNED MEETING; NOTICE...................................3
2.8 VOTING......................................................4
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT...........4
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING....5
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING
CONSENTS.........................................................6
2.12 PROXIES....................................................6
2.13 INSPECTORS OF ELECTION.....................................7
ARTICLE III
DIRECTORS.........................................................7
3.1 POWERS......................................................7
3.2 NUMBER OF DIRECTORS.........................................7
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS....................8
3.4 REMOVAL.....................................................8
3.5 RESIGNATION AND VACANCIES...................................8
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE....................9
3.7 REGULAR MEETINGS............................................9
3.8 SPECIAL MEETINGS; NOTICE....................................9
3.9 QUORUM......................................................9
3.10 WAIVER OF NOTICE...........................................10
3.11 ADJOURNMENT................................................10
3.12 NOTICE OF ADJOURNMENT......................................10
3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING..........10
3.14 FEES AND COMPENSATION OF DIRECTORS.........................10
3.15 APPROVAL OF LOANS TO OFFICERS..............................11
ARTICLE IV
COMMITTEES........................................................11
4.1 COMMITTEES OF DIRECTORS.....................................11
4.2 MEETINGS AND ACTION OF COMMITTEES...........................12
i
<PAGE>
ARTICLE V
OFFICERS..........................................................12
5.1 OFFICERS....................................................12
5.2 APPOINTMENT OF OFFICERS.....................................12
5.3 SUBORDINATE OFFICERS........................................12
5.4 REMOVAL AND RESIGNATION OF OFFICERS.........................13
5.5 VACANCIES IN OFFICES........................................13
5.6 CHAIRMAN OF THE BOARD.......................................13
5.7 PRESIDENT...................................................13
5.8 VICE PRESIDENTS.............................................13
5.9 SECRETARY...................................................14
5.10 CHIEF FINANCIAL OFFICER....................................14
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
AND OTHER AGENTS..................................................14
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS...................15
6.2 INDEMNIFICATION OF OTHERS...................................15
6.3 PAYMENT OF EXPENSES IN ADVANCE..............................15
6.4 INDEMNITY NOT EXCLUSIVE.....................................15
6.5 INSURANCE INDEMNIFICATION...................................16
6.6 CONFLICTS...................................................16
6.7 RIGHT TO BRING SUIT.........................................16
6.8 INDEMNITY AGREEMENTS........................................16
6.9 AMENDMENT, REPEAL OR MODIFICATION...........................17
ARTICLE VII
RECORDS AND REPORTS...............................................17
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER................17
7.2 MAINTENANCE AND INSPECTION OF BYLAWS........................18
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS.......18
7.4 INSPECTION BY DIRECTORS.....................................18
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER.......................18
7.6 FINANCIAL STATEMENTS........................................19
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS..............19
ARTICLE VIII
GENERAL MATTERS...................................................20
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING.......20
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS...................20
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED..........20
8.4 CERTIFICATES FOR SHARES.....................................20
8.5 LOST CERTIFICATES...........................................21
8.6 CONSTRUCTION; DEFINITIONS...................................21
ARTICLE IX
AMENDMENTS........................................................21
9.1 AMENDMENT BY SHAREHOLDERS...................................21
9.2 AMENDMENT BY DIRECTORS......................................21
9.3 RECORD OF AMENDMENTS........................................22
ARTICLE X - INTERPRETATION............................................18
ii
<PAGE>
BYLAWS
OF
A & R MATERIALS, INC.
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 PRINCIPAL OFFICE
----------------
The Board of Directors shall fix the location of the principal
executive office of the corporation at any place within or outside the State of
California. If the principal executive office is located outside California and
the corporation has one or more business offices in California, then the Board
of Directors shall fix and designate a principal business office in California.
1.2 OTHER OFFICES
-------------
The Board of Directors may at any time establish branch or subordinate
offices at any place or places.
ARTICLE II
MEETINGS OF SHAREHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of shareholders shall be held at any place within or outside
the State of California designated by the Board of Directors. In the absence of
any such designation, shareholders' meetings shall be held at the principal
executive office of the corporation or at any place consented to in writing by
all persons entitled to vote at such meeting, given before or after the meeting
and filed with the Secretary of the corporation.
2.2 ANNUAL MEETING
--------------
An annual meeting of shareholders shall be held each year on a date
and at a time designated by the Board of Directors. At that meeting, directors
shall be elected. Any other proper business may be transacted at the annual
meeting of shareholders.
2.3 SPECIAL MEETINGS
----------------
Special meetings of the shareholders may be called at any time,
subject to the provisions of Sections 2.4 and 2.5 of these Bylaws, by the Board
of Directors, the Chairman of the Board, the President or the holders of shares
entitled to cast not less than ten percent (10%) of the votes at that meeting.
1
<PAGE>
If a special meeting is called by anyone other than the Board of
Directors or the President or the Chairman of the Board, then the request shall
be in writing, specifying the time of such meeting and the general nature of the
business proposed to be transacted, and shall be delivered personally or sent by
registered mail or by other written communication to the Chairman of the Board,
the President, any Vice President or the Secretary of the corporation. The
officer receiving the request forthwith shall cause notice to be given to the
shareholders entitled to vote, in accordance with the provisions of Sections 2.4
and 2.5 of these Bylaws, that a meeting will be held at the time requested by
the person or persons calling the meeting, so long as that time is not less than
thirty-five (35) nor more than sixty (60) days after the receipt of the request.
If the notice is not given within twenty (20) days after receipt of the request,
then the person or persons requesting the meeting may give the notice. Nothing
contained in this paragraph of this Section 2.3 shall be construed as limiting,
fixing or affecting the time when a meeting of shareholders called by action of
the Board of Directors may be held.
2.4 NOTICE OF SHAREHOLDERS' MEETINGS
--------------------------------
All notices of meetings of shareholders shall be sent or otherwise
given in accordance with Section 2.5 of these Bylaws not less than ten (10) (or,
if sent by third-class mail pursuant to Section 2.5 of these Bylaws, not less
than thirty (30)) nor more than sixty (60) days before the date of the meeting
to each shareholder entitled to vote thereat. Such notice shall state the
place, date, and hour of the meeting and (i) in the case of a special meeting,
the general nature of the business to be transacted, and no business other than
that specified in the notice may be transacted, or (ii) in the case of the
annual meeting, those matters which the Board of Directors, at the time of the
mailing of the notice, intends to present for action by the shareholders, but,
subject to the provisions of the next paragraph of this Section 2.4, any proper
matter may be presented at the meeting for such action. The notice of any
meeting at which Directors are to be elected shall include the names of nominees
intended at the time of the notice to be presented by the Board for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the California Corporations Code (the
"Code"), (ii) an amendment of the Articles of Incorporation, pursuant to Section
902 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to
Section 1900 of the Code, or (v) a distribution in dissolution other than in
accordance with the rights of any outstanding preferred shares, pursuant to
Section 2007 of the Code, then the notice shall also state the general nature of
that proposal.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Notice of a shareholders' meeting shall be given either personally or
by first-class mail, or, if the corporation has outstanding shares held of
record by five hundred (500) or more persons (determined as provided in Section
605 of the Code) on the record date for the shareholders' meeting, notice may be
sent by third-class mail, or other means of written communication, addressed to
the shareholder at the address of the shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice; or if no such address appears or is given, at the place where the
principal executive office of the corporation is located or by publication at
least once in a newspaper of general circulation in the county in which the
principal executive office is located. The notice shall be deemed to have been
given at the time when delivered personally or deposited in the mail or sent by
other means of written communication.
2
<PAGE>
If any notice (or any report referenced in Article VII of these
Bylaws) addressed to a shareholder at the address of such shareholder appearing
on the books of the corporation is returned to the corporation by the United
States Postal Service marked to indicate that the United States Postal Service
is unable to deliver the notice to the shareholder at that address, all future
notices or reports shall be deemed to have been duly given without further
mailing if the same shall be available to the shareholder upon written demand of
the shareholder at the principal executive office of the corporation for a
period of one (1) year from the date of the giving of the notice.
An affidavit of mailing of any notice or report in accordance with the
provisions of this Section 2.5, executed by the Secretary, Assistant Secretary
or any transfer agent, shall be prima facie evidence of the giving of the notice
or report.
2.6 QUORUM
------
Unless otherwise provided in the Articles of Incorporation of the
corporation, a majority of the shares entitled to vote, represented in person or
by proxy, shall constitute a quorum at a meeting of the shareholders. The
shareholders present at a duly called or held meeting at which a quorum is
present may continue to transact business until adjournment notwithstanding the
withdrawal of enough shareholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum.
In the absence of a quorum, any meeting of shareholders may be
adjourned from time to time by the vote of a majority of the shares represented
either in person or by proxy, but no other business may be transacted, except as
provided in the last sentence of the preceding paragraph.
2.7 ADJOURNED MEETING; NOTICE
-------------------------
Any shareholders' meeting, annual or special, whether or not a quorum
is present, may be adjourned from time to time by the vote of the majority of
the shares represented at that meeting, either in person or by proxy.
When any meeting of shareholders, either annual or special, is
adjourned to another time or place, notice need not be given of the adjourned
meeting if its time and place are announced at the meeting at which the
adjournment is taken. However, if the adjournment is for more than forty-five
(45) days from the date set for the original meeting or if a new record date for
the adjourned meeting is fixed, a notice of the adjourned meeting shall be given
to each shareholder of record entitled to vote at the adjourned meeting in
accordance with the provisions of Sections 2.4 and 2.5 of these Bylaws. At any
adjourned meeting the corporation may transact any business which might have
been transacted at the original meeting.
2.8 VOTING
------
The shareholders entitled to vote at any meeting of shareholders shall
be determined in accordance with the provisions of Section 2.11 of these Bylaws,
subject to the provisions of Sections 702 through 704 of the Code (relating to
voting shares held by a fiduciary, in the name of a corporation, or in joint
ownership).
3
<PAGE>
Elections for directors and voting on any other matter at a
shareholders' meeting need not be by ballot unless a shareholder demands
election by ballot at the meeting and before the voting begins.
Except as provided in the last paragraph of this Section 2.8, or as
may be otherwise provided in the Articles of Incorporation, each outstanding
share, regardless of class, shall be entitled to one vote on each matter
submitted to a vote of the shareholders. Any holder of shares entitled to vote
on any matter may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or may vote them against the proposal other
than elections to office, but, if the shareholder fails to specify the number of
shares such shareholder is voting affirmatively, it will be conclusively
presumed that the shareholder's approving vote is with respect to all shares
which the shareholder is entitled to vote.
The affirmative vote of the majority of the shares represented and
voting at a duly held meeting at which a quorum is present (which shares voting
affirmatively also constitute at least a majority of the required quorum) shall
be the act of the shareholders, unless the vote of a greater number or voting by
classes is required by the Code or by the Articles of Incorporation.
At a shareholders' meeting at which directors are to be elected, a
shareholder shall be entitled to cumulate votes either (i) by giving one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which that shareholder's shares are
normally entitled or (ii) by distributing the shareholder's votes on the same
principle among as many candidates as the shareholder thinks fit, if the
candidate or candidates' names have been placed in nomination prior to the
voting and the shareholder has given notice prior to the voting of the
shareholder's intention to cumulate the shareholder's votes. If any one
shareholder has given such a notice, then every shareholder entitled to vote may
cumulate votes for candidates in nomination. The candidates receiving the
highest number of affirmative votes, up to the number of directors to be
elected, shall be elected; votes against any candidate and votes withheld shall
have no legal effect.
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
-------------------------------------------------
The transactions of any meeting of shareholders, either annual or
special, however called and noticed, and wherever held, are as valid as though
they had been taken at a meeting duly held after regular call and notice, if a
quorum be present either in person or by proxy, and if, either before or after
the meeting, each of the persons entitled to vote, not present in person or by
proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. Neither the business to be
transacted at nor the purpose of any annual or special meeting of shareholders
need be specified in any written waiver of notice or consent to the holding of
the meeting or approval of the minutes thereof, except that if action is taken
or proposed to be taken for approval of any of those matters specified in the
second paragraph of Section 2.4 of these Bylaws, the waiver of notice or consent
or approval shall state the general nature of the proposal. All such waivers,
consents, and approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
Attendance of a person at a meeting shall constitute a waiver of
notice of and presence at that meeting, except when the person objects, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened and except that attendance at a meeting is
not a waiver of any right to object to the consideration of
4
<PAGE>
matters required by the Code to be included in the notice of such meeting but
not so included, if such objection is expressly made at the meeting.
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding shares having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted.
Directors may not be elected by written consent except by unanimous
written consent of all shares entitled to vote for the election of directors.
However, a director may be elected at any time to fill any vacancy on the Board
of Directors, provided that it was not created by removal of a director and that
it has not been filled by the directors, by the written consent of the holders
of a majority of the outstanding shares entitled to vote for the election of
directors.
All such consents shall be maintained in the corporate records. Any
shareholder giving a written consent, or the shareholder's proxy holders, or a
transferee of the shares, or a personal representative of the shareholder, or
their respective proxy holders, may revoke the consent by a writing received by
the Secretary of the corporation before written consents of the number of shares
required to authorize the proposed action have been filed with the Secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing, the Secretary shall give prompt notice of any corporate
action approved by the shareholders without a meeting by less than unanimous
written consent to those shareholders entitled to vote who have not consented in
writing. Such notice shall be given in the manner specified in Section 2.5 of
these Bylaws. In the case of approval of (i) a contract or transaction in which
a director has a direct or indirect financial interest, pursuant to Section 310
of the Code, (ii) indemnification of a corporate "agent," pursuant to Section
317 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, and (iv) a distribution in dissolution other than in
accordance with the rights of outstanding preferred shares, pursuant to Section
2007 of the Code, the notice shall be given at least ten (10) days before the
consummation of any action authorized by that approval, unless the consents of
all shareholders entitled to vote have been solicited in writing.
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
In order that the corporation may determine the shareholders entitled to
notice of any meeting or to vote, the Board of Directors may fix, in advance, a
record date, which shall not be more than sixty (60) days nor less than ten (10)
days prior to the date of such meeting nor more than sixty (60) days before any
other action. Shareholders at the close of business on the record date are
entitled to notice and to vote, as the case may be, notwithstanding any transfer
of any shares on the books of the corporation after the record date, except as
otherwise provided in the Articles of Incorporation or the Code.
A determination of shareholders of record entitled to notice of or to vote
at a meeting of shareholders shall apply to any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned meeting,
but the Board of Directors shall fix a new record
5
<PAGE>
date if the meeting is adjourned for more than forty-five (45) days from the
date set for the original meeting.
If the Board of Directors does not so fix a record date:
(a) The record date for determining shareholders entitled to notice
of or to vote at a meeting of shareholders shall be at the close of business on
the business day next preceding the day on which notice is given or, if notice
is waived, at the close of business on the business day next preceding the day
on which the meeting is held.
(b) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the Board has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action by the Board has been taken, shall
be at the close of business on the day on which the Board adopts the resolution
relating thereto, or the sixtieth (60th) day prior to the date of such other
action, whichever is later.
The record date for any other purpose shall be as provided in Section 8.1
of these Bylaws.
2.12 PROXIES
-------
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the Secretary of the
corporation. A proxy shall be deemed signed if the shareholder's name or other
authorization is placed on the proxy (whether by manual signature, typewriting,
telegraphic or electronic transmission or otherwise) by the shareholder or the
shareholder's attorney-in-fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i) the
person who executed the proxy revokes it prior to the time of voting by
delivering a writing to the corporation stating that the proxy is revoked or by
executing a subsequent proxy and presenting it to the meeting or by attendance
at such meeting and voting in person, or (ii) written notice of the death or
incapacity of the maker of that proxy is received by the corporation before the
vote pursuant to that proxy is counted; provided, however, that no proxy shall
be valid after the expiration of eleven (11) months from the date thereof,
unless otherwise provided in the proxy. The dates contained on the forms of
proxy presumptively determine the order of execution, regardless of the postmark
dates on the envelopes in which they are mailed. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Sections 705(e) and 705(f) of the Code.
2.13 INSPECTORS OF ELECTION
----------------------
In advance of any meeting of shareholders, the Board of Directors may
appoint inspectors of election to act at the meeting and any adjournment
thereof. If inspectors of election are not so appointed or designated or if any
persons so appointed fail to appear or refuse to act, then the Chairman of the
meeting may, and on the request of any shareholder or a shareholder's proxy
shall, appoint inspectors of election (or persons to replace those who so fail
to appear) at the meeting. The number of inspectors shall be either one (1) or
three (3). If appointed at a meeting on the request of one (1) or more
shareholders or proxies, the majority of shares represented in person or by
proxy shall determine whether one (1) or three (3) inspectors are to be
appointed.
6
<PAGE>
The inspectors of election shall determine the number of shares outstanding
and the voting power of each, the shares represented at the meeting, the
existence of a quorum, and the authenticity, validity, and effect of proxies,
receive votes, ballots or consents, hear and determine all challenges and
questions in any way arising in connection with the right to vote, count and
tabulate all votes or consents, determine when the polls shall close, determine
the result and do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the Code and any limitations in the
Articles of Incorporation and these Bylaws relating to action required to be
approved by the shareholders or by the outstanding shares, the business and
affairs of the corporation shall be managed and all corporate powers shall be
exercised by or under the direction of the Board of Directors. The Board may
delegate the management of the day-to-day operation of the business of the
corporation to a management company or other person provided that the business
and affairs of the corporation shall be managed and all corporate powers shall
be exercised under the ultimate direction of the Board.
3.2 NUMBER OF DIRECTORS
-------------------
The authorized number of directors of the corporation shall be three
(3). Any amendment to these Bylaws which would have the effect of specifying or
changing a fixed number of directors or the maximum or minimum number or
changing from a variable to a fixed board or vice versa may only be adopted by
approval of the outstanding shares (as defined in Section 152 of the Code);
provided, however, that an amendment to these Bylaws or an amendment to the
Articles of Incorporation which would have the effect of reducing the fixed
number or the minimum number of directors to a number less than five (5) cannot
be adopted if the votes cast against its adoption at a meeting, or the shares
not consenting in the case of an action by written consent, are equal to more
than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled
to vote thereon.
No reduction of the authorized number of directors shall have the effect
of removing any director before that director's term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
----------------------------------------
At each annual meeting of shareholders, directors shall be elected to
hold office until the next annual meeting. Each director, including a director
elected to fill a vacancy, shall hold office until the expiration of the term
for which elected and until a successor has been elected and qualified, except
in the case of the death, resignation, or removal of such a director.
3.4 REMOVAL
-------
The entire Board of Directors or any individual director may be
removed from office without cause by the affirmative vote of a majority of the
outstanding shares entitled to vote on
7
<PAGE>
such removal; provided, however, that unless the entire Board is removed, no
individual director may be removed when the votes cast against such director's
removal, or not consenting in writing to such removal, would be sufficient to
elect that director if voted cumulatively at an election at which the same total
number of votes cast were cast (or, if such action is taken by written consent,
all shares entitled to vote were voted) and the entire number of directors
authorized at the time of such director's most recent election were then being
elected.
3.5 RESIGNATION AND VACANCIES
-------------------------
Any director may resign effective upon giving oral or written notice
to the Chairman of the Board, the President, the Secretary or the Board of
Directors, unless the notice specifies a later time for the effectiveness of
such resignation. If the resignation of a director is effective at a future
time, the Board of Directors may elect a successor to take office when the
resignation becomes effective.
Vacancies on the Board of Directors may be filled by a majority of the
remaining directors, or if the number of directors then in office is less than a
quorum by (i) unanimous written consent of the directors then in office, (ii)
the affirmative vote of a majority of the directors then in office at a meeting
held pursuant to notice or waivers of notice, or (iii) a sole remaining
director; however, a vacancy created by the removal of a director by the vote or
written consent of the shareholders or by court order may be filled only by the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute at least a majority of the required quorum), or by the unanimous
written consent of all shares entitled to vote thereon. Each director so
elected shall hold office until the next annual meeting of the shareholders and
until a successor has been elected and qualified, or until his or her death,
resignation or removal.
A vacancy or vacancies in the Board of Directors shall be deemed to
exist (i) in the event of the death, resignation or removal of any director,
(ii) if the Board of Directors by resolution declares vacant the office of a
director who has been declared of unsound mind by an order of court or convicted
of a felony, (iii) if the authorized number of directors is increased, or (iv)
if the shareholders fail, at any meeting of shareholders at which any director
or directors are elected, to elect the full authorized number of directors to be
elected at that meeting.
The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors, but any such election by
written consent, other than to fill a vacancy created by removal, shall require
the consent of the holders of a majority of the outstanding shares entitled to
vote thereon. A director may not be elected by written consent to fill a
vacancy created by removal except by unanimous consent of all shares entitled to
vote for the election of directors.
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
Regular meetings of the Board of Directors may be held at any place
within or outside the State of California that has been designated from time to
time by resolution of the Board. In the absence of such a designation, regular
meetings shall be held at the principal executive office of the corporation.
Special meetings of the Board may be held at any place within or outside the
State of California that has been designated in the notice of the meeting or, if
not stated in the notice or if there is no notice, at the principal executive
office of the corporation.
8
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Members of the Board may participate in a meeting through the use of
conference telephone or similar communications equipment, so long as all
directors participating in such meeting can hear one another. Participation in
a meeting pursuant to this paragraph constitutes presence in person at such
meeting.
3.7 REGULAR MEETINGS
----------------
Regular meetings of the Board of Directors may be held without notice
if the time and place of such meetings are fixed by the Board of Directors.
3.8 SPECIAL MEETINGS; NOTICE
------------------------
Subject to the provisions of the following paragraph, special meetings
of the Board of Directors for any purpose or purposes may be called at any time
by the Chairman of the Board, the President, any Vice President, the Secretary
or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail,
telegram, charges prepaid, or by telecopier, addressed to each director at that
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least four
(4) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone or by telecopier or telegram, it shall be
delivered personally or by telephone or by telecopier or to the telegraph
company at least forty-eight (48) hours before the time of the holding of the
meeting. Any oral notice given personally or by telephone may be communicated
either to the director or to a person at the office of the director who the
person giving the notice has reason to believe will promptly communicate it to
the director. The notice need not specify the purpose of the meeting.
3.9 QUORUM
------
A majority of the authorized number of directors shall constitute a
quorum for the transaction of business, except to adjourn as provided in Section
3.11 of these Bylaws. Every act or decision done or made by a majority of the
directors present at a meeting duly held at which a quorum is present is the act
of the Board of Directors, subject to the provisions of Section 310 of the Code
(as to approval of contracts or transactions in which a director has a direct or
indirect material financial interest), Section 311 of the Code (as to
appointment of committees), Section 317(e) of the Code (as to indemnification of
directors), the Articles of Incorporation, and other applicable law.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for such
meeting.
3.10 WAIVER OF NOTICE
----------------
Notice of a meeting need not be given to any director who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or who attends the meeting
without protesting, prior thereto or at its commencement, the lack of notice to
such director. All such waivers, consents, and approvals shall be filed with
the corporate records or made a part of the minutes of the meeting. A waiver
9
<PAGE>
of notice need not specify the purpose of any regular or special meeting of the
Board of Directors.
3.11 ADJOURNMENT
-----------
A majority of the directors present, whether or not a quorum is
present, may adjourn any meeting to another time and place.
3.12 NOTICE OF ADJOURNMENT
---------------------
If the meeting is adjourned for more than twenty-four (24) hours,
notice of any adjournment to another time and place shall be given prior to the
time of the adjourned meeting to the directors who were not present at the time
of the adjournment.
3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Any action required or permitted to be taken by the Board of Directors
may be taken without a meeting, if all members of the Board individually or
collectively consent in writing to such action. Such written consent or
consents shall be filed with the minutes of the proceedings of the Board. Such
action by written consent shall have the same force and effect as a unanimous
vote of the Board of Directors.
3.14 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Directors and members of committees may receive such compensation, if
any, for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the Board of Directors. This Section 3.14 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.15 APPROVAL OF LOANS TO OFFICERS
-----------------------------
If these Bylaws have been approved by the corporation's shareholders
in accordance with the Code, the corporation may, upon the approval of the Board
of Directors alone, make loans of money or property to, or guarantee the
obligations of, any officer of the corporation or of its parent, if any, whether
or not a director, or adopt an employee benefit plan or plans authorizing such
loans or guaranties provided that (i) the Board of Directors determines that
such a loan or guaranty or plan may reasonably be expected to benefit the
corporation, (ii) the corporation has outstanding shares held of record by 100
or more persons (determined as provided in Section 605 of the Code) on the date
of approval by the Board of Directors, and (iii) the approval of the Board of
Directors is by a vote sufficient without counting the vote of any interested
director or directors. Notwithstanding the foregoing, the corporation shall have
the power to make loans permitted by the Code.
10
<PAGE>
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The Board of Directors may, by resolution adopted by a majority of the
authorized number of directors, designate one or more committees, each
consisting of two (2) or more directors, to serve at the pleasure of the Board.
The Board may designate one or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any such committee shall
have authority to act in the manner and to the extent provided in the resolution
of the Board and may have all the authority of the Board, except with respect
to:
(a) The approval of any action which, under the Code, also
requires shareholders' approval or approval of the outstanding shares.
(b) The filling of vacancies on the Board of Directors or in any
committee.
(c) The fixing of compensation of the directors for serving on
the Board or on any committee.
(d) The amendment or repeal of these Bylaws or the adoption of
new Bylaws.
(e) The amendment or repeal of any resolution of the Board of
Directors which by its express terms is not so amendable or repealable.
(f) A distribution to the shareholders of the corporation, except
at a rate, in a periodic amount or within a price range set forth in the
Articles of Incorporation or determined by the Board of Directors.
(g) The appointment of any other committees of the Board of
Directors or the members thereof.
4.2 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these Bylaws, Section
3.6 (place of meetings), Section 3.7 (regular meetings), Section 3.8 (special
meetings and notice), Section 3.9 (quorum), Section 3.10 (waiver of notice),
Section 3.11 (adjournment), Section 3.12 (notice of adjournment), and Section
3.13 (action without meeting), with such changes in the context of those Bylaws
as are necessary to substitute the committee and its members for the Board of
Directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the Board of Directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the Board of Directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The Board of Directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these Bylaws.
11
<PAGE>
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a President, a Secretary, and
a Chief Financial Officer. The corporation may also have, at the discretion of
the Board of Directors, a Chairman of the Board, one or more Vice Presidents,
one or more Assistant Secretaries, one or more Assistant Treasurers, and such
other officers as may be appointed in accordance with the provisions of Section
5.3 of these Bylaws. Any number of offices may be held by the same person.
5.2 APPOINTMENT OF OFFICERS
-----------------------
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these Bylaws, shall be chosen by the Board and serve at the pleasure of the
Board, subject to the rights, if any, of an officer under any contract of
employment.
5.3 SUBORDINATE OFFICERS
--------------------
The Board of Directors may appoint, or may empower the Chairman of the
Board or the President to appoint, such other officers as the business of the
corporation may require, each of whom shall hold office for such period, have
such authority, and perform such duties as are provided in these Bylaws or as
the Board of Directors may from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, all officers serve at the pleasure of the Board of Directors and any
officer may be removed, either with or without cause, by the Board of Directors
at any regular or special meeting of the Board or, except in case of an officer
chosen by the Board of Directors, by any officer upon whom such power of removal
may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these Bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
---------------------
The Chairman of the Board, if such an officer be elected, shall, if
present, preside at meetings of the Board of Directors and exercise and perform
such other powers and duties as
12
<PAGE>
may from time to time be assigned by the Board
of Directors or as may be prescribed by these Bylaws. If there is no President,
then the Chairman of the Board shall also be the chief executive officer of the
corporation and shall have the powers and duties prescribed in Section 5.7 of
these Bylaws.
5.7 PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the Chairman of the Board, if there be such an officer,
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 the officers of the corporation. The
President shall preside at all meetings of the shareholders and, in the absence
or nonexistence of a Chairman of the Board, at all meetings of the Board of
Directors. The President shall have the general powers and duties of management
usually vested in the office of President of a corporation, and shall have such
other powers and duties as may be prescribed by the Board of Directors or these
Bylaws.
5.8 VICE PRESIDENTS
---------------
In the absence or disability of the President, the Vice Presidents, if
any, in order of their rank as fixed by the Board of Directors or, if not
ranked, a Vice President designated by the Board of Directors, shall perform all
the duties of the President and when so acting shall have all the powers of, and
be subject to all the restrictions upon, the President. The Vice Presidents
shall have such other powers and perform such other duties as from time to time
may be prescribed for them respectively by the Board of Directors, these Bylaws,
the President or the Chairman of the Board.
5.9 SECRETARY
---------
The Secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the Board of
Directors may direct, a book of minutes of all meetings and actions of
Directors, committees of directors and shareholders. The minutes shall show the
time and place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
shareholders' meetings, and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the Board of
Directors, a share register, or a duplicate share register, showing the names of
all shareholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings
of the shareholders and of the Board of Directors required to be given by law or
by these Bylaws. The Secretary shall keep the seal of the corporation, if one
be adopted, in safe custody and shall have such other powers and perform such
other duties as may be prescribed by the Board of Directors or by these Bylaws.
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<PAGE>
5.10 CHIEF FINANCIAL OFFICER
-----------------------
The Chief Financial Officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The Chief Financial Officer shall deposit all money and other
valuables in the name and to the credit of the corporation with such
depositaries as may be designated by the Board of Directors. The Chief Financial
Officer shall disburse the funds of the corporation as may be ordered by the
Board of Directors, shall render to the President and directors, whenever they
request it, an account of all of his or her transactions as Chief Financial
Officer and of the financial condition of the corporation, and shall have such
other powers and perform such other duties as may be prescribed by the Board of
Directors or these Bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
--------------------------------------------------
AND OTHER AGENTS
----------------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner
permitted by the Code, indemnify each of its directors and officers against
expenses (as defined in Section 317(a) of the Code), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding (as defined in Section 317(a) of the Code), arising by
reason of the fact that such person is or was a director or officer of the
corporation. For purposes of this Article VI, a "director" or "officer" of the
corporation includes any person (i) who is or was a director or officer of the
corporation, (ii) who is or was serving at the request of the corporation as a
director or officer of another foreign or domestic corporation, partnership,
joint venture, trust or other enterprise, or (iii) who was a director or officer
of a corporation which was a predecessor corporation of the corporation or of
another enterprise at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the extent and in the manner
permitted by the Code, to indemnify each of its employees and agents (other than
directors or officers) against expenses (as defined in Section 317(a) of the
Code), judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding (as defined in Section 317(a) of the
Code), arising by reason of the fact that such person is or was an employee or
agent of the corporation. For purposes of this Article VI, an "employee" or
"agent" of the corporation (other than a director or officer) includes any
person (i) who is or was an employee or agent of the corporation, (ii) who is or
was serving at the request of the corporation as an employee or agent of another
foreign or domestic corporation, partnership, joint venture, trust or other
enterprise, or (iii) who was an employee or agent of a corporation which was a
predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation.
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<PAGE>
6.3 PAYMENT OF EXPENSES IN ADVANCE
------------------------------
Expenses and attorneys' fees incurred in defending any civil or
criminal action or proceeding for which indemnification is required pursuant to
Section 6.1, or if otherwise authorized by the Board of Directors, shall be paid
by the corporation in advance of the final disposition of such action or
proceeding upon receipt of an undertaking by or on behalf of the indemnified
party to repay such amount if it shall ultimately be determined that the
indemnified party is not entitled to be indemnified as authorized in this
Article VI.
6.4 INDEMNITY NOT EXCLUSIVE
-----------------------
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any Bylaw, agreement, vote of shareholders or directors or
otherwise, both as to action in an official capacity and as to action in another
capacity while holding such office. The rights to indemnity hereunder shall
continue as to a person who has ceased to be a director, officer, employee, or
agent and shall inure to the benefit of the heirs, executors, and administrators
of the person.
6.5 INSURANCE INDEMNIFICATION
-------------------------
The corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation against any liability asserted against or incurred by
such person in such capacity or arising out of that person's status as such,
whether or not the corporation would have the power to indemnify that person
against such liability under the provisions of this Article VI.
6.6 CONFLICTS
---------
No indemnification or advance shall be made under this Article VI,
except where such indemnification or advance is mandated by law or the order,
judgment or decree of any court of competent jurisdiction, in any circumstance
where it appears:
(1) That it would be inconsistent with a provision of the
Articles of Incorporation, these Bylaws, a resolution of the shareholders or an
agreement in effect at the time of the accrual of the alleged cause of the
action asserted in the proceeding in which the expenses were incurred or other
amounts were paid, which prohibits or otherwise limits indemnification; or
(2) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
6.7 RIGHT TO BRING SUIT
-------------------
If a claim under this Article is not paid in full by the corporation
within 90 days after a written claim has been received by the corporation
(either because the claim is denied or because no determination is made), the
claimant may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall also be entitled to be paid the expenses of prosecuting such
claim. 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 Code for the corporation to
15
<PAGE>
indemnify the claimant for the claim. Neither the failure of the corporation
(including its Board of Directors, independent legal counsel, or its
shareholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is permissible in the circumstances
because he or she has met the applicable standard of conduct, if any, nor an
actual determination by the corporation (including its Board of Directors,
independent legal counsel, or its shareholders) that the claimant has not met
the applicable standard of conduct, shall be a defense to such action or create
a presumption for the purposes of such action that the claimant has not met the
applicable standard of conduct.
6.8 INDEMNITY AGREEMENTS
--------------------
The Board of Directors is authorized to enter into a contract with any
director, officer, employee or agent of the corporation, or any person who is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, including employee benefit plans, or any person who was a director,
officer, employee or agent of a corporation which was a predecessor corporation
of the corporation or of another enterprise at the request of such predecessor
corporation, providing for indemnification rights equivalent to or, if the Board
of Directors so determines and to the extent permitted by applicable law,
greater than, those provided for in this Article VI.
6.9 AMENDMENT, REPEAL OR MODIFICATION
---------------------------------
Any amendment, repeal or modification of any provision of this Article
VI shall not adversely affect any right or protection of a director or agent of
the corporation existing at the time of such amendment, repeal or modification.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER
--------------------------------------------
The corporation shall keep either at its principal executive office or
at the office of its transfer agent or registrar (if either be appointed), as
determined by resolution of the Board of Directors, a record of its shareholders
listing the names and addresses of all shareholders and the number and class of
shares held by each shareholder.
A shareholder or shareholders of the corporation holding at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation or who hold at least one percent (1%) of such voting shares and have
filed a Schedule 14B with the United States Securities and Exchange Commission
relating to the election of directors, shall have an absolute right to do either
or both of the following (i) inspect and copy the record of shareholders' names,
addresses, and shareholdings during usual business hours upon five (5) days'
prior written demand upon the corporation, or (ii) obtain from the transfer
agent for the corporation, upon written demand and upon the tender of such
transfer agent's usual charges for such list (the amount of which charges shall
be stated to the shareholder by the transfer agent upon request), a list of the
shareholders' names and addresses who are entitled to vote for the election of
directors, and their shareholdings, as of the most recent record date for which
it has been compiled or as of a date specified by the shareholder subsequent to
the date of demand. The list shall be made available on or before the later of
five (5) business days after the demand is received or the date specified
therein as the date as of which the list is to be compiled.
16
<PAGE>
The record of shareholders shall also be open to inspection and
copying by any shareholder or holder of a voting trust certificate at any time
during usual business hours upon written demand on the corporation, for a
purpose reasonably related to the holder's interests as a shareholder or holder
of a voting trust certificate.
Any inspection and copying under this Section 7.1 may be made in
person or by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.
7.2 MAINTENANCE AND INSPECTION OF BYLAWS
------------------------------------
The corporation shall keep at its principal executive office or, if
its principal executive office is not in the State of California, at its
principal business office in California, the original or a copy of these Bylaws
as amended to date, which shall be open to inspection by the shareholders at all
reasonable times during office hours. If the principal executive office of the
corporation is outside the State of California and the corporation has no
principal business office in such state, then it shall, upon the written request
of any shareholder, furnish to such shareholder a copy of these Bylaws as
amended to date.
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS
-----------------------------------------------------
The accounting books and records and the minutes of proceedings of the
shareholders and the Board of Directors, and committees of the Board of
Directors shall be kept at such place or places as are designated by the Board
of Directors or, in absence of such designation, at the principal executive
office of the corporation. The minutes shall be kept in written form, and the
accounting books and records shall be kept either in written form or in any
other form capable of being converted into written form.
The minutes and accounting books and records shall be open to
inspection upon the written demand on the corporation of any shareholder or
holder of a voting trust certificate at any reasonable time during usual
business hours, for a purpose reasonably related to such holder's interests as a
shareholder or as the holder of a voting trust certificate. Such inspection by
a shareholder or holder of a voting trust certificate may be made in person or
by an agent or attorney and the right of inspection includes the right to copy
and make extracts. Such rights of inspection shall extend to the records of each
subsidiary corporation of the corporation.
7.4 INSPECTION BY DIRECTORS
-----------------------
Every director shall have the absolute right at any reasonable time to
inspect and copy all books, records, and documents of every kind and to inspect
the physical properties of the corporation and each of its subsidiary
corporations, domestic or foreign. Such inspection by a director may be made in
person or by an agent or attorney and the right of inspection includes the right
to copy and make extracts.
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER
-------------------------------------
The Board of Directors shall cause an annual report to be sent to the
shareholders not later than one hundred twenty (120) days after the close of the
fiscal year adopted by the corporation. Such report shall be sent to the
shareholders at least fifteen (15) (or, if sent by third-class mail, thirty-five
(35)) days prior to the annual meeting of shareholders to be held
17
<PAGE>
during the next fiscal year and in the manner specified in Section 2.5 of these
Bylaws for giving notice to shareholders of the corporation.
The annual report shall contain a balance sheet as of the end of the
fiscal year and an income statement and statement of changes in financial
position for the fiscal year, accompanied by any report thereon of independent
accountants or, if there is no such report, the certificate of an authorized
officer of the corporation that the statements were prepared without audit from
the books and records of the corporation.
The foregoing requirement of an annual report shall be waived so long
as the shares of the corporation are held by fewer than one hundred (100)
holders of record.
7.6 FINANCIAL STATEMENTS
--------------------
If no annual report for the fiscal year has been sent to shareholders,
then the corporation shall, upon the written request of any shareholder made
more than one hundred twenty (120) days after the close of such fiscal year,
deliver or mail to the person making the request, within thirty (30) days
thereafter, a copy of 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.
A shareholder or shareholders holding at least five percent (5%) of
the outstanding shares of any class of the corporation may make a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the current fiscal year ended
more than thirty (30) days prior to the date of the request and a balance sheet
of the corporation as of the end of that period. The statements shall be
delivered or mailed to the person making the request within thirty (30) days
thereafter. A copy of the statements shall be kept on file in the principal
office of the corporation for twelve (12) months and it shall be exhibited at
all reasonable times to any shareholder demanding an examination of the
statements or a copy shall be mailed to the shareholder. If the corporation has
not sent to the shareholders its annual report for the last fiscal year, the
statements referred to in the first paragraph of this Section 7.6 shall likewise
be delivered or mailed to the shareholder or shareholders within thirty (30)
days after the request.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report thereon, if any, of any independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The Chairman of the Board, the President, any Vice President, the
Chief Financial Officer, the Secretary or Assistant Secretary of this
corporation, or any other person authorized by the Board of Directors or the
President or a Vice President, is authorized to vote, represent, and exercise on
behalf of this corporation all rights incident to any and all shares of any
other corporation or corporations standing in the name of this corporation. The
authority herein granted may be exercised either by such person directly or by
any other person authorized to do so by proxy or power of attorney duly executed
by such person having the authority.
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<PAGE>
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
-----------------------------------------------------
For purposes of determining the shareholders entitled to receive
payment of any dividend or other distribution or allotment of any rights or
entitled to exercise any rights in respect of any other lawful action (other
than with respect to notice or voting at a shareholders meeting or action by
shareholders by written consent without a meeting), the Board of Directors may
fix, in advance, a record date, which shall not be more than sixty (60) days
prior to any such action. Only shareholders of record at the close of business
on the record date are entitled to receive the dividend, distribution or
allotment of rights, or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date, except as otherwise provided in the Articles of Incorporation
or the Code.
If the Board of Directors does not so fix a record date, then the
record date for determining shareholders for any such purpose shall be at the
close of business on the day on which the Board adopts the resolution relating
thereto or the sixtieth (60th) day prior to the date of that action, whichever
is later.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
-----------------------------------------
From time to time, the Board of Directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
--------------------------------------------------
The Board of Directors, except as otherwise provided in these Bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so 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.
8.4 CERTIFICATES FOR SHARES
-----------------------
A certificate or certificates for shares of the corporation shall be
issued to each shareholder when any of such shares are fully paid. The Board of
Directors may authorize the issuance of certificates for shares partly paid
provided that these certificates shall state the total amount of the
consideration to be paid for them and the amount actually paid. All
certificates shall be signed in the name of the corporation by the Chairman of
the Board or the Vice Chairman of the Board or the President or a Vice President
and by the Chief Financial Officer or an Assistant Treasurer or the Secretary or
an Assistant Secretary, certifying the number of shares and the class or series
of shares owned by the shareholder. Any or all of the signatures on the
certificate may be by facsimile.
19
<PAGE>
In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed on a certificate has ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if that person were an
officer, transfer agent or registrar at the date of issue.
8.5 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation or its transfer agent or registrar and cancelled
at the same time. The Board of Directors may, in case any share certificate or
certificate for any other security is lost, stolen or destroyed (as evidenced by
a written affidavit or affirmation of such fact), authorize the issuance of
replacement certificates on such terms and conditions as the Board may require;
the Board may require indemnification of the corporation secured by a bond or
other adequate security sufficient to protect the corporation against any claim
that may be made against it, including any expense or liability, on account of
the alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules
of construction, and definitions in the Code shall govern the construction of
these Bylaws. Without limiting the generality of this provision, the singular
number includes the plural, the plural number includes the singular, and the
term "person" includes both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
----------
9.1 AMENDMENT BY SHAREHOLDERS
-------------------------
New Bylaws may be adopted or these Bylaws may be amended or repealed
by the vote or written consent of holders of a majority of the outstanding
shares entitled to vote; provided, however, that if the Articles of
Incorporation of the corporation set forth the number of authorized Directors of
the corporation, then the authorized number of Directors may be changed only by
an amendment of the Articles of Incorporation.
9.2 AMENDMENT BY DIRECTORS
----------------------
Subject to the rights of the shareholders as provided in Section 9.1
of these Bylaws, Bylaws, other than a Bylaw or an amendment of a Bylaw changing
the authorized number of directors (except to fix the authorized number of
directors pursuant to a Bylaw providing for a variable number of directors), may
be adopted, amended or repealed by the Board of Directors.
9.3 RECORD OF AMENDMENTS
--------------------
Whenever an amendment or new Bylaw is adopted, it shall be copied in
the book of minutes with the original Bylaws. If any Bylaw is repealed, the
fact of repeal, with the date of the meeting at which the repeal was enacted or
written consent was filed, shall be stated in said book.
20
<PAGE>
ARTICLE X
INTERPRETATION
--------------
Reference in these Bylaws to any provision of the California
Corporations Code shall be deemed to include all amendments thereof.
21
<PAGE>
SECRETARY'S CERTIFICATE OF ADOPTION OF BYLAWS
OF
A & R MATERIALS, INC.
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of A & R
Materials, Inc., a California corporation.
2. That the foregoing Bylaws constitute the Bylaws of said
corporation as amended, restated and adopted by the Directors of said
corporation by unanimous written consent as of October 3, 1994.
IN WITNESS WHEREOF, I have hereunto subscribed my name this ______ day
of ___________________, 1994.
--------------------------------
Lee Pekary
Secretary
22
<PAGE>
EXHIBIT 10.01
A & R MATERIALS, INC.
1996 STOCK OPTION PLAN
1. Purpose of Plan.
---------------
The purpose of the 1996 Stock Option Plan (the "Plan") is to attract,
retain and reward persons providing services to A & R Materials, Inc., a
California corporation, and any successor corporation thereto (collectively
referred to as the "Company"), and any present or future parent and/or
subsidiary corporations of such corporation (all of whom along with the Company
being individually referred to as a "Participating Company" and collectively
referred to as the "Participating Company Group"), and to motivate such persons
to contribute to the growth and profits of the Participating Company Group in
the future. For purposes of the Plan, a parent corporation and a subsidiary
corporation shall be as defined in sections 424(e) and 424(f) of the Internal
Revenue Code of 1986, as amended (the "Code").
2. Administration.
--------------
(a) Administration by Board and/or Committee. The Plan shall be
----------------------------------------
administered by the Board of Directors of the Company (the "Board") and/or by a
duly appointed committee of the Board having such powers as shall be specified
by the Board. Any subsequent references herein to the Board shall also mean the
committee if such committee has been appointed and, unless the powers of the
committee have been specifically limited, the committee shall have all of the
powers of the Board granted herein, including, without limitation, the power to
terminate or amend the Plan at any time, subject to the terms of the Plan and
any applicable limitations imposed by law. All questions of interpretation of
the Plan or of any options granted under the Plan (an "Option") shall be
determined by the Board, and such determinations shall be final and binding-
upon all persons having an interest in the Plan and/or any Option.
(b) Options Authorized. Options-may be either incentive stock options
------------------
as defined in section 422 of the Code ("Incentive Stock Options") or
nonqualified stock options.
(c) Authority of Officers. Any officer of a Participating Company
---------------------
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, or election which is the responsibility of or which
is allocated to the Company herein, provided the officer has apparent authority
with respect to such matter, right, obligation, or election.
(d) Disinterested Administration. After the Company first registers
----------------------------
its common stock under Section 12 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), then with respect to the participation in the Plan
of any employees who are also officers or directors of the Company subject to
Section 16 of the Exchange Act, the Plan shall be administered by the Board in
compliance with the "disinterested administration" requirement of Rule 16b-3, as
promulgated under the Exchange Act and amended from time to
1
<PAGE>
time or any successor rule or regulation ("Rule 16b-3").
3. Eligibility.
-----------
(a) Eligible Persons. Options may be granted only to employees
----------------
(including officers) and directors of the Participating Company Group or to
individuals who are rendering services as consultants to the Participating
Company Group. For purposes of the foregoing sentence, "employees" shall
include prospective employees to whom Options are granted in connection with
written offers of employment and "consultants" shall include prospective
consultants to whom Options are granted in connection with written offers of
engagement with the Participating Company Group. The Board shall, in its sole
discretion, determine which eligible persons shall be granted Options (an
"Optionee"). Eligible persons may be granted more than one (1) Option.
(b) Directors Serving on Committee. If a committee of the Board has
------------------------------
been established to administer the Plan in compliance with the "disinterested
administration" requirement of Rule 16b-3, no member of such committee, while a
member, shall be eligible to be granted an Option.
(c) Restrictions on Option Grants. Any person who is not an employee
----------------------
on the effective date of the -rant of an Option to such person may be granted
only a nonqualified stock option. An Incentive Stock Option granted to a
prospective employee upon the condition that such person become an employee
shall be deemed granted effective on the date such person commences service with
a Participating Companv, with an exercise price determined as of such date in
accordance with paragraph 6(a).
4. Shares Subject to Option. Options shall be for the purchase of shares
------------------------
of the authorized but unissued or reacquired common stock of the Company (the
"Stock"), subject to adjustment as provided in paragraph 10 below. The maximum
number of shares of Stock which may be issued under the Plan shall be Five
Million (5,000,000) shares. If any outstanding Option for any reason expires or
is terminated or canceled and/or shares of Stock subject to repurchase are
repurchased by the Company, the shares allocable to the unexercised portion of
such Option, or such repurchased shares may again be subject to an Option grant.
5. Time for Granting Options. All Options shall be -ranted, if at all,
-------------------------
within ten (10) years from January 2, 1996.
6. Terms. Conditions and Form of Options. Subject to the provisions of
--------------------------------------
the Plan, the Board shall determine for each Option (which need not be
identical,) the number of shares of Stock for which the Option shall be granted,
the exercise price of the Option, the timing, and terms of exercisability and
vesting of the Option, the time of expiration of the Option, the effect of the
Optionee's termination of employment or service, whether the Option is to be
treated as an Incentive Stock Option or as a nonqualified stock option, the
method for satisfaction of any tax withholding obligation arising in connection
with an Option, including by withholding or
2
<PAGE>
delivery of shares of stock, and all other terms and conditions of the Option
not consistent with the Plan. Options granted pursuant to the Plan shall be
evidenced by written agreements specifying the number of shares of Stock covered
thereby, in such form as the Board shall from time to time establish, which
agreements may incorporate all or any of the terms of the Plan by reference and
shall comply with and be subject to the following terms and conditions.
(a) Option Exercise Price. The exercise price for each Option shall
---------------------
be established in the sole discretion of the Board; provided, however, that (i)
the exercise price per share for an Incentive Stock Option shall not be less
than the fair market value, as determined by the Board, of a share of Stock on
the effective date of grant of the Option, (ii) the exercise price per share for
a nonqualified stock option shall not be less than eight-five percent (85%) of
the fair market value, as determined by the Board, of a share of Stock on the
effective date of grant of the Option and (iii) no Incentive Stock Option
granted to an Optionee who at the time the Option is granted owns stock
possessing more than ten percent (10%) of the total combined voting power of all
classes of stock of a Participating Company within the meaning of section
422(b)(6) of the Code (a "Ten Percent Owner Optionee") shall have an exercise
price per share less than one hundred ten percent (1 10 '7o) of the fair market
value of a share of Stock on the effective date of grant of the Option.
Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a
nonqualified stock option) may be granted with an exercise price lower than the
minimum exercise price set forth above if such Option is ,ranted pursuant to an
assumption or substitution for another option in a manner qualifying with the
provisions of section 424(a) of the Code.
(b) Exercise Period of Options. The Board shall have the power to
---------------------------
set, including by amendment of an Option, the time or times within each Option
shall be exercisable or the event or events upon the occurrence of which all or
a portion of each Option shall be exercisable and the term of each Option;
provided, however, that (i) no Option shall be exercisable after the expiration
of ten (10) years after the effective date of grant of such Option, (ii) no
Incentive Stock Option granted to a Ten Percent Owner Optionee shall be
exercisable after the expiration of five (5) years after the effective date of
grant of such Option, and (iii) no Option granted to a prospective employee or
prospective consultant may become exercisable prior to the date on which such
person commences service with a Participating Company.
(c) Payment of Exercise Price.
--------------------------
(i) Forms of Consideration Authorized. Payment of the
----------------------------------
exercise price for the number of shares of Stock being purchased pursuant to any
Option shall be made (1) in cash, by check, or cash equivalent, (2) by tender to
the Company of shares of the Company's stock owned by the Optionee having a
value, as determined by the Board (but without regard to any restrictions on
transferability applicable to such stock by reason of federal or state
securities laws or agreements with an underwriter for the Company), not less
than the exercise price, (3) by the assignment of the proceeds of a sale or loan
with respect to some or all of the shares being acquired upon the exercise of
the Option (a "Cashless Exercise"), or (4) by any combination thereof. The Board
may at any time or from time to time, by adoption of
3
<PAGE>
or by amendment to the standard form or forms of stock option agreement
described in paragraph 7 below, or by other means, grant Options which do not
permit all of the foregoing forms of consideration to be used in payment of the
exercise price and/or which other-wise restrict one (1) or more forms of
consideration.
(ii) Tender of Company Stock. Notwithstanding the foregoing, an
-----------------------
Option may not be exercised by tender to the Company of shares of the Company's
stock to the extent such tender of stock would constitute a violation of the
provisions of any law, regulation and/or agreement restricting the redemption of
the Company's stock. Unless otherwise provided for by the Board, an Option may
not be exercised by tender to the Company of shares of the Company's stock
unless such shares of the Company's stock either have been owned by the Optionee
for more than six (6) months or were not acquired, directly or indirectly, from
the Company.
(iii) Cashless Exercise. The Company reserves, at any and all
-----------------
times, the right, in the Company's sole and absolute discretion, to establish,
decline to approve and/or terminate any program and/or procedures for the
exercise of Options by means of a Cashless Exercise.
7. Standard Forms of Stock Option Agreement.
----------------------------------------
(a) Incentive Stock Options. Unless otherwise provided for by the
-----------------------
Board at the time an Option is granted, an Option designated as an "Incentive
Stock Option" shall comply with and be subject to the terms and conditions set
forth in the form of incentive stock option agreement attached hereto as
Exhibit A and as amended from time to time.
- ---------
(b) Nonqualified Stock Options. Unless otherwise provided for by the
--------------------------
Board at the time an Option is granted, an Option designated as a "Nonqualified
Stock Option" shall comply with and be subject to the terms and conditions set
forth in the form of nonqualified stock option agreement attached hereto as
Exhibit B and as amended from time to time.
- ---------
(c) Standard Term for Options. Unless otherwise provided for by the
-------------------------
Board in the grant of an Option, any Option granted hereunder shall be
exercisable for a term of ten
(10) years from the effective date of grant of the Option.
8. Authority to Vary Terms. The Board shall have the authority to vary,
-----------------------
from time to time, the terms of either of the standard forms of stock option
agreement described in paragraph 7 above, either in connection with the grant or
amendment of an individual Option or in connection with the authorization of a
new standard form or forms; provided, however, that the terms and conditions of
such revised or amended standard form or forms of stock option agreement shall
be in accordance with the terms of the Plan. Such authority shall include, but
not by way of limitation, the authority to grant Options which are not
immediately exercisable.
9. Fair Market Value Limitation. To the extent that the aggregate fair
----------------------------
market value
4
<PAGE>
(determined at the time the Option is granted) of Stock with respect to which
Incentive Stock Options are exercisable by an Optionee for the first time during
any calendar year (under all stock options plans of the Company, including the
Plan) exceeds One Hundred Thousand Dollars ($100,000), such options shall be
treated as nonqualified stock options. This paragraph shall be applied by
taking Incentive Stock Options into account in the order in which they were
granted.
10. Effect of Change in Stock Subject to Plan. Appropriate adjustments
-----------------------------------------
shall be made in the number and class of shares of Stock subject to the Plan and
to any outstanding Options and in the exercise price of any outstanding Options
in the event of a stock dividend, stock split, reverse stock split,
recapitalization, combination, reclassification, or like change in the capital
structure of the Company. If a majority of the shares which are of the same
class as the shares that are subject to outstanding Options are exchanged for,
converted into, or otherwise become shares of another corporation (the "New
Shares"), the Company may unilaterally amend the outstanding Options to provide
that such Options are exercisable for New Shares. In the event of any such
amendments, the number of shares and the exercise prices of the outstanding
Options shall be adjusted in a fair and equitable manner.
11. Transfer of Control. A "Transfer of Control" shall be deemed to have
-------------------
occurred if any of the following occurs with respect to the Company:
(a) the direct or indirect sale or exchange by the stockholders of
the Company
of all or substantially all of the stock of the Company where the stockholders
of the Company before such sale or exchange do not retain, directly or
indirectly, at least a majority of the beneficial interest in the voting stock
of the Company after such sale or exchange;
(b) a merger or consolidation in which the Company is not the
surviving corporation;
(c) a merger or consolidation in which the Company is the surviving
corporation where the stockholders of the Company before such merger or
consolidation do not retain, directly or indirectly, at least a majority o f the
beneficial interest in the voting stock of the Company after such merger or
consolidation,
(d) the sale, exchange., or transfer of all or substantially all of
the assets of the Company (other than a sale, exchange, or transfer to one (1)
or more subsidiary corporations (as defined in paragraph 1 above) of the
Company); or
(e) a liquidation or dissolution of the Company.
In the event of a Transfer of Control, the Board, in its sole discretion,
may arrange with the surviving, continuing, successor, or purchasing
corporation, or parent corporation thereof, as the case may be (the "Acquiring
Corporation"), for the Acquiring Corporation to either assume the Company's
rights and obligations under outstanding stock option agreements or substitute
options for the Acquiring Corporation's stock for such outstanding Options. Any
Options which are neither assumed or substituted for by the Acquiring
Corporation nor exercised
5
<PAGE>
as of the date of the Transfer of Control shall terminate effective as of the
date of the Transfer of Control.
12. Provision of Information. Each Optionee shall be given access to
------------------------
information concerning the Company equivalent to that information generally made
available to the Company's common stockholders.
13. Options Non-Transferable. During the lifetime of the Optionee, the
------------------------
Option shall be exercisable only by the Optionee. No Option shall be assigned
or transferred by the Optionee, except by will or by the laws of descent and
distribution.
14. Indemnification. In addition to such other rights of
---------------
indemnification as they may have as members of the Board or as officers or
employees of the Participating Company Group, members of the Board and any
officers or employees of the Participating Company Group to whom authority to
act for the Board is delegated shall be indemnified by the Company against all
reasonable expenses, including attorneys' fees, actually and necessarily
incurred in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with the
Plan, or any right granted hereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent legal
counsel selected by the Company) or paid by them in satisfaction of a judgment
in any such action, suit or proceeding, except in relation to matters as to
which it shall be adjudged in such action, suit such action, suit or proceeding
that such person is liable for gross negligence, bad faith or intentional
misconduct in duties; provided, however, that within sixty (60) days after the
institution of such action, suit or proceeding such person shall offer to the
Company, in writing, the opportunity at its own expense to handle and defend the
same.
15. Termination of Amendment of Plan or Options. The Board, including any
-------------------------------------------
duly appointed committee of the Board, may terminate or amend the Plan or any
Option at any time; provided, however, that without the approval of the
Company's stockholders, there shall be (a) no increase in the total number of
shares of Stock covered by the Plan (except by operation of the provisions of
paragraph 10 above), (b) no change in the class of persons eligible to receive
Incentive Stock Options and (c) no expansion in the class of persons eligible to
receive nonqualified stock options. In addition to the foregoing, the approval
of the Company's stockholders shall be sought for any amendment to the Plan for
which the Board deems stockholder approval necessary in order to comply with
Rule 16b-3. In any event, no amendment may adversely affect any then outstanding
Option, or any unexercised portion thereof, without the consent of the Optionee,
unless such amendment is required to enable an Option designated as an Incentive
Stock Option to qualify as an Incentive Stock Option.
6
<PAGE>
EXHIBIT 10.02
EMPLOYMENT AGREEMENT
This Agreement, dated as of _____ is between Isonics Corporation, a
California corporation ("Employer"), and _________ ("Employee").
BACKGROUND
Employer has spent significant time, effort, and money to develop certain
Proprietary Information (as defined below), which Employer considers vital to
its business and goodwill. The Proprietary Information necessarily will be
communicated to or acquired by Employee in the course of Employee's employment
with Employer, and the parties desire to provide for the protection of
Employer's Proprietary Information, and goodwill. Further, the parties
anticipate that certain Invention/Ideas (as defined below) will be conceived,
developed, or reduced to practice by Employee during the course of Employee's
employment by Employer, and the parties desire to provide for the disclosure,
assignment, and protection of these Invention/Ideas as provided in this
Agreement. In addition, the parties desire to provide certain restrictions
against solicitating customers or suppliers of Employer and inducing other
employees to leave Employer, all as set forth below.
The parties also desire to set forth in writing the terms and conditions of
Employee's employment by Employer. The parties acknowledge that Employer
considers the services of Employee to be unique, extraordinary and/or of
intellectual character.
TERMS OF AGREEMENT
NOW, THEREFORE, in consideration of the employment or continued employment
of Employee by Employer, the parties agree as follows:
1. Term of Agreement.
-----------------
This Agreement shall continue in full force and effect for the duration of
Employee's employment by Employer (the "Period of Employment") and shall
continue thereafter until terminated through a written instrument signed by both
parties.
2. Compensation and Benefits.
-------------------------
(a) Compensation. In consideration of the services to be rendered by
------------
Employee commencing with the date of this Agreement and continuing until the
termination of Employee's employment, Employer shall pay Employee ________ per
year, payable semi-monthly, pursuant to the procedures regularly established,
and as they may be amended from time to time, by Employer in its sole
discretion. Employer shall review annually Employee's compensation in
accordance with Employer's established administrative practice for adjusting
salaries for similarly situated employees.
<PAGE>
(b) Benefits. Employee shall be entitled to vacation leave in
--------
accordance with Employer's standard policies, as they may be amended from time
to time. As Employee becomes eligible therefor. Employee shall have the right to
participate in and receive benefits from all present and future benefit plans
specified in Employer's policies (as they may be amended from time to time) and
generally made available to similarly situated employees of Employer. The amount
and extent of benefits to which Employee is entitled shall be governed by the
specific benefit plan, as amended. Nothing contained in this Agreement shall
prevent Employer from changing or eliminating any benefit(s) during the Period
of Employment as Employer, in its sole discretion, may deem necessary or
desirable. All compensation and comparable payments to be paid to Employee shall
be less withholdings required by law.
(c) No Incentive Compensation. Unless otherwise agreed by the parties
-------------------------
in a separate written agreement signed by the President of Employer, Employee
shall not be entitled to any additional or incentive compensation.
(d) Expenses. Employer shall reimburse Employee for reasonable
--------
out-of-town travel and other business expenses reasonably incurred by Employee
in the performance of Employee's duties, in accordance with Employer's policies,
as they may be amended from time to time in Employer's sole discretion.
3. Termination of Employment.
-------------------------
(a) At-Will Employment. At any time, either party may terminate the
------------------
Period of Employment for any reason, with or without cause. Without limiting the
generality of the foregoing, Employer may dismiss Employee without cause at any
time notwithstanding anything to the contrary contained in or arising from any
statements, policies or practices of Employer relating to the employment,
discipline, or termination of its employees.
(b) Termination Obligations.
-----------------------
(i) Employee agrees that all property, including, without limitation,
all equipment, tangible Proprietary Information (as defined below), documents,
books, records, reports, notes, contracts, lists, computer disks (and other
computer-generated files and data), and copies thereof, created on any medium
and furnished to, obtained by, or prepared by Employee in the course of or
incident to Employee's employment, belong to Employer and shall be returned
promptly to Employer upon termination of the Period of Employment.
(ii) Employee's representations, warranties, and obligations contained in
this Agreement shall survive the termination of the Period of Employment, and
Employee's representations and warranties shall also survive the expiration of
this Agreement.
(iii) Following any termination of the Period of Employment, Employee
shall fully cooperate with Employer in all matters relating to Employee's
continuing obligations under this Agreement.
2
<PAGE>
4. Proprietary Information.
-----------------------
(a) Defined. "Proprietary Information" is all information, ideas and
-------
concepts in whatever form, tangible or intangible, pertaining in any manner to
the business of Employer, or any Affiliate (as hereinafter defined), or the
respective employees, clients, customers, suppliers, consultants or business
associates of Employer or any Affiliate, which information, idea(s) or
concept(s) have been, or shall have been, produced by any employee of Employer
in the course of his or her employment or otherwise produced or acquired by or
on behalf of Employer. All Proprietary Information not generally known outside
of Employer's organization, and all Proprietary Information so known only
through improper means, shall be deemed "Confidential Information." Without
limiting the foregoing definition, Proprietary Information and Confidential
Information shall include, but not be limited to: (i) formulas, teaching and
development techniques, processes, trade secrets, computer programs, electronic
codes, inventions, improvements, and research projects; (ii) information about
costs, profits, markets, sales, and lists of vendors, suppliers, customers or
clients; (iii) business, marketing, and strategic plans; and (iv) employee
personnel files and compensation information. Employee should consult any
Employer procedures instituted to identify and protect certain types of
Confidential Information, which are considered by Employer to be safeguards in
addition to the protection provided by this Agreement. Nothing contained in
those procedures or in this Agreement is intended to limit the effect of the
other. For purposes of this Agreement, "Affiliate" shall mean any person or
entity that directly or indirectly controls, is controlled by, or is under
common control with Employer.
(b) General Restrictions on Use. During the Period of Employment, Employee
---------------------------
shall use Proprietary Information, and shall disclose Confidential Information,
only for the benefit of Employer and as is necessary to carry out Employee's
responsibilities under this Agreement. Following termination, Employee shall
neither, directly or indirectly, use any Proprietary Information nor disclose
any Confidential Information, except as expressly and specifically authorized in
writing by Employer. The publication of any Proprietary Information through
literature or speeches must be approved in advance in writing by Employer.
(c) Location and Reproduction. Employee shall maintain at Employee's work
-------------------------
station and/or any other place under Employee's control only such Confidential
Information as Employee has a current "need to know." Employee shall return to
the appropriate person or location or otherwise properly dispose of Confidential
Information once that need to know no longer exists. Employee shall not make
copies of or otherwise reproduce Confidential Information unless there is a
legitimate business need for reproduction.
(d) Prior Actions and Knowledge. Employee represents and warrants that
---------------------------
from the time of Employee's first contact with Employer, Employee has held in
strict confidence all Confidential Information and has not disclosed any
Confidential Information, directly or indirectly, to anyone outside of Employer,
or used, copied, published, or summarized any Confidential Information, except
to the extent otherwise permitted in this Agreement.
3
<PAGE>
(e) Third-Party Information. Employee acknowledges that Employer has
-----------------------
received and in the future will receive from third parties their confidential
information subject to a duty on Employer's part to maintain the confidentiality
of such information and to use it only for certain limited purposes. Employee
agrees that Employee owes Employer and such third parties, during the Period of
Employment and thereafter, a duty to hold all such confidential information in
the strictest confidence and not to disclose or use it, except as necessary to
perform Employee's obligations hereunder and as is consistent with Employer's
agreement with such third parties.
(f) Conflicting Obligations. Employee represents and warrants that
-----------------------
Employee's execution of this Agreement, Employee's employment with Employer, and
the performance of Employee's proposed duties under this Agreement shall not
violate any obligations Employee may have to any former employer (or other
person or entity), including any obligations with respect to proprietary or
confidential information of any other person or entity.
5. Competitive Activity.
--------------------
(a) Acknowledgment. Employee acknowledges that the pursuit of the
--------------
activities forbidden by Section 5(b) below would necessarily involve the use or
disclosure of Confidential Information in breach of Section 4, but that proof of
such a breach would be extremely difficult.
(b) Prohibited Activity. To forestall the above-described disclosure, use,
-------------------
and breach, Employee agrees that for a period of one (1) year after termination
of the Period of Employment, Employee shall not, directly or indirectly, (i)
divert or attempt to divert from Employer (or any Affiliate) any business of any
kind in which it is engaged, including, without limitation, the solicitation of
or interference with any of its customers or suppliers; (i) employ, solicit for
employment, or recommend for employment any person employed by Employer (or any
Affiliate); or (iii) engage in any business activity that is or may be
competitive with Employer (or any Affiliate) in any state where Employer
conducts its business, unless Employee can prove that any action taken is
contravention of this subsection was done without the use in any way of
Confidential Information.
6. Inventions and Ideas.
--------------------
(a) Defined: Statutory Notice. The term "Invention/Idea" includes any and
--------------------------
all ideas, processes, trademarks, service marks, inventions, technology,
computer hardware or software, original works of authorship, designs, formulas,
discoveries, patents, copyrights and products, as well as any and all
improvements, know-how, rights and claims related to the foregoing, that are
conceived, developed, or reduced to practice by Employee (alone or with others),
during the Period of Employment, except to the extent that California Labor Code
Section 2870 lawfully prohibits the assignment of rights in such intellectual
property.
Employee acknowledges that Employee understands that this definition includes
only those rights that my be lawfully assigned pursuant to California Labor Code
Section 2870, which provides:
4
<PAGE>
"(a) Any provision in any employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the
employer's equipment, supplies, facilities, or trade secret information
except for those inventions that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer; or
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in any employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable."
Nothing in this Agreement is intended to expand the scope of protection
provided Employee by Sections 2870 through 2872 of the California Labor Code.
(b) Disclosure. Employee agrees to maintain adequate and current written
----------
records on the development of all Invention/Ideas and to disclose promptly to
Employer all Invention/Ideas and relevant records, which records will remain the
sole property of Employer. Employee further agrees that all information and
records pertaining to any idea, process, trademark, service mark, invention,
technology, computer hardware or software, original work of authorship, design,
formula, discovery, patent, copyright or product, as well as any improvement or
know-how related to the foregoing ("Intellectual Property"), that Employee does
not believe to be an Invention/Idea, but that is conceived, developed, or
reduced to practice by Employee (alone or with others) during the Period of
Employment (or during the post-employment period set forth in Section 4(e)
below), shall be disclosed promptly to Employer (such disclosure to be received
in confidence). Employer shall examine such information to determine if in fact
the Intellectual Property is an Invention/Idea subject to this Agreement.
(c) Assignment. Employee agrees to assign to Employer the Employee's
----------
entire right, title, and interest (throughout the United States and in all
foreign countries), free and clear of all liens and encumbrances, in and to each
Invention/Idea, which shall be the sole property of Employer, whether or not
patentable. In the event any Invention/Idea is deemed by Employer to be
patentable or otherwise registrable, Employee shall assist Employer (at its
expense) in obtaining letters patent or other applicable registrations thereon
and shall execute all documents and do all other things necessary or proper
thereto (including testifying at Employer's expense) in order to vest Employer,
or any entity or person specified by Employer, with full and perfect title
thereto or interest therein. Employee shall also take any action necessary or
advisable in connection with any continuations, renewals, or reissues thereof or
in any related proceedings or litigation.
5
<PAGE>
Should Employer be unable to secure Employee's signature on any document
necessary to apply for, prosecute, obtain, or enforce any patent, copyright, or
other right or protection relating to any Invention/Idea, whether due to
Employee's mental or physical incapacity, refusal to sign or any other cause,
Employee irrevocably designates and appoints Employer and each of its duly
authorized officers and agents as Employee's agent and attorney in fact, to act
for and in Employee's behalf and stead and to execute and file any such
document, and to do all other lawfully permitted acts to further the
prosecution, issuance, and enforcement of patents, copyrights, or other rights
or protections with the same force and effect as if executed, delivered, and/or
done by Employee. EMPLOYER SHALL HAVE NO OBLIGATION TO PAY EMPLOYEE ANY
ADDITIONAL CONSIDERATION WITH RESPECT TO THE ASSIGNMENT OF ANY OF THE ABOVE-
DESCRIBED INVENTIONS/IDEAS.
(d) No Conflict. To the best of Employee's knowledge, there is no existing
-----------
contract in conflict with this Agreement and there is no contract to assign any
Intellectual Property that is now in existence between Employee and any other
person or entity.
(e) Post-Termination Period. Because of the difficulty of establishing
-----------------------
when any Intellectual Property is first conceived or developed by Employee, or
whether it results from access to Confidential Information or Employer's
equipment, supplies, facilities, or data, Employee agrees that any Intellectual
Property shall be presumed to be an Invention/Idea, if reduced to practice by
Employee or with the aid of Employee within one (1) year after termination of
the Period of Employment. Employee can rebut the above presumption if Employee
proves that the Intellectual Property (i) was developed entirely on Employee's
own time without using Employer's equipment, supplies, facilities, or trade
secret information; (ii) was not conceived or reduced to practice during the
Period of Employment, or, if conceived or reduced to practice during this
period, did not, at the time of conception or reduction to practice, relate to
Employer's business or actual or demonstrably anticipated research or
development; and (iii) did not result from any work performed by Employee by
Employer.
(f) Representation of Coverage and Grant of License. Except for those
-----------------------------------------------
Inventions/Ideas (if any) specifically reserved by Employee in an attachment to
this Agreement, Employee represents that there are no Inventions/Ideas owned
wholly or in part by Employee, or controlled directly or indirectly by Employee,
which Employee considers to be reserved and excluded from the scope of this
Agreement. Employee grants to the Company a royalty-free, non-exclusive,
irrevocable license on any and all non-reserved Invention/Ideas of Employee.
(g) Preservation of Confidence. In order to preserve Employee's
--------------------------
proprietary rights in any unpatented or unpublished reserved Inventions/Ideas,
Employer shall keep in confidence all information provided by Employee
pertaining to any reserved Invention/Idea unless the information: (i) is
already known to or in the possession of Employer; (ii) is or becomes publicly
known through no wrongful act of Employer; (iii) is rightfully received by
Employer from a third party without beach of any obligation to
6
<PAGE>
Employee; (iv) is approved for release by written authorization of Employee; (v)
is distributed or made available to others by Employee without restriction as to
use or disclosure; or (vi) is developed independently by Employer through
persons not involved with information received by Employer from Employee.
(h) License from Use. Notwithstanding the reservation of an Invention/Idea
----------------
under Section 6(f) above, if Employee (i) uses a reserved Invention/Idea while
employed by Employer, or (ii) permits the use of a reserved Invention/Idea by
another employee of Employer and does not have a prior written agreement with
Employer pertaining to such use, then Employee thereby grants to Employer a
royalty-free, non-exclusive, irrevocable license to that Invention/Idea
(provided that the reserved Invention/Idea is owned wholly or in part by
Employee, or is within the direct or indirect control of Employee at the time of
employment).
(i) Right of First Refusal. With respect to any reserved Inventions/Ideas
----------------------
specified under Section 6(f) above, Employee grants to Employer a right of first
refusal to purchase or license such Inventions/Ideas (unless otherwise licensed
to Employer by any other terms of this Agreement) on terms at least as favorable
as those offered by Employee to any other purchaser or licensee while Employee
is employed by Employer.
7. Grounds for Termination. Any material breach by Employee of this Agreement
-----------------------
shall be grounds for terminating Employee's employment with Employer.
Notwithstanding the foregoing, nothing in this Agreement is intended to alter
the at-will employment status of Employee.
8. Notices. Any notice under this Agreement must be in writing and shall be
-------
effective upon delivery by hand, upon facsimile transmission to the number
provided below (if one is provided), or three (3) business days after deposit in
the United States mails, postage prepaid, certified or registered, and addressed
to Employer or to Employee at the corresponding address below. Employee shall
be obligated to notify Employer in writing of any change in Employee's address.
Notice of change of address shall be effective only when done in accordance with
this Section.
Employer's Notice Address:
Isonics Corporation
4010 Moorpark, Suite 119
San Jose, CA 95117
Attn: James E. Alexander, President
Employee's Notice Address:
_______________________________
_______________________________
_______________________________
7
<PAGE>
9. Action by Employer. All actions required or permitted to be taken under
------------------
this Agreement by Employer, including, without limitation, exercise of
discretion, consents, waivers, and amendments to this agreement, shall be made
and authorized only by the President or by his or her representative
specifically authorized to fulfill these obligations under this Agreement.
10. Integration. This Agreement is intended to be the final, complete, and
-----------
exclusive statement of the terms of Employee's employment by Employer. This
Agreement may not be contradicted by evidence of any prior or contemporaneous
statements or agreements. To the extent that the practices, policies, or
procedures of Employer, now or in the future, apply to Employee and are
inconsistent with the terms of this Agreement, the provisions of this Agreement
shall control.
11. Amendments; Waivers. This Agreement may not be modified, amended, or
-------------------
terminated except by an instrument in writing, signed by each of the parties.
No failure to exercise and no delay in exercising any right, remedy, or power
under this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, or power under this Agreement preclude
any other or further exercise thereof, or the exercise of any other right,
remedy, or power provided herein or by law or in equity.
12. Assignment; Successors and Assigns. Employee agrees that Employee will not
----------------------------------
assign, sell, transfer, delegate, or otherwise dispose of, whether voluntarily
or involuntarily, or by operation of law, any rights or obligations under this
Agreement. Any such purported assignment, transfer, or delegation shall be null
and void. Nothing in this Agreement shall prevent the consolidation of Employer
with, or its merger into, any other entity, or the sale by Employer of all or
substantially all of its assets, or the otherwise lawful assignment by Employer
of any rights or obligations under this Agreement. Subject to the foregoing,
this Agreement shall be binding upon and shall inure to the benefit of the
parties and their respective heirs, legal representatives, successors, and
permitted assigns, and shall not benefit any person or entity other than those
specifically enumerated in this Agreement.
13. Severability. If any provision of this Agreement, or its application to
------------
any person, place, or circumstance, is held by an arbitrator or a court of
competent jurisdiction to be invalid, unenforceable, or void, such provision
shall be enforced to the greatest extent permitted by law, and the remainder of
this Agreement and such provision as applied to other persons, places, and
circumstances shall remain in full force and effect.
14. Attorneys' Fees. In any legal action, arbitration, or other proceeding
---------------
brought to enforce of interpret the terms of this Agreement, the prevailing
party shall be entitled to recover reasonable attorneys' fees and costs.
15. Injunctive Relief. If Employee breaches or threatens to breach any
-----------------
provision of this Agreement, the parties acknowledge that the damage or imminent
damage to Employer's business or its goodwill would be irreparable and extremely
difficult to
8
<PAGE>
estimate, making any remedy at law or in damages inadequate. Accordingly,
Employer shall be entitled to injunctive relief against Employee in the event of
any breach or threatened breach of such provisions by Employee, in addition to
any other relief (including damages) available to Employer under this Agreement
or under law.
16. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the law of the State of California, notwithstanding any
California or other conflict-of-laws provisions to the contrary.
17. Interpretation. This Agreement shall be construed as a whole, according to
--------------
its fair meaning, and not in favor of or against any party. By way of example
and not in limitation, this Agreement shall not be construed in favor of the
party receiving a benefit nor against the party responsible for any particular
language in this Agreement.
18. Employee Acknowledgment. Employee acknowledges that Employee has had the
-----------------------
opportunity to consult legal counsel in regard to this Agreement, that Employee
has read and understands this Agreement, that Employee is fully aware of its
legal effect, and that Employee has entered into it freely and voluntarily and
based on Employee's own judgment and not on any representations or promises
other than those contained in this Agreement. Without limiting the generality
of the foregoing, Employee acknowledges that Employee has agreed that any and
all Inventions/Ideas that Employee might create during the course of Employee's
employment with Employer automatically will be assigned to Employer. Employee
further acknowledges that Employee has been advised by Employer that the
assignment provisions of this Agreement will not apply to an invention which
qualifies fully under the provisions of Section 2870 of the California Labor
Code and that Employee is aware of the provisions of Section 2870.
The parties have duly executed this Agreement as of the date first written
above.
EMPLOYEE:
- ---------------------------------
EMPLOYER:
- ---------------------------------
Isonics Corporation
By:
-----------------------------
James E. Alexander, President
9
<PAGE>
EXHIBIT 10.03
ISONICS CORPORATION
1996 EXECUTIVES' EQUITY INCENTIVE PLAN
As Adopted _______, 1996
1. PURPOSE. The purpose of this Plan is to provide incentives to
-------
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company, its Parent and
Subsidiaries, by offering them an opportunity to participate in the Company's
future performance through awards of Options, Restricted Stock and Stock
Bonuses. Capitalized terms not defined in the text are defined in Section 23.
2. SHARES SUBJECT TO THE PLAN.
--------------------------
2.1 Number of Shares Available. Subject to Sections 2.2 and
--------------------------
18, the total number of Shares reserved and available for grant and issuance
pursuant to this Plan will be 225,000 Shares. Subject to Sections 2.2 and 18,
Shares that: (a) are subject to issuance upon exercise of an Option but cease to
be subject to such Option for any reason other than exercise of such Option; (b)
are subject to an Award granted hereunder but are forfeited or are repurchased
by the Company at the original issue price; or (c) are subject to an Award that
otherwise terminates without Shares being issued will again be available for
grant and issuance in connection with future Awards under this Plan. At all
times the Company shall reserve and keep available a sufficient number of Shares
as shall be required to satisfy the requirements of all outstanding Options
granted under this Plan and all other outstanding but unvested Awards granted
under this Plan.
2.2 Adjustment of Shares. In the event that the number of
--------------------
outstanding Shares is changed by a stock dividend, recapitalization, stock
split, reverse stock split, subdivision, combination, reclassification or
similar change in the capital structure of the Company without consideration,
then (a) the number of Shares reserved for issuance under this Plan, (b) the
Exercise Prices of and number of Shares subject to outstanding Options, and (c)
the number of Shares subject to other outstanding Awards will be proportionately
adjusted, subject to any required action by the Board or the shareholders of the
Company and compliance with applicable securities laws; provided, however, that
-------- -------
fractions of a Share will not be issued but will either be replaced by a cash
payment equal to the Fair Market Value of such fraction of a Share or will be
rounded up to the nearest whole Share, as determined by the Committee.
3. ELIGIBILITY. ISO (as defined in Section 5 below) may be granted
-----------
only to employees (including officers and directors who are also employees) of
the Company or of a Parent or Subsidiary of the Company. All other Awards may
be granted to employees, officers, directors, consultants, independent
contractors and advisors of the Company or any Parent or Subsidiary of the
Company; provided such consultants, contractors and advisors render bona fide
--------
services not in connection with the offer and sale of securities in a capital-
raising transaction. Notwithstanding the foregoing, Awards under this Plan
shall be granted only to persons who (i) have a preexisting personal or business
relationship with the Company or any of its officers, directors or controlling
persons, or (ii) by reason of their business or financial experience or the
business or financial experience of their professional advisors who are
unaffiliated with and who are not compensated by the Company or any affiliate or
selling agent of the Company, directly or indirectly, could be reasonably
assumed to have the capacity to protect their own interests in connection with
the transaction. No person will be eligible to receive more than 50,000 Shares
in any calendar year under this Plan pursuant to the grant of Awards hereunder,
other than new employees of the Company or of a Parent or Subsidiary of the
Company (including new employees who are also officers and directors of the
Company or any Parent or Subsidiary of the Company) who are eligible to receive
up to a maximum of 200,000 Shares in the calendar year in which they commence
their employment. A person may be granted more than one Award under this Plan.
<PAGE>
Isonics Corporation
1996 Executives' Equity Incentive Plan
4. ADMINISTRATION.
--------------
4.1 Committee Authority. This Plan will be administered by
-------------------
the Committee or by the Board acting as the Committee. Subject to the general
purposes, terms and conditions of this Plan, and to the direction of the Board,
the Committee will have full power to implement and carry out this Plan. Without
limitation, the Committee will have the authority to:
(a) construe and interpret this Plan, any Award Agreement and any
other agreement or document executed pursuant to this Plan;
(b) prescribe, amend and rescind rules and regulations relating to
this Plan;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject to
Awards;
(f) determine whether Awards will be granted singly, in combination
with, in tandem with, in replacement of, or as alternatives to,
other Awards under this Plan or any other incentive or
compensation plan of the Company or any Parent or Subsidiary of
the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission or reconcile any
inconsistency in this Plan, any Award or any Award Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the
administration of this Plan.
4.2 Committee Discretion. Any determination made by the
--------------------
Committee with respect to any Award will be made in its sole discretion at the
time of grant of the Award or, unless in contravention of any express term of
this Plan or Award, at any later time, and such determination will be final and
binding on the Company and on all persons having an interest in any Award under
this Plan. The Committee may delegate to one or more officers of the Company
the authority to grant an Award under this Plan to Participants who are not
Insiders of the Company.
4.3 Committee Members. If two or more members of the Board
-----------------
are Outside Directors, the Committee will be comprised of at least two (2)
members of the Board, all of whom are Outside Directors and who satisfy the
requirements under the Exchange Act for administering this Plan.
5. OPTIONS. The Committee may grant Options to eligible persons and
-------
will determine whether such Options will be Incentive Stock Options within the
meaning of the Code ("ISO") or Nonqualified Stock Options ("NQSOS"), the number
of Shares subject to the Option, the Exercise Price of the Option, the period
during which the Option may be exercised, and all other terms and conditions of
the Option, subject to the following:
5.1 Form of Option Grant. Each Option granted under this Plan
--------------------
will be evidenced by an Award Agreement which will expressly identify the Option
as an ISO or an NQSO ("STOCK OPTION AGREEMENT"), and will be in such form and
contain such provisions (which need not be the same for each Participant) as the
Committee may from time to time approve, and which will comply with and be
subject to the terms and conditions of this Plan.
-2-
<PAGE>
Isonics Corporation
1996 Executives' Equity Incentive Plan
5.2 Date of Grant. The date of grant of an Option will be the
-------------
date on which the Committee makes the determination to grant such Option, unless
otherwise specified by the Committee. The Stock Option Agreement and a copy of
this Plan will be delivered to the Participant within a reasonable time after
the granting of the Option.
5.3 Exercise Period. Options may be exercisable within the
---------------
times or upon the events determined by the Committee as set forth in the Stock
Option Agreement governing such Option; provided, however, that no Option will
-------- -------
be exercisable after the expiration of ten (10) years from the date the Option
is granted; and provided further that no ISO granted to a person who directly or
-------- -------
by attribution owns more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or of any Parent or Subsidiary of
the Company ("TEN PERCENT SHAREHOLDER") will be exercisable after the expiration
of five (5) years from the date the ISO is granted. The Committee also may
provide for Options to become exercisable at one time or from time to time,
periodically or otherwise, in such number of Shares or percentage of Shares as
the Committee determines.
5.4 Exercise Price. The Exercise Price of an Option will be
--------------
determined by the Committee when the Option is granted and may be not less than
85% of the Fair Market Value of the Shares on the date of grant; provided that:
(i) the Exercise Price of an ISO will be not less than 100% of the Fair Market
Value of the Shares on the date of grant; and (ii) the Exercise Price of any ISO
granted to a Ten Percent Shareholder will not be less than 110% of the Fair
Market Value of the Shares on the date of grant. Payment for the Shares
purchased may be made in accordance with Section 8 of this Plan.
5.5 Method of Exercise. Options may be exercised only by
------------------
delivery to the Company of a written stock option exercise agreement (the
"EXERCISE AGREEMENT") in a form approved by the Committee (which need not be the
same for each Participant), stating the number of Shares being purchased, the
restrictions imposed on the Shares purchased under such Exercise Agreement, if
any, and such representations and agreements regarding Participant's investment
intent and access to information and other matters, if any, as may be required
or desirable by the Company to comply with applicable securities laws, together
with payment in full of the Exercise Price for the number of Shares being
purchased.
5.6 Termination. Notwithstanding the exercise periods set
-----------
forth in the Stock Option Agreement, exercise of an Option will always be
subject to the following:
(a) If the Participant is Terminated for any reason except death or
Disability, then the Participant may exercise such Participant's
Options only to the extent that such Options would have been
exercisable upon the Termination Date no later than three (3)
months after the Termination Date (or such shorter or longer time
period not exceeding five (5) years as may be determined by the
Committee, with any exercise beyond three (3) months after the
Termination Date deemed to be an NQSO), but in any event, no later
than the expiration date of the Options.
(b) If the Participant is Terminated because of Participant's death or
Disability (or the Participant dies within three (3) months after
a Termination other than because of Participant's death or
disability), then Participant's Options may be exercised only to
the extent that such Options would have been exercisable by
Participant on the Termination Date and must be exercised by
Participant (or Participant's legal representative or authorized
assignee) no later than twelve (12) months after the Termination
Date (or such shorter or longer time period not exceeding five (5)
years as may be determined by the Committee, with any such
exercise beyond (a) three (3) months after the Termination Date
when the Termination is for any reason other than the
Participant's death or Disability, or (b) twelve (12) months after
the Termination Date when the Termination is for Participant's
death or Disability, deemed to be an NQSO), but in any event no
later than the expiration date of the Options.
(c) If a Participant is Terminated for Cause, unless otherwise
determined by the Committee, neither the Participant, the
Participant's estate nor such other person who may then hold the
-3-
<PAGE>
Isonics Corporation
1996 Executives' Equity Incentive Plan
Option shall be entitled to exercise any Option with respect to
any Shares whatsoever, after termination of service, whether or
not after termination of service the Participant may receive
payment from the Company or Subsidiary for vacation pay, for
services rendered prior to termination, for services rendered for
the day on which termination occurs, for salary in lieu of notice,
or for any other benefits. In making such determination, the
Board shall give the Participant an opportunity to present to the
Board evidence on his behalf. For the purpose of this paragraph,
termination of service shall be deemed to occur on the date when
the Company dispatches notice or advice to the Participant that
his service is terminated.
5.7 Limitations on Exercise. The Committee may specify a
-----------------------
reasonable minimum number of Shares that may be purchased on any exercise of an
Option, provided that such minimum number will not prevent Participant from
exercising the Option for the full number of Shares for which it is then
exercisable.
5.8 Limitations on ISO. The aggregate Fair Market Value
------------------
(determined as of the date of grant) of Shares with respect to which ISO are
exercisable for the first time by a Participant during any calendar year (under
this Plan or under any other incentive stock option plan of the Company, Parent
or Subsidiary of the Company) shall not exceed $100,000. If the Fair Market
Value of Shares on the date of grant with respect to which ISO are exercisable
for the first time by a Participant during any calendar year would exceed
$100,000, then the Options for the first $100,000 worth of Shares to become
exercisable in such calendar year will be ISO and the Options for the amount in
excess of $100,000 that become exercisable in that calendar year will be NQSOs.
In the event that the Code or the regulations promulgated thereunder are amended
after the Effective Date of this Plan to provide for a different limit on the
Fair Market Value of Shares permitted to be subject to ISO, such different limit
will be automatically incorporated herein and will apply to any Options granted
after the effective date of such amendment.
5.9 Modification, Extension or Renewal. The Committee may
----------------------------------
modify, extend or renew outstanding Options and authorize the grant of new
Options in substitution therefor, provided that any such action may not, without
the written consent of a Participant, impair any of such Participant's rights
under any Option previously granted. Any outstanding ISO that is modified,
extended, renewed or otherwise altered will be treated in accordance with
Section 424(h) of the Code. The Committee may reduce the Exercise Price of
outstanding Options without the consent of Participants affected by a written
notice to them; provided, however, that the Exercise Price may not be reduced
-------- -------
below the minimum Exercise Price that would be permitted under Section 5.4 of
this Plan for Options granted on the date the action is taken to reduce the
Exercise Price.
5.10 No Disqualification. Notwithstanding any other provision
-------------------
in this Plan, no term of this Plan relating to ISO will be interpreted, amended
or altered, nor will any discretion or authority granted under this Plan be
exercised, so as to disqualify this Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the
----------------
Company to sell to an eligible person Shares that are subject to restrictions.
The Committee will determine to whom an offer will be made, the number of Shares
the person may purchase, the price to be paid (the "PURCHASE PRICE"), the
restrictions to which the Shares will be subject, and all other terms and
conditions of the Restricted Stock Award, subject to the following:
6.1 Form of Restricted Stock Award. All purchases under a
------------------------------
Restricted Stock Award made pursuant to this Plan will be evidenced by an Award
Agreement ("RESTRICTED STOCK PURCHASE AGREEMENT") that will be in such form
(which need not be the same for each Participant) as the Committee will from
time to time approve, and will comply with and be subject to the terms and
conditions of this Plan. The offer of Restricted Stock will be accepted by the
Participant's execution and delivery of the Restricted Stock Purchase Agreement
and full payment for the Shares to the Company within thirty (30) days from the
date the Restricted Stock Purchase Agreement is delivered to the person. If
such person does not execute and deliver the Restricted Stock Purchase Agreement
along with full payment for the Shares to the Company within thirty (30) days,
then the offer will terminate, unless otherwise determined by the Committee.
-4-
<PAGE>
Isonics Corporation
1996 Executives' Equity Incentive Plan
6.2 Purchase Price. The Purchase Price of Shares sold
--------------
pursuant to a Restricted Stock Award will be determined by the Committee and
will be at least 85% of the Fair Market Value of the Shares on the date the
Restricted Stock Award is granted, except in the case of a sale to a Ten Percent
Shareholder, in which case the Purchase Price will be 100% of the Fair Market
Value. Payment of the Purchase Price may be made in accordance with Section 8 of
this Plan.
6.3 Restrictions. Restricted Stock Awards will be subject to
------------
such restrictions (if any) as the Committee may impose. The Committee may
provide for the lapse of such restrictions in installments and may accelerate or
waive such restrictions, in whole or part, based on length of service,
performance or such other factors or criteria as the Committee may determine.
7. STOCK BONUSES.
-------------
7.1 Awards of Stock Bonuses. A Stock Bonus is an award of
-----------------------
Shares (which may consist of Restricted Stock) for services rendered to the
Company or any Parent or Subsidiary of the Company. A Stock Bonus may be awarded
for past services already rendered to the Company, or any Parent or Subsidiary
of the Company pursuant to an Award Agreement (the "STOCK BONUS AGREEMENT") that
will be in such form (which need not be the same for each Participant) as the
Committee will from time to time approve, and will comply with and be subject to
the terms and conditions of this Plan. A Stock Bonus may be awarded upon
satisfaction of such performance goals as are set out in advance in the
Participant's individual Award Agreement (the "PERFORMANCE STOCK BONUS
AGREEMENT") that will be in such form (which need not be the same for each
Participant) as the Committee will from time to time approve, and will comply
with and be subject to the terms and conditions of this Plan. Stock Bonuses may
vary from Participant to Participant and between groups of Participants, and may
be based upon the achievement of the Company, Parent or Subsidiary and/or
individual performance factors or upon such other criteria as the Committee may
determine.
7.2 Terms of Stock Bonuses. The Committee will determine the
----------------------
number of Shares to be awarded to the Participant and whether such Shares will
be Restricted Stock. If the Stock Bonus is being earned upon the satisfaction
of performance goals pursuant to a Performance Stock Bonus Agreement, then the
Committee will determine: (a) the nature, length and starting date of any
period during which performance is to be measured (the "PERFORMANCE PERIOD") for
each Stock Bonus; (b) the performance goals and criteria to be used to measure
the performance, if any; (c) the number of Shares that may be awarded to the
Participant; and (d) the extent to which such Stock Bonuses have been earned.
Performance Periods may overlap and Participants may participate simultaneously
with respect to Stock Bonuses that are subject to different Performance Periods
and different performance goals and other criteria. The number of Shares may be
fixed or may vary in accordance with such performance goals and criteria as may
be determined by the Committee. The Committee may adjust the performance goals
applicable to the Stock Bonuses to take into account changes in law and
accounting or tax rules and to make such adjustments as the Committee deems
necessary or appropriate to reflect the impact of extraordinary or unusual
items, events or circumstances to avoid windfalls or hardships.
7.3 Form of Payment. The earned portion of a Stock Bonus may
---------------
be paid currently or on a deferred basis with such interest or dividend
equivalent, if any, as the Committee may determine. Payment may be made in the
form of cash, whole Shares, including Restricted Stock, or a combination
thereof, either in a lump sum payment or in installments, all as the Committee
will determine.
7.4 Termination During Performance Period. If a Participant
-------------------------------------
is Terminated during a Performance Period for any reason, then such Participant
will be entitled to payment (whether in Shares, cash or otherwise) with respect
to the Stock Bonus only to the extent earned as of the date of Termination in
accordance with the Performance Stock Bonus Agreement, unless the Committee will
determine otherwise.
8. PAYMENT FOR SHARE PURCHASES.
---------------------------
8.1 Payment. Payment for Shares purchased pursuant to this
-------
Plan may be made in cash (by check) or, where expressly approved for the
Participant by the Committee and where permitted by law:
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Isonics Corporation
1996 Executives' Equity Incentive Plan
(a) by cancellation of indebtedness of the Company to the Participant;
(b) by surrender of shares that either: (1) have been owned by
Participant for more than six (6) months and have been paid for
within the meaning of SEC Rule 144 (and, if such shares were
purchased from the Company by use of a promissory note, such note
has been fully paid with respect to such shares); or (2) were
obtained by Participant in the public market;
(c) by tender of a full recourse promissory note having such terms as
may be approved by the Committee and bearing interest at a rate
sufficient to avoid imputation of income under Sections 483 and
1274 of the Code; provided, however, that Participants who are not
-------- -------
employees or directors of the Company will not be entitled to
purchase Shares with a promissory note unless the note is
adequately secured by collateral other than the Shares;
(d) by waiver of compensation due or accrued to the Participant for
services rendered;
(e) with respect only to purchases upon exercise of an Option, and
provided that a public market for the Company's stock exists:
(1) through a "same day sale" commitment from the Participant and
a broker-dealer that is a member of the National Association
of Securities Dealers (an "NASD DEALER") whereby the
Participant irrevocably elects to exercise the Option and to
sell a portion of the Shares so purchased to pay for the
Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise
Price directly to the Company; or
(2) through a "margin" commitment from the Participant and a NASD
Dealer whereby the Participant irrevocably elects to exercise
the Option and to pledge the Shares so purchased to the NASD
Dealer in a margin account as security for a loan from the
NASD Dealer in the amount of the Exercise Price, and whereby
the NASD Dealer irrevocably commits upon receipt of such
Shares to forward the Exercise Price directly to the Company;
or
(f) by any combination of the foregoing.
8.2 Loan Guarantees. The Committee may help the Participant
---------------
pay for Shares purchased under this Plan by authorizing a guarantee by the
Company of a third-party loan to the Participant.
9. WITHHOLDING TAXES.
-----------------
9.1 Withholding Generally. Whenever Shares are to be issued
---------------------
in satisfaction of Awards granted under this Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares. Whenever, under this Plan, payments
in satisfaction of Awards are to be made in cash, such payment will be net of an
amount sufficient to satisfy federal, state, and local withholding tax
requirements.
9.2 Stock Withholding. When, under applicable tax laws, a
-----------------
Participant incurs tax liability in connection with the exercise or vesting of
any Award that is subject to tax withholding and the Participant is obligated to
pay the Company the amount required to be withheld, the Committee may in its
sole discretion allow the Participant to satisfy the minimum withholding tax
obligation by electing to have the Company withhold from the Shares to be issued
that number of Shares having a Fair Market Value equal to the minimum amount
required to be withheld, determined on the date that the amount of tax to be
withheld is to be determined (the "TAX DATE"). All elections by a Participant
to have Shares withheld for this purpose will be made in accordance with the
requirements established by the Committee and be in writing in a form acceptable
to the Committee
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Isonics Corporation
1996 Executives' Equity Incentive Plan
10. PRIVILEGES OF STOCK OWNERSHIP.
-----------------------------
10.1 Voting and Dividends. No Participant will have any of the
--------------------
rights of a shareholder with respect to any Shares until the Shares are issued
to the Participant. After Shares are issued to the Participant, the Participant
will be a shareholder and have all the rights of a shareholder with respect to
such Shares, including the right to vote and receive all dividends or other
distributions made or paid with respect to such Shares; provided, that if such
--------
Shares are Restricted Stock, then any new, additional or different securities
the Participant may become entitled to receive with respect to such Shares by
virtue of a stock dividend, stock split or any other change in the corporate or
capital structure of the Company will be subject to the same restrictions as the
Restricted Stock; provided, further, that the Participant will have no right to
-------- -------
retain such stock dividends or stock distributions with respect to Shares that
are repurchased at the Participant's original Purchase Price pursuant to Section
12.
10.2 Financial Statements. The Company will provide financial
--------------------
statements to each Participant prior to such Participant's purchase of Shares
under this Plan, and to each Participant annually during the period such
Participant has Awards outstanding; provided, however, the Company will not be
-------- -------
required to provide such financial statements to Participants whose services in
connection with the Company assure them access to equivalent information.
11. TRANSFERABILITY. Awards granted under this Plan, and any interest
---------------
therein, will not be transferable or assignable by Participant, and may not be
made subject to execution, attachment or similar process, otherwise than by will
or by the laws of descent and distribution. During the lifetime of the
Participant an Award will be exercisable only by the Participant, and any
elections with respect to an Award may be made only by the Participant.
12. RESTRICTIONS ON SHARES. At the discretion of the Committee, the
----------------------
Company may reserve to itself and/or its assignee(s) in the Award Agreement a
right to repurchase a portion of or all Unvested Shares held by a Participant
following such Participant's Termination at any time within ninety (90) days
after the later of Participant's Termination Date and the date Participant
purchases Shares under this Plan, for cash and/or cancellation of purchase money
indebtedness, at the Participant's Exercise Price or Purchase Price, as the case
may be.
13. CERTIFICATES. All certificates for Shares or other securities
------------
delivered under this Plan will be subject to such stock transfer orders, legends
and other restrictions as the Committee may deem necessary or advisable,
including restrictions under any applicable federal, state or foreign securities
law, or any rules, regulations and other requirements of the SEC or any stock
exchange or automated quotation system upon which the Shares may be listed or
quoted.
14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
------------------------
Participant's Shares, the Committee may require the Participant to deposit all
certificates representing Shares, together with stock powers or other
instruments of transfer approved by the Committee, appropriately endorsed in
blank, with the Company or an agent designated by the Company to hold in escrow
until such restrictions have lapsed or terminated, and the Committee may cause a
legend or legends referencing such restrictions to be placed on the
certificates. Any Participant who is permitted to execute a promissory note as
partial or full consideration for the purchase of Shares under this Plan will be
required to pledge and deposit with the Company all or part of the Shares so
purchased as collateral to secure the payment of Participant's obligation to the
Company under the promissory note; provided, however, that the Committee may
-------- -------
require or accept other or additional forms of collateral to secure the payment
of such obligation and, in any event, the Company will have full recourse
against the Participant under the promissory note notwithstanding any pledge of
the Participant's Shares or other collateral. In connection with any pledge of
the Shares, Participant will be required to execute and deliver a written pledge
agreement in such form as the Committee will from time to time approve. The
Shares purchased with the promissory note may be released from the pledge on a
pro rata basis as the promissory note is paid.
15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or
-----------------------------
from time to time, authorize the Company, with the consent of the respective
Participants, to issue new Awards in
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<PAGE>
Isonics Corporation
1996 Executives' Equity Incentive Plan
exchange for the surrender and cancellation of any or all outstanding Awards.
The Committee may at any time buy from a Participant an Award previously granted
with payment in cash, Shares (including Restricted Stock) or other
consideration, based on such terms and conditions as the Committee and the
Participant may agree.
16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not
----------------------------------------------
be effective unless such Award is in compliance with all applicable federal and
state securities laws, rules and regulations of any governmental body, and the
requirements of any stock exchange or automated quotation system upon which the
Shares may then be listed or quoted, as they are in effect on the date of grant
of the Award and also on the date of exercise or other issuance.
Notwithstanding any other provision in this Plan, the Company will have no
obligation to issue or deliver certificates for Shares under this Plan prior to:
(a) obtaining any approvals from governmental agencies that the Company
determines are necessary or advisable; and/or (b) completion of any registration
or other qualification of such Shares under any state or federal law or ruling
of any governmental body that the Company determines to be necessary or
advisable. The Company will be under no obligation to register the Shares with
the SEC or to effect compliance with the registration, qualification or listing
requirements of any state securities laws, stock exchange or automated quotation
system, and the Company will have no liability for any inability or failure to
do so.
17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award
-----------------------
granted under this Plan will confer or be deemed to confer on any Participant
any right to continue in the employ of, or to continue any other relationship
with, the Company or any Parent or Subsidiary of the Company or limit in any way
the right of the Company or any Parent or Subsidiary of the Company to terminate
Participant's employment or other relationship at any time, with or without
cause.
18. CORPORATE TRANSACTIONS.
----------------------
18.1 Assumption or Replacement of Awards by Successor. In the
------------------------------------------------
event of (a) a dissolution or liquidation of the Company, (b) a merger or
consolidation in which the Company is not the surviving corporation (other than
a merger or consolidation with a wholly-owned subsidiary, a reincorporation of
the Company in a different jurisdiction, or other transaction in which there is
no substantial change in the shareholders of the Company or their relative stock
holdings and the Awards granted under this Plan are assumed, converted or
replaced by the successor corporation, which assumption will be binding on all
Participants), (c) a merger in which the Company is the surviving corporation
but after which the shareholders of the Company immediately prior to such merger
(other than any shareholder that merges, or which owns or controls another
corporation that merges, with the Company in such merger) cease to own their
shares or other equity interest in the Company, or (d) the sale of substantially
all of the assets of the Company, the vesting of all options granted pursuant to
this Plan will accelerate and the options will become exercisable in full prior
to the consummation of such event at such times and on such conditions as the
Committee determines, and if such options are not exercised prior to the
consummation of the corporate transaction, they shall terminate in accordance
with the provisions of this Plan.
18.2 Other Treatment of Awards. Subject to any greater rights
-------------------------
granted to Participants under the foregoing provisions of this Section 18, in
the event of the occurrence of any transaction described in Section 18.1, any
outstanding Awards will be treated as provided in the applicable agreement or
plan of merger, consolidation, dissolution, liquidation, sale of assets or other
"corporate transaction."
18.3 Assumption of Awards by the Company. The Company, from
-----------------------------------
time to time, also may substitute or assume outstanding awards granted by
another company, whether in connection with an acquisition of such other company
or otherwise, by either; (a) granting an Award under this Plan in substitution
of such other company's award; or (b) assuming such award as if it had been
granted under this Plan if the terms of such assumed award could be applied to
an Award granted under this Plan. Such substitution or assumption will be
permissible if the holder of the substituted or assumed award would have been
eligible to be granted an Award under this Plan if the other company had applied
the rules of this Plan to such grant. In the event the Company assumes an award
granted by another company, the terms and conditions of such award will remain
unchanged (except that the exercise price and the number and nature of Shares
------
issuable upon exercise of any such option will be adjusted appropriately
pursuant to Section 424(a) of the Code). In the event the Company elects to
grant a new Option rather than assuming an existing option, such new Option may
be granted with a similarly adjusted Exercise Price.
-8-
<PAGE>
Isonics Corporation
1996 Executives' Equity Incentive Plan
19. ADOPTION AND SHAREHOLDER APPROVAL. This Plan will become
---------------------------------
effective on the date on which the registration statement filed by the Company
with the SEC under the Securities Act registering the initial public offering of
the Company's Common Stock is declared effective by the SEC (the "EFFECTIVE
DATE"); provided, however, that if the Effective Date does not occur on or
-------- -------
before December 31, 1997, this Plan will terminate having never become
effective. This Plan shall be approved by the shareholders of the Company
(excluding Shares issued pursuant to this Plan), consistent with applicable
laws, within twelve (12) months before or after the date this Plan is adopted by
the Board. Upon the Effective Date, the Board may grant Awards pursuant to this
Plan; provided, however, that: (a) no Option may be exercised prior to initial
-------- -------
shareholder approval of this Plan; (b) no Option granted pursuant to an increase
in the number of Shares subject to this Plan approved by the Board will be
exercised prior to the time such increase has been approved by the shareholders
of the Company; and (c) in the event that shareholder approval of such increase
is not obtained within the time period provided herein, all Awards granted
hereunder will be canceled, any Shares issued pursuant to any Award will be
canceled, and any purchase of Shares hereunder will be rescinded. So long as
the Company is subject to Section 16(b) of the Exchange Act, the Company will
comply with the requirements of Rule 16b-3 (or its successor), as amended, with
respect to shareholder approval.
20. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided
--------------------------
herein, this Plan will terminate ten (10) years from the date this Plan is
adopted by the Board or, if earlier, the date of shareholder approval. This
Plan and all agreements thereunder shall be governed by and construed in
accordance with the laws of the State of California.
21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time
--------------------------------
terminate or amend this Plan in any respect, including without limitation
amendment of any form of Award Agreement or instrument to be executed pursuant
to this Plan; provided, however, that the Board will not, without the approval
-------- -------
of the shareholders of the Company, amend this Plan in any manner that requires
such shareholder approval pursuant to the Code or the regulations promulgated
thereunder as such provisions apply to ISO plans or (if the Company is subject
to the Exchange Act or Section 16(b) of the Exchange Act) pursuant to the
Exchange Act or Rule 16b-3 (or its successor), as amended, thereunder,
respectively.
22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by
--------------------------
the Board, the submission of this Plan to the shareholders of the Company for
approval, nor any provision of this Plan will be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and bonuses otherwise than under this Plan, and such
arrangements may be either generally applicable or applicable only in specific
cases.
23. DEFINITIONS. As used in this Plan, the following terms will have
-----------
the following meanings:
"AWARD" means any award under this Plan, including any Option,
Restricted Stock or Stock Bonus.
"AWARD AGREEMENT" means, with respect to each Award, the signed
written agreement between the Company and the Participant setting forth the
terms and conditions of the Award.
"BOARD" means the Board of Directors of the Company.
"CAUSE" means Termination because of (i) any willful material
violation by the Participant of any law or regulation applicable to the business
of the Company or a Parent or Subsidiary of the Company, the Participant's
conviction for, or guilty plea to, a felony or a crime involving moral
turpitude, any willful perpetration by the Participant of a common law fraud or
any unlawful use by the Participant of drugs or other controlled substances,
(ii) the Participant's commission of an act of personal dishonesty which
involves personal profit in connection with the Company or any other entity
having a business relationship with the Company, (iii) any material breach by
the Participant of any provision of any agreement or understanding between the
Company and the Participant regarding the terms of the Participant's service as
an employee, director, consultant, independent contractor or adviser to the
Company or a Parent or Subsidiary of the Company, including without limitation,
the willful and continued failure or refusal of the Participant to perform the
material duties required of such Participant as an employee, director,
consultant, independent
-9-
<PAGE>
Isonics Corporation
1996 Executives' Equity Incentive Plan
contractor or adviser of the Company or a Parent or Subsidiary of the Company,
other than as a result of being Disabled, or a breach of any applicable
invention assignment and confidentiality agreement or similar agreement between
the Company and the Participant, (iv) Participant's disregard of the policies of
the Company so as to cause loss, damage or injury to the property, reputation or
employees of the Company or a Parent or Subsidiary of the Company, or (v) any
other misconduct by the Participant which is materially injurious to the
financial condition or business reputation of, or is otherwise materially
injurious to, the Company or a Parent or Subsidiary of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the committee appointed by the Board to
administer this Plan, or if no such committee is appointed, the Board.
"COMPANY" means Isonics Corporation or any successor corporation.
"DISABILITY" means a disability, whether temporary or permanent,
partial or total, within the meaning of Section 22(e)(3) of the Code, as
determined by the Committee.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"EXERCISE PRICE" means the price at which a holder of an Option
may purchase the Shares issuable upon exercise of the Option.
"FAIR MARKET VALUE" means, as of any date, the value of a share of
the Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National Market,
its closing price on the Nasdaq National Market on the date of
determination as reported in The Wall Street Journal;
-----------------------
(b) if such Common Stock is publicly traded and is then listed on a
national securities exchange, its closing price on the date of
determination on the principal national securities exchange on
which the Common Stock is listed or admitted to trading as
reported in The Wall Street Journal;
-----------------------
(c) if such Common Stock is publicly traded but is not quoted on the
Nasdaq National Market nor listed or admitted to trading on a
national securities exchange, the average of the closing bid and
asked prices on the date of determination as reported in The Wall
--------
Street Journal;
--------------
(d) in the case of an Award made on the Effective Date, the price per
share at which shares of the Company's Common Stock are initially
offered for sale to the public by the Company's underwriters in
the initial public offering of the Company's Common Stock pursuant
to a registration statement filed with the SEC under the
Securities Act; or
(e) if none of the foregoing is applicable, by the Committee in good
faith.
"INSIDER" means an officer or director of the Company or any other
person whose transactions in the Company's Common Stock are subject to Section
16 of the Exchange Act.
"OUTSIDE DIRECTOR" means any director who is not; (a) a current
employee of the Company or any Parent or Subsidiary of the Company; (b) a former
employee of the Company or any Parent or Subsidiary of the Company who is
receiving compensation for prior services (other than benefits under a tax-
qualified pension
-10-
<PAGE>
Isonics Corporation
1996 Executives' Equity Incentive Plan
plan); (c) a current or former officer of the Company or any Parent or
Subsidiary of the Company; or (d) currently receiving compensation for personal
services in any capacity, other than as a director, from the Company or any
Parent or Subsidiary of the Company; provided, however, that at such time as the
-------- -------
term "Outside Director", as used in Section 162(m) of the Code is defined in
regulations promulgated under Section 162(m) of the Code, "Outside Director"
will have the meaning set forth in such regulations, as amended from time to
time and as interpreted by the Internal Revenue Service.
"OPTION" means an award of an option to purchase Shares pursuant
to Section 5.
"PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if each of such
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
"PARTICIPANT" means a person who receives an Award under this
Plan.
"PLAN" means this Isonics Corporation 1996 Equity Incentive Plan,
as amended from time to time.
"RESTRICTED STOCK AWARD" means an award of Shares pursuant to
Section 6.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHARES" means shares of the Company's Common Stock reserved for
issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any
successor security.
"STOCK BONUS" means an award of Shares, or cash in lieu of Shares,
pursuant to Section 7.
"SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
"TERMINATION" or "TERMINATED" means, for purposes of this Plan
with respect to a Participant, that the Participant has for any reason ceased to
provide services as an employee, officer, director, consultant, independent
contractor, or advisor to the Company or a Parent or Subsidiary of the Company.
An employee will not be deemed to have ceased to provide services in the case of
(i) sick leave, (ii) military leave, or (iii) any other leave of absence
approved by the Committee, provided, that such leave is for a period of not more
than 90 days, unless reemployment upon the expiration of such leave is
guaranteed by contract or statute or unless provided otherwise pursuant to
formal policy adopted from time to time by the Company and issued and
promulgated to employees in writing. In the case of any employee on an approved
leave of absence, the Committee may make such provisions respecting suspension
of vesting of the Award while on leave from the employ of the Company or a
Subsidiary as it may deem appropriate, except that in no event may an Option be
exercised after the expiration of the term set forth in the Option agreement.
The Committee will have sole discretion to determine whether a Participant has
ceased to provide services and the effective date on which the Participant
ceased to provide services (the "TERMINATION DATE").
"UNVESTED SHARES" means "Unvested Shares" as defined in the Award
Agreement.
"VESTED SHARES" means "Vested Shares" as defined in the Award
Agreement.
-11-
<PAGE>
EXHIBIT 10.04
ISONICS CORPORATION
1996 EQUITY INCENTIVE PLAN
As Adopted _____________, 1996
1. PURPOSE. The purpose of this Plan is to provide incentives to
-------
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company, its Parent and
Subsidiaries, by offering them an opportunity to participate in the Company's
future performance through awards of Options, Restricted Stock and Stock
Bonuses. Capitalized terms not defined in the text are defined in Section 23.
2. SHARES SUBJECT TO THE PLAN.
--------------------------
2.1 Number of Shares Available. Subject to Sections 2.2 and
--------------------------
18, the total number of Shares reserved and available for grant and issuance
pursuant to this Plan will be 50,000 Shares. Subject to Sections 2.2 and 18,
Shares that: (a) are subject to issuance upon exercise of an Option but cease to
be subject to such Option for any reason other than exercise of such Option; (b)
are subject to an Award granted hereunder but are forfeited or are repurchased
by the Company at the original issue price; or (c) are subject to an Award that
otherwise terminates without Shares being issued will again be available for
grant and issuance in connection with future Awards under this Plan. At all
times the Company shall reserve and keep available a sufficient number of Shares
as shall be required to satisfy the requirements of all outstanding Options
granted under this Plan and all other outstanding but unvested Awards granted
under this Plan.
2.2 Adjustment of Shares. In the event that the number of
--------------------
outstanding Shares is changed by a stock dividend, recapitalization, stock
split, reverse stock split, subdivision, combination, reclassification or
similar change in the capital structure of the Company without consideration,
then (a) the number of Shares reserved for issuance under this Plan, (b) the
Exercise Prices of and number of Shares subject to outstanding Options, and (c)
the number of Shares subject to other outstanding Awards will be proportionately
adjusted, subject to any required action by the Board or the shareholders of the
Company and compliance with applicable securities laws; provided, however, that
-------- -------
fractions of a Share will not be issued but will either be replaced by a cash
payment equal to the Fair Market Value of such fraction of a Share or will be
rounded up to the nearest whole Share, as determined by the Committee.
3. ELIGIBILITY. ISO (as defined in Section 5 below) may be granted
-----------
only to employees (including officers and directors who are also employees) of
the Company or of a Parent or Subsidiary of the Company. All other Awards may
be granted to employees, officers, directors, consultants, independent
contractors and advisors of the Company or any Parent or Subsidiary of the
Company; provided such consultants, contractors and advisors render bona fide
--------
services not in connection with the offer and sale of securities in a capital-
raising transaction. No person will be eligible to receive more than 50,000
Shares in any calendar year under this Plan pursuant to the grant of Awards
hereunder, other than new employees of the Company or of a Parent or Subsidiary
of the Company (including new employees who are also officers and directors of
the Company or any Parent or Subsidiary of the Company) who are eligible to
receive up to a maximum of 30,000 Shares in the calendar year in which they
commence their employment. A person may be granted more than one Award under
this Plan.
<PAGE>
Isonics Corporation
1996 Equity Incentive Plan
4. ADMINISTRATION.
--------------
4.1 Committee Authority. This Plan will be administered by
-------------------
the Committee or by the Board acting as the Committee. Subject to the general
purposes, terms and conditions of this Plan, and to the direction of the Board,
the Committee will have full power to implement and carry out this Plan. Without
limitation, the Committee will have the authority to:
(a) construe and interpret this Plan, any Award Agreement and any
other agreement or document executed pursuant to this Plan;
(b) prescribe, amend and rescind rules and regulations relating to
this Plan;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject to
Awards;
(f) determine whether Awards will be granted singly, in combination
with, in tandem with, in replacement of, or as alternatives to,
other Awards under this Plan or any other incentive or
compensation plan of the Company or any Parent or Subsidiary of
the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission or reconcile any
inconsistency in this Plan, any Award or any Award Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the
administration of this Plan.
4.2 Committee Discretion. Any determination made by the
--------------------
Committee with respect to any Award will be made in its sole discretion at the
time of grant of the Award or, unless in contravention of any express term of
this Plan or Award, at any later time, and such determination will be final and
binding on the Company and on all persons having an interest in any Award under
this Plan. The Committee may delegate to one or more officers of the Company
the authority to grant an Award under this Plan to Participants who are not
Insiders of the Company.
4.3 Committee Members. If two or more members of the Board
-----------------
are Outside Directors, the Committee will be comprised of at least two (2)
members of the Board, all of whom are Outside Directors and who satisfy the
requirements under the Exchange Act for administering this Plan.
5. OPTIONS. The Committee may grant Options to eligible persons and
-------
will determine whether such Options will be Incentive Stock Options within the
meaning of the Code ("ISO") or Nonqualified Stock Options ("NQSOS"), the number
of Shares subject to the Option, the Exercise Price of the Option, the period
during which the Option may be exercised, and all other terms and conditions of
the Option, subject to the following:
5.1 Form of Option Grant. Each Option granted under this Plan
--------------------
will be evidenced by an Award Agreement which will expressly identify the Option
as an ISO or an NQSO ("STOCK OPTION AGREEMENT"), and will be in such form and
contain such provisions (which need not be the same for each Participant) as the
Committee may from time to time approve, and which will comply with and be
subject to the terms and conditions of this Plan.
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Isonics Corporation
1996 Equity Incentive Plan
5.2 Date of Grant. The date of grant of an Option will be the
-------------
date on which the Committee makes the determination to grant such Option, unless
otherwise specified by the Committee. The Stock Option Agreement and a copy of
this Plan will be delivered to the Participant within a reasonable time after
the granting of the Option.
5.3 Exercise Period. Options may be exercisable within the
---------------
times or upon the events determined by the Committee as set forth in the Stock
Option Agreement governing such Option; provided, however, that no Option will
-------- -------
be exercisable after the expiration of ten (10) years from the date the Option
is granted; and provided further that no ISO granted to a person who directly or
-------- -------
by attribution owns more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or of any Parent or Subsidiary of
the Company ("TEN PERCENT SHAREHOLDER") will be exercisable after the expiration
of five (5) years from the date the ISO is granted. The Committee also may
provide for Options to become exercisable at one time or from time to time,
periodically or otherwise, in such number of Shares or percentage of Shares as
the Committee determines.
5.4 Exercise Price. The Exercise Price of an Option will be
--------------
determined by the Committee when the Option is granted and may be not less than
85% of the Fair Market Value of the Shares on the date of grant; provided that:
(i) the Exercise Price of an ISO will be not less than 100% of the Fair Market
Value of the Shares on the date of grant; and (ii) the Exercise Price of any
Option granted to a Ten Percent Shareholder will not be less than 110% of the
Fair Market Value of the Shares on the date of grant. Payment for the Shares
purchased may be made in accordance with Section 8 of this Plan.
5.5 Method of Exercise. Options may be exercised only by
------------------
delivery to the Company of a written stock option exercise agreement (the
"EXERCISE AGREEMENT") in a form approved by the Committee (which need not be the
same for each Participant), stating the number of Shares being purchased, the
restrictions imposed on the Shares purchased under such Exercise Agreement, if
any, and such representations and agreements regarding Participant's investment
intent and access to information and other matters, if any, as may be required
or desirable by the Company to comply with applicable securities laws, together
with payment in full of the Exercise Price for the number of Shares being
purchased.
5.6 Termination. Notwithstanding the exercise periods set
-----------
forth in the Stock Option Agreement, exercise of an Option will always be
subject to the following:
(a) If the Participant is Terminated for any reason except death or
Disability, then the Participant may exercise such Participant's
Options only to the extent that such Options would have been
exercisable upon the Termination Date no later than three (3)
months after the Termination Date (or such shorter or longer time
period not exceeding five (5) years as may be determined by the
Committee, with any exercise beyond three (3) months after the
Termination Date deemed to be an NQSO), but in any event, no later
than the expiration date of the Options.
(b) If the Participant is Terminated because of Participant's death or
Disability (or the Participant dies within three (3) months after
a Termination other than because of Participant's death or
Disability), then Participant's Options may be exercised only to
the extent that such Options would have been exercisable by
Participant on the Termination Date and must be exercised by
Participant (or Participant's legal representative or authorized
assignee) no later than twelve (12) months after the Termination
Date (or such shorter or longer time period not exceeding five (5)
years as may be determined by the Committee, with any such
exercise beyond (a) three (3) months after the Termination Date
when the Termination is for any reason other than the
Participant's death or disability, within the meaning of Section
22(e)(3) of the Code, or (b) twelve (12) months after the
Termination Date when the Termination is for Participant's death
or disability, within the meaning of Section 22(e)(3) of the Code,
deemed to be an NQSO), but in any event no later than the
expiration date of the Options.
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Isonics Corporation
1996 Equity Incentive Plan
(c) If the Participant is terminated for Cause, then Participant's
options shall expire on such Participant's Termination Date, or at
such later time or on such conditions as determined by the
Committee.
5.7 Limitations on Exercise. The Committee may specify a
-----------------------
reasonable minimum number of Shares that may be purchased on any exercise of an
Option, provided that such minimum number will not prevent Participant from
exercising the Option for the full number of Shares for which it is then
exercisable.
5.8 Limitations on ISO. The aggregate Fair Market Value
------------------
(determined as of the date of grant) of Shares with respect to which ISO are
exercisable for the first time by a Participant during any calendar year (under
this Plan or under any other incentive stock option plan of the Company, Parent
or Subsidiary of the Company) shall not exceed $100,000. If the Fair Market
Value of Shares on the date of grant with respect to which ISO are exercisable
for the first time by a Participant during any calendar year would exceed
$100,000, then the Options for the first $100,000 worth of Shares to become
exercisable in such calendar year will be ISO and the Options for the amount in
excess of $100,000 that become exercisable in that calendar year will be NQSOs.
In the event that the Code or the regulations promulgated thereunder are amended
after the Effective Date of this Plan to provide for a different limit on the
Fair Market Value of Shares permitted to be subject to ISO, such different limit
will be automatically incorporated herein and will apply to any Options granted
after the effective date of such amendment.
5.9 Modification, Extension or Renewal. The Committee may
----------------------------------
modify, extend or renew outstanding Options and authorize the grant of new
Options in substitution therefor, provided that any such action may not, without
the written consent of a Participant, impair any of such Participant's rights
under any Option previously granted. Any outstanding ISO that is modified,
extended, renewed or otherwise altered will be treated in accordance with
Section 424(h) of the Code. The Committee may reduce the Exercise Price of
outstanding Options without the consent of Participants affected by a written
notice to them; provided, however, that the Exercise Price may not be reduced
-------- -------
below the minimum Exercise Price that would be permitted under Section 5.4 of
this Plan for Options granted on the date the action is taken to reduce the
Exercise Price.
5.10 No Disqualification. Notwithstanding any other provision
-------------------
in this Plan, no term of this Plan relating to ISO will be interpreted, amended
or altered, nor will any discretion or authority granted under this Plan be
exercised, so as to disqualify this Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the
----------------
Company to sell to an eligible person Shares that are subject to restrictions.
The Committee will determine to whom an offer will be made, the number of Shares
the person may purchase, the price to be paid (the "PURCHASE PRICE"), the
restrictions to which the Shares will be subject, and all other terms and
conditions of the Restricted Stock Award, subject to the following:
6.1 Form of Restricted Stock Award. All purchases under a
------------------------------
Restricted Stock Award made pursuant to this Plan will be evidenced by an Award
Agreement ("RESTRICTED STOCK PURCHASE AGREEMENT") that will be in such form
(which need not be the same for each Participant) as the Committee will from
time to time approve, and will comply with and be subject to the terms and
conditions of this Plan. The offer of Restricted Stock will be accepted by the
Participant's execution and delivery of the Restricted Stock Purchase Agreement
and full payment for the Shares to the Company within thirty (30) days from the
date the Restricted Stock Purchase Agreement is delivered to the person. If
such person does not execute and deliver the Restricted Stock Purchase Agreement
along with full payment for the Shares to the Company within thirty (30) days,
then the offer will terminate, unless otherwise determined by the Committee.
6.2 Purchase Price. The Purchase Price of Shares sold
--------------
pursuant to a Restricted Stock Award will be determined by the Committee and
will be at least 85% of the Fair Market Value of the Shares on the date the
Restricted Stock Award is granted, except in the case of a sale to a Ten Percent
Shareholder, in which case the Purchase Price will be 100% of the Fair Market
Value. Payment of the Purchase Price may be made in accordance with Section 8 of
this Plan.
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Isonics Corporation
1996 Equity Incentive Plan
6.3 Restrictions. Restricted Stock Awards will be subject to
------------
such restrictions (if any) as the Committee may impose. The Committee may
provide for the lapse of such restrictions in installments and may accelerate or
waive such restrictions, in whole or part, based on length of service,
performance or such other factors or criteria as the Committee may determine.
7. STOCK BONUSES.
-------------
7.1 Awards of Stock Bonuses. A Stock Bonus is an award of
-----------------------
Shares (which may consist of Restricted Stock) for services rendered to the
Company or any Parent or Subsidiary of the Company. A Stock Bonus may be awarded
for past services already rendered to the Company, or any Parent or Subsidiary
of the Company pursuant to an Award Agreement (the "STOCK BONUS AGREEMENT") that
will be in such form (which need not be the same for each Participant) as the
Committee will from time to time approve, and will comply with and be subject to
the terms and conditions of this Plan. A Stock Bonus may be awarded upon
satisfaction of such performance goals as are set out in advance in the
Participant's individual Award Agreement (the "PERFORMANCE STOCK BONUS
AGREEMENT") that will be in such form (which need not be the same for each
Participant) as the Committee will from time to time approve, and will comply
with and be subject to the terms and conditions of this Plan. Stock Bonuses may
vary from Participant to Participant and between groups of Participants, and may
be based upon the achievement of the Company, Parent or Subsidiary and/or
individual performance factors or upon such other criteria as the Committee may
determine.
7.2 Terms of Stock Bonuses. The Committee will determine the
----------------------
number of Shares to be awarded to the Participant and whether such Shares will
be Restricted Stock. If the Stock Bonus is being earned upon the satisfaction
of performance goals pursuant to a Performance Stock Bonus Agreement, then the
Committee will determine: (a) the nature, length and starting date of any
period during which performance is to be measured (the "PERFORMANCE PERIOD") for
each Stock Bonus; (b) the performance goals and criteria to be used to measure
the performance, if any; (c) the number of Shares that may be awarded to the
Participant; and (d) the extent to which such Stock Bonuses have been earned.
Performance Periods may overlap and Participants may participate simultaneously
with respect to Stock Bonuses that are subject to different Performance Periods
and different performance goals and other criteria. The number of Shares may be
fixed or may vary in accordance with such performance goals and criteria as may
be determined by the Committee. The Committee may adjust the performance goals
applicable to the Stock Bonuses to take into account changes in law and
accounting or tax rules and to make such adjustments as the Committee deems
necessary or appropriate to reflect the impact of extraordinary or unusual
items, events or circumstances to avoid windfalls or hardships.
7.3 Form of Payment. The earned portion of a Stock Bonus may
---------------
be paid currently or on a deferred basis with such interest or dividend
equivalent, if any, as the Committee may determine. Payment may be made in the
form of cash, whole Shares, including Restricted Stock, or a combination
thereof, either in a lump sum payment or in installments, all as the Committee
will determine.
7.4 Termination During Performance Period. If a Participant
-------------------------------------
is Terminated during a Performance Period for any reason, then such Participant
will be entitled to payment (whether in Shares, cash or otherwise) with respect
to the Stock Bonus only to the extent earned as of the date of Termination in
accordance with the Performance Stock Bonus Agreement, unless the Committee
determines otherwise.
8. PAYMENT FOR SHARE PURCHASES.
---------------------------
8.1 Payment. Payment for Shares purchased pursuant to this
-------
Plan may be made in cash (by check) or, where expressly approved for the
Participant by the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the Participant;
(b) by surrender of shares that either: (1) have been owned by
Participant for more than six (6) months and have been paid for
within the meaning of SEC Rule 144 (and, if such shares
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Isonics Corporation
1996 Equity Incentive Plan
were purchased from the Company by use of a promissory note, such
note has been fully paid with respect to such shares); or (2) were
obtained by Participant in the public market;
(c) by tender of a full recourse promissory note having such terms as
may be approved by the Committee and bearing interest at a rate
sufficient to avoid imputation of income under Sections 483 and
1274 of the Code; provided, however, that Participants who are not
-------- -------
employees or directors of the Company will not be entitled to
purchase Shares with a promissory note unless the note is
adequately secured by collateral other than the Shares;
(d) by waiver of compensation due or accrued to the Participant for
services rendered;
(e) with respect only to purchases upon exercise of an Option, and
provided that a public market for the Company's stock exists:
(1) through a "same day sale" commitment from the Participant and
a broker-dealer that is a member of the National Association
of Securities Dealers (an "NASD DEALER") whereby the
Participant irrevocably elects to exercise the Option and to
sell a portion of the Shares so purchased to pay for the
Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise
Price directly to the Company; or
(2) through a "margin" commitment from the Participant and a NASD
Dealer whereby the Participant irrevocably elects to exercise
the Option and to pledge the Shares so purchased to the NASD
Dealer in a margin account as security for a loan from the
NASD Dealer in the amount of the Exercise Price, and whereby
the NASD Dealer irrevocably commits upon receipt of such
Shares to forward the Exercise Price directly to the Company;
or
(f) by any combination of the foregoing.
8.2 Loan Guarantees. The Committee may help the Participant
---------------
pay for Shares purchased under this Plan by authorizing a guarantee by the
Company of a third-party loan to the Participant.
9. WITHHOLDING TAXES.
-----------------
9.1 Withholding Generally. Whenever Shares are to be issued
---------------------
in satisfaction of Awards granted under this Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares. Whenever, under this Plan, payments
in satisfaction of Awards are to be made in cash, such payment will be net of an
amount sufficient to satisfy federal, state, and local withholding tax
requirements.
9.2 Stock Withholding. When, under applicable tax laws, a
-----------------
Participant incurs tax liability in connection with the exercise or vesting of
any Award that is subject to tax withholding and the Participant is obligated to
pay the Company the amount required to be withheld, the Committee may in its
sole discretion allow the Participant to satisfy the minimum withholding tax
obligation by electing to have the Company withhold from the Shares to be issued
that number of Shares having a Fair Market Value equal to the minimum amount
required to be withheld, determined on the date that the amount of tax to be
withheld is to be determined. All elections by a Participant to have Shares
withheld for this purpose will be made in accordance with the requirements
established by the Committee and be in writing in a form acceptable to the
Committee
10. PRIVILEGES OF STOCK OWNERSHIP.
-----------------------------
10.1 Voting and Dividends. No Participant will have any of the
--------------------
rights of a shareholder with respect to any Shares until the Shares are issued
to the
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Isonics Corporation
1996 Equity Incentive Plan
Participant. After Shares are issued to the Participant, the Participant
will be a shareholder and have all the rights of a shareholder with respect to
such Shares, including the right to vote and receive all dividends or other
distributions made or paid with respect to such Shares; provided, that if such
--------
Shares are Restricted Stock, then any new, additional or different securities
the Participant may become entitled to receive with respect to such Shares by
virtue of a stock dividend, stock split or any other change in the corporate or
capital structure of the Company will be subject to the same restrictions as the
Restricted Stock; provided, further, that the Participant will have no right to
-------- -------
retain such stock dividends or stock distributions with respect to Shares that
are repurchased at the Participant's original Purchase Price pursuant to Section
12.
10.2 Financial Statements. The Company will provide financial
--------------------
statements to each Participant prior to such Participant's purchase of Shares
under this Plan, and to each Participant annually during the period such
Participant has Awards outstanding; provided, however, the Company will not be
-------- -------
required to provide such financial statements to Participants whose services in
connection with the Company assure them access to equivalent information.
11. TRANSFERABILITY. Awards granted under this Plan, and any interest
---------------
therein, will not be transferable or assignable by Participant, and may not be
made subject to execution, attachment or similar process, otherwise than by will
or by the laws of descent and distribution or as consistent with the specific
Plan and Award Agreement provisions relating thereto. During the lifetime of
the Participant an Award will be exercisable only by the Participant, and any
elections with respect to an Award may be made only by the Participant.
12. RESTRICTIONS ON SHARES. At the discretion of the Committee, the
----------------------
Company may reserve to itself and/or its assignee(s) in the Award Agreement a
right to repurchase Unvested Shares held by a Participant following such
Participant's Termination at any time within ninety (90) days after
Participant's Termination Date for cash and/or cancellation of purchase money
indebtedness, at the Participant's Exercise Price or Purchase Price, as the case
may be, provided, that to the extent the Participant is not an officer, director
--------
or consultant of the Company, such right of repurchase lapses at the rate of at
least twenty percent (20%) per year over five (5) years from: (A) the date of
grant of the Option or (B) in the case of Restricted Stock, the date the
Participant purchases the Shares.
13. CERTIFICATES. All certificates for Shares or other securities
------------
delivered under this Plan will be subject to such stock transfer orders, legends
and other restrictions as the Committee may deem necessary or advisable,
including restrictions under any applicable federal, state or foreign securities
law, or any rules, regulations and other requirements of the SEC or any stock
exchange or automated quotation system upon which the Shares may be listed or
quoted.
14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
------------------------
Participant's Shares, the Committee may require the Participant to deposit all
certificates representing Shares, (other than Shares with respect to which
consideration has been fully paid by the Participant (in forms other than by
promissory notes) and received by the Company), together with stock powers or
other instruments of transfer approved by the Committee, appropriately endorsed
in blank, with the Company or an agent designated by the Company to hold in
escrow until such restrictions have lapsed or terminated, and the Committee may
cause a legend or legends referencing such restrictions to be placed on the
certificates. Any Participant who is permitted to execute a promissory note as
partial or full consideration for the purchase of Shares under this Plan will be
required to pledge and deposit with the Company all or part of the Shares so
purchased as collateral to secure the payment of Participant's obligation to the
Company under the promissory note; provided, however, that the Committee may
-------- -------
require or accept other or additional forms of collateral to secure the payment
of such obligation and, in any event, the Company will have full recourse
against the Participant under the promissory note notwithstanding any pledge of
the Participant's Shares or other collateral. In connection with any pledge of
the Shares, Participant will be required to execute and deliver a written pledge
agreement in such form as the Committee will from time to time approve. The
Shares purchased with the promissory note may be released from the pledge on a
pro rata basis as the promissory note is paid.
15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or
-----------------------------
from time to time, authorize the Company, with the consent of the respective
Participants, to issue new Awards in exchange for the surrender and cancellation
of any or all outstanding Awards. The Committee may at any time buy
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Isonics Corporation
1996 Equity Incentive Plan
from a Participant an Award previously granted with payment in cash, Shares
(including Restricted Stock) or other consideration, based on such terms and
conditions as the Committee and the Participant may agree.
16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not
----------------------------------------------
be effective unless such Award is in compliance with all applicable federal and
state securities laws, rules and regulations of any governmental body, and the
requirements of any stock exchange or automated quotation system upon which the
Shares may then be listed or quoted, as they are in effect on the date of grant
of the Award and also on the date of exercise or other issuance.
Notwithstanding any other provision in this Plan, the Company will have no
obligation to issue or deliver certificates for Shares under this Plan prior to:
(a) obtaining any approvals from governmental agencies that the Company
determines are necessary or advisable; and/or (b) completion of any registration
or other qualification of such Shares under any state or federal law or ruling
of any governmental body that the Company determines to be necessary or
advisable. The Company will be under no obligation to register the Shares with
the SEC or to effect compliance with the registration, qualification or listing
requirements of any state securities laws, stock exchange or automated quotation
system, and the Company will have no liability for any inability or failure to
do so.
17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award
-----------------------
granted under this Plan will confer or be deemed to confer on any Participant
any right to continue in the employ of, or to continue any other relationship
with, the Company or any Parent or Subsidiary of the Company or limit in any way
the right of the Company or any Parent or Subsidiary of the Company to terminate
Participant's employment or other relationship at any time, with or without
cause.
18. CORPORATE TRANSACTIONS.
----------------------
18.1 Assumption or Replacement of Awards by Successor. In the
------------------------------------------------
event of (a) a dissolution or liquidation of the Company, (b) a merger or
consolidation in which the Company is not the surviving corporation (other than
a merger or consolidation with a wholly-owned subsidiary, a reincorporation of
the Company in a different jurisdiction, or other transaction in which there is
no substantial change in the shareholders of the Company or their relative stock
holdings and the Awards granted under this Plan are assumed, converted or
replaced by the successor corporation, which assumption will be binding on all
Participants), (c) a merger in which the Company is the surviving corporation
but after which the shareholders of the Company immediately prior to such merger
(other than any shareholder that merges, or which owns or controls another
corporation that merges, with the Company in such merger) cease to own their
shares or other equity interest in the Company, or (d) the sale of substantially
all of the assets of the Company, any or all outstanding Awards may be assumed,
converted or replaced by the successor corporation (if any), which assumption,
conversion or replacement will be binding on all Participants. In the
alternative, the successor corporation may substitute equivalent Awards or
provide substantially similar consideration to Participants as was provided to
shareholders (after taking into account the existing provisions of the Awards).
The successor corporation may also issue, in place of outstanding Shares of the
Company held by the Participant, substantially similar shares or other property
subject to repurchase restrictions no less favorable to the Participant. In the
event such successor corporation (if any) refuses to assume or substitute
Awards, as provided above, pursuant to a transaction described in this
Subsection 18.1, such Awards will expire on such transaction at such time and on
such conditions as the Board will determine.
18.2 Other Treatment of Awards. Subject to any greater rights
-------------------------
granted to Participants under the foregoing provisions of this Section 18, in
the event of the occurrence of any transaction described in Section 18.1, any
outstanding Awards will be treated as provided in the applicable agreement or
plan of merger, consolidation, dissolution, liquidation, sale of assets or other
"corporate transaction."
18.3 Assumption of Awards by the Company. The Company, from time
-----------------------------------
to time, also may substitute or assume outstanding awards granted by another
company, whether in connection with an acquisition of such other company or
otherwise, by either; (a) granting an Award under this Plan in substitution of
such other company's award; or (b) assuming such award as if it had been granted
under this Plan if the terms of such assumed award could be applied to an Award
granted under this Plan. Such substitution or assumption will be permissible if
the holder of the substituted or assumed award would have been eligible to be
granted an Award under this Plan if the other company had applied the rules of
this Plan to such grant. In the event the Company assumes an award
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Isonics Corporation
1996 Equity Incentive Plan
granted by another company, the terms and conditions of such award will remain
unchanged (except that the exercise price and the number and nature of Shares
------
issuable upon exercise of any such option will be adjusted appropriately
pursuant to Section 424(a) of the Code). In the event the Company elects to
grant a new Option rather than assuming an existing option, such new Option may
be granted with a similarly adjusted Exercise Price.
19. ADOPTION AND SHAREHOLDER APPROVAL. This Plan will become
---------------------------------
effective on the date on which the registration statement filed by the Company
with the SEC under the Securities Act registering the initial public offering of
the Company's Common Stock is declared effective by the SEC (the "EFFECTIVE
DATE"); provided, however, that if the Effective Date does not occur on or
-------- -------
before December 31, 1997, this Plan will terminate having never become
effective. This Plan shall be approved by the shareholders of the Company
(excluding Shares issued pursuant to this Plan), consistent with applicable
laws, within twelve (12) months before or after the date this Plan is adopted by
the Board. Upon the Effective Date, the Board may grant Awards pursuant to this
Plan; provided, however, that: (a) no Option may be exercised prior to initial
-------- -------
shareholder approval of this Plan; (b) no Option granted pursuant to an increase
in the number of Shares subject to this Plan approved by the Board will be
exercised prior to the time such increase has been approved by the shareholders
of the Company; and (c) in the event that shareholder approval of such increase
is not obtained within the time period provided herein, all Awards granted
hereunder will be canceled, any Shares issued pursuant to any Award will be
canceled, and any purchase of Shares hereunder will be rescinded. So long as
the Company is subject to Section 16(b) of the Exchange Act, the Company will
comply with the requirements of Rule 16b-3 (or its successor), as amended, with
respect to shareholder approval.
20. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided
--------------------------
herein, this Plan will terminate ten (10) years from the date this Plan is
adopted by the Board or, if earlier, the date of shareholder approval. This
Plan and all agreements thereunder shall be governed by and construed in
accordance with the laws of the State of California.
21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time
--------------------------------
terminate or amend this Plan in any respect, including without limitation
amendment of any form of Award Agreement or instrument to be executed pursuant
to this Plan; provided, however, that the Board will not, without the approval
-------- -------
of the shareholders of the Company, amend this Plan in any manner that requires
such shareholder approval pursuant to the Code or the regulations promulgated
thereunder as such provisions apply to ISO plans or (if the Company is subject
to the Exchange Act or Section 16(b) of the Exchange Act) pursuant to the
Exchange Act or Rule 16b-3 (or its successor), as amended, thereunder,
respectively.
22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by
--------------------------
the Board, the submission of this Plan to the shareholders of the Company for
approval, nor any provision of this Plan will be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and bonuses otherwise than under this Plan, and such
arrangements may be either generally applicable or applicable only in specific
cases.
23. DEFINITIONS. As used in this Plan, the following terms will have
-----------
the following meanings:
"AWARD" means any award under this Plan, including any Option,
Restricted Stock or Stock Bonus.
"AWARD AGREEMENT" means, with respect to each Award, the signed
written agreement between the Company and the Participant setting forth the
terms and conditions of the Award.
"BOARD" means the Board of Directors of the Company.
"CAUSE" means Termination because of (i) any willful material
violation by the Participant of any law or regulation applicable to the business
of the Company or a Parent or Subsidiary of the Company, the Participant's
conviction for, or guilty plea to, a felony or a crime involving moral
turpitude, any willful perpetration by the Participant of a common law fraud or
any unlawful use by the Participant of drugs or other controlled
-9-
<PAGE>
Isonics Corporation
1996 Equity Incentive Plan
substances, (ii) the Participant's commission of an act of personal dishonesty
which involves personal profit in connection with the Company or any other
entity having a business relationship with the Company, (iii) any material
breach by the Participant of any provision of any agreement or understanding
between the Company and the Participant regarding the terms of the Participant's
service as an employee, director, consultant, independent contractor or adviser
to the Company or a Parent or Subsidiary of the Company, including without
limitation, the willful and continued failure or refusal of the Participant to
perform the material duties required of such Participant as an employee,
director, consultant, independent contractor or adviser of the Company or a
Parent or Subsidiary of the Company, other than as a result of being Disabled,
or a breach of any applicable invention assignment and confidentiality agreement
or similar agreement between the Company and the Participant, (iv) Participant's
disregard of the policies of the Company so as to cause loss, damage or injury
to the property, reputation or employees of the Company or a Parent or
Subsidiary of the Company, or (v) any other misconduct by the Participant which
is materially injurious to the financial condition or business reputation of, or
is otherwise materially injurious to, the Company or a Parent or Subsidiary of
the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the committee appointed by the Board to
administer this Plan, or if no such committee is appointed, the Board.
"COMPANY" means Isonics Corporation or any successor corporation.
"DISABILITY" means a disability, whether temporary or permanent,
partial or total, as determined by the Committee.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"EXERCISE PRICE" means the price at which a holder of an Option
may purchase the Shares issuable upon exercise of the Option.
"FAIR MARKET VALUE" means, as of any date, the value of a share of
the Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National Market,
its closing price on the Nasdaq National Market on the date of
determination as reported in The Wall Street Journal;
-----------------------
(b) if such Common Stock is publicly traded and is then listed on a
national securities exchange, its closing price on the date of
determination on the principal national securities exchange on
which the Common Stock is listed or admitted to trading as
reported in The Wall Street Journal;
-----------------------
(c) if such Common Stock is publicly traded but is not quoted on the
Nasdaq National Market nor listed or admitted to trading on a
national securities exchange, the average of the closing bid and
asked prices on the date of determination as reported in The Wall
--------
Street Journal;
--------------
(d) in the case of an Award made on the Effective Date, the price per
share at which shares of the Company's Common Stock are initially
offered for sale to the public by the Company's underwriters in
the initial public offering of the Company's Common Stock pursuant
to a registration statement filed with the SEC under the
Securities Act; or
(d) if none of the foregoing is applicable, by the Committee in good
faith.
"INSIDER" means an officer or director of the Company or any other
person whose transactions in the Company's Common Stock are subject to Section
16 of the Exchange Act.
-10-
<PAGE>
Isonics Corporation
1996 Equity Incentive Plan
"OUTSIDE DIRECTOR" means any director who is not; (a) a current
employee of the Company or any Parent or Subsidiary of the Company; (b) a former
employee of the Company or any Parent or Subsidiary of the Company who is
receiving compensation for prior services (other than benefits under a tax-
qualified pension plan); (c) a current or former officer of the Company or any
Parent or Subsidiary of the Company; or (d) currently receiving compensation for
personal services in any capacity, other than as a director, from the Company or
any Parent or Subsidiary of the Company; provided, however, that at such time as
-----------------
the term "Outside Director", as used in Section 162(m) of the Code is defined in
regulations promulgated under Section 162(m) of the Code, "Outside Director"
will have the meaning set forth in such regulations, as amended from time to
time and as interpreted by the Internal Revenue Service.
"OPTION" means an award of an option to purchase Shares pursuant
to Section 5.
"PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if each of such
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
"PARTICIPANT" means a person who receives an Award under this
Plan.
"PLAN" means this Isonics Corporation 1996 Equity Incentive Plan,
as amended from time to time.
"RESTRICTED STOCK AWARD" means an award of Shares pursuant to
Section 6.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHARES" means shares of the Company's Common Stock reserved for
issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any
successor security.
"STOCK BONUS" means an award of Shares, or cash in lieu of Shares,
pursuant to Section 7.
"SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
"TERMINATION" or "TERMINATED" means, for purposes of this Plan
with respect to a Participant, that the Participant has for any reason ceased to
provide services as an employee, officer, director, consultant, independent
contractor, or advisor to the Company or a Parent or Subsidiary of the Company.
An employee will not be deemed to have ceased to provide services in the case of
(i) sick leave, (ii) military leave, or (iii) any other leave of absence
approved by the Committee, provided, that such leave is for a period of not more
than 90 days, unless reemployment upon the expiration of such leave is
guaranteed by contract or statute or unless provided otherwise pursuant to
formal policy adopted from time to time by the Company and issued and
promulgated to employees in writing. In the case of any employee on an approved
leave of absence, the Committee may make such provisions respecting suspension
of vesting of the Award while on leave from the employ of the Company or a
Subsidiary as it may deem appropriate, except that in no event may an Option be
exercised after the expiration of the term set forth in the Option agreement.
The Committee will have sole discretion to determine whether a Participant has
ceased to provide services and the effective date on which the Participant
ceased to provide services (the "TERMINATION DATE").
-11-
<PAGE>
Isonics Corporation
1996 Equity Incentive Plan
"UNVESTED SHARES" means "Unvested Shares" as defined in the Award
Agreement.
"VESTED SHARES" means "Vested Shares" as defined in the Award
Agreement.
-12-
<PAGE>
EXHIBIT 10.05
M E M O R A N D U M
O F A G R E E M E N T
July 1996
This MOA is a record of agreement reached by the following parties after
several meetings in Russia and the USA:
Electrochemical Plant Zelenogorsk, Russia
AO Techsnabexport Co., Ltd. Moscow, Russia
A & R Materials, Inc. San Jose, California
The parties seeing the benefits of the ongoing business relationship that
combines their individual strengths in the manufacturing and marketing of
enriched stable isotopes have agreed to the following:
1. The Parties will extend current, 1996 delivery contracts for additional
3 years, through 1997, 1998 and 1999. Specific contract details such as
quantities, price and delivery schedule for each contract year will be agreed to
by November 1st of the previous year.
2. Following stable isotope products will be covered by these contracts:
Depleted Zinc (DZO)
Carbon
Cadmium
Silicon
3. The parties agree that Electrochemical Plant will allocate its stable
isotope production capacity for the A&R identified markets and customers and
will expand the isotope products list as dictated by the marketplace.
4. The Parties agree that a natural continuation to these contracts would
be formation of a joint venture (JV). The Parties further agree that such JV
could become effective at any time and would replace the then existing contracts
between the Parties.
The Parties wishing to be bound to the aforesaid, affix the signatures of
their authorized representatives below:
<TABLE>
<CAPTION>
<S> <C> <C>
Electrochemical Plant AO Techsnabexport Co., Ltd. A&R Materials, Inc.
_______________ A. Shubin _______________ A. Shishkin _______________ J. Alexander
General Director General Director President
_______________ Date _______________ Date _______________ Date
</TABLE>
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
EXHIBIT 10.06
OPTION AGREEMENT
----------------
This Agreement is effective on the date last subscribed below, and is by
and between A&R Materials, Inc., with offices at San Jose, California
(hereinafter referred to as "A&R") and YALE UNIVERSITY with offices at New
Haven, Connecticut (hereinafter referred to as "Yale").
WHEREAS, Professor T.P. Ma in the Yale University Department of Electrical
Engineering is conducting research on and has discovered increased conductivity
and electron mobility in istopically enriched semiconductor materials (the
"Invention"); and
WHEREAS, a patent application for the Invention was filed on 16 November
1990 with the serial number 615,425; and
WHEREAS, A&R wishes to examine the business opportunities presented by this
Invention; and
WHEREAS, A&R or an affiliate may wish to obtain a world-wide exclusive
license to the Invention and to all patents issuing from it and from other
applications claiming priority on the basis of its filing date (the "Patent
Rights");
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties agree as follows:
Section I Option
----------------
1.1 Yale hereby grants to A&R, for the term of this agreement, an exclusive
option to an exclusive, world-wide license to make, have made, use, sell and
practice the Invention pursuant to the Patent Rights, such license to be on such
reasonable terms and conditions, including reasonable royalties, as the parties
may agree. If A&R decides to exercise this option, it shall so notify Yale in
writing within the term of this agreement. Thereafter, Yale and A&R shall within
ninety (90) days negotiate in good faith a license agreement. Provided that the
terms of said Licensing Agreement shall be no less favorable to A&R than those
contained in the following two tables:
i) LICENSEE shall pay to YALE Earned Royalties on Net Sales according to
the following schedule:
<TABLE>
<CAPTION>
Net Sales Royalty Rate
- ------------------------------------------------------------------------------
<S> <C>
[CONFIDENTIAL]
</TABLE>
<PAGE>
ii) In addition, LICENSEE shall pay to YALE Sublicense Income according
to the following schedule:
<TABLE>
<CAPTION>
Sublicensee Sublicense Income
- ------------------------------------------------------------------------------
<S> <C>
[CONFIDENTIAL]
</TABLE>
where "Investor" is a company that funded A&R to acquire /28/Si to provide
to YALE and a "Non-investor" is a company which did not fund A&R to acquire
/28/Si to provide to YALE as contemplated in 4.1 below.
Section II Term
---------------
2.1 This Agreement shall expire eighteen (18) months after its signing by both
parties. This option will be extendible for an additional six (6) months if
agreed in writing by both parties.
Section III Evaluation
----------------------
3.1 During the term of this Agreement, A&R will evaluate the feasibility of the
commercial development of the Invention.
Section IV Payment
------------------
4.1 As consideration of the option hereby, A&R shall provide Yale istopically
and chemically pure rod and wafer specimens of single crystal silicon suitable
for measurement of thermal conductivity and electron mobility. The parties
agree that the isotopic enrichment should exceed 99% /28/Si and have less than 1
part per million total chemical impurities. A&R will make all reasonable
efforts to reduce these chemical impurities to levels approaching industry
standard purity. A&R shall provide Yale with a full accounting of the costs it
has incurred in securing said isotopically and chemically pure silicon crystals,
and shall be reimbursed for one-half (1/2) of said amount but only by deduction
from royalty payments due Yale from A&R under the Licensing Agreement
contemplated herein. To cover this reimbursement, royalty payments due Yale
shall be reduced by no more than one-half (1/2) in any given Royalty Year until
the full amount is paid.
Section V Miscellaneous
-----------------------
5.1 Notices. All notices shall be mailed via certified mail, return receipt
-------
requested, or shall be given by fax, telegraph, telex or cable, confirmed by
letter mailed as provided above, addressed as follows, or to such other address
as may be designated from time to time by notice given in the manner provided in
this Section:
2
<PAGE>
If to Yale: If to A&R:
Yale University James E. Alexander
Director President & CEO
Office of Cooperative Research A&R Materials, Inc.
246 Church Street, Suite 401 4606 Meridian Ave., Suite K
New Haven, CT 06510 San Jose, CA 95124
FAX: 203-432-7245 FAX: 408-266-6970
Notices shall be deemed given as of the date sent.
5.2 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Connecticut.
5.3 Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the parties hereto and their respective legal representatives,
successors and permitted assigns.
5.4 Headings. Paragraph headings are inserted herein for convenience of
--------
reference only and do not form a part of this Agreement, and no construction or
inference shall be derived therefrom.
5.5 Entire Agreement. This Agreement and the instruments, documents and other
----------------
agreements referred to herein or signed concurrently set forth the entire
agreement and understanding of the parties regarding the subject matter.
5.6 Counterparts. This Agreement may be executed simultaneously in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.7 Amendment; Waiver; etc. This Agreement may be amended, modified,
----------------------
superseded or canceled, and any of the terms hereof may be waived, only by a
written instrument executed by each party hereto or, in the case of waiver, by
the party or parties waiving compliance. The delay or failure of any party at
any time or times to require performance of any provision hereof shall in no
manner affect the rights at a later time to enforce the same. No waiver by any
party of any condition or of the breach of any term contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
to be, or construed as, a further or continuing waiver of any such condition or
of the breach of such term or any other term of this Agreement.
5.8 No Third Party Beneficiaries. No person not a party to this Agreement,
----------------------------
including any employee of any party to this Agreement, shall have or acquire any
rights by reason of this Agreement, nor shall any party hereto have any
obligations or liabilities to such other Person by reason of this Agreement.
Nothing contained in this Agreement shall be deemed to constitute the parties
partners with each other or any Person.
3
<PAGE>
5.9 Assignment and Successors. This Agreement may not be assigned by either
-------------------------
party hereto, except that A&R may assign this Agreement and the rights and
interests of A&R hereunder, in whole or in part, to any of its Affiliates, any
purchaser of all or substantially all of its assets or to any successor
corporation resulting from any merger or consolidation of A&R with or into such
corporation.
5.10 Severability and Survival. If any provision of this Agreement is or
-------------------------
becomes invalid or is ruled invalid by any court of competent jurisdiction or is
deemed unenforceable, it is the intention of the parties that the remainder of
the Agreement shall not be affected.
5.11 Representations. Yale represents that it has the right to enter into this
---------------
Agreement, and that there are no other agreements which conflict with this
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first written
above.
YALE UNIVERSITY A&R MATERIALS, INC.
By: ___________________________ By: ____________________________
Typed Name: ___________________ Typed Name: ____________________
Its: _________________________ Its: ___________________________
Date: _________________________ Date: __________________________
4
<PAGE>
EXHIBIT 10.07
EARLY POSSESSION AGREEMENT
Reference is made to that lease commencing February 1, 1996 between the LESSOR:
PAULSEN OFFICE PARK and the LESSEE: A & R MATERIALS, INC. at 4010 Moorpark
Avenue, Suite 119, San Jose, California LESSEE is allowed to occupy premises on
January 12, 1996. Rent is to begin on February 1, 1996. LESSOR and LESSEE
agree that all the terms and conditions to the above referenced lease are to be
in full force and effect as of the date of LESSEE's possession of the premises.
LESSEE accepts premises in their present condition. LESSOR agrees to complete
all LESSEE improvements as set forth in this lease.
LESSEE understands that his early occupancy may cause some delay in the con-
struction of the LESSEE improvements and that such delay will not be a release
of liability of any rent due. It is further understood that prior to any
improvement of the leased premises by the LESSEE which may result in the delay
in construction of LESSEE improvements or the obtaining of building permit
without written consent of LESSOR is hereby prohibited. Any such violation may
cause the termination of this lease.
In the event LESSEE takes possession of the premises prior to completion of any
construction, LESSEE agrees to hold LESSOR harmless from any and all claims for
damages to goods, equipment or inconvenience.
ACCEPTED:
LESSOR: LESSEE:
PAULSEN OFFICE A & R MATERIALS, INC.
- -------------------------------- ------------------------------------
BY: Peter Paulsen BY: James E. Alexander
BY: Linda Stockhus, Attorney in Fact
DATE: _______________________ TITLE: ____________________________
<PAGE>
OFFICE LEASE AGREEMENT
THIS LEASE is made between PAULSEN PROPERTIES, called "Landlord"
and A & R MATERIALS, INC., A CALIFORNIA CORPORATION, called "Tenant."
IT IS AGREED BETWEEN LANDLORD AND TENANT AS FOLLOWS: -
1. PREMISES: Landlord hereby leases and Tenant hereby hires, upon the
terms and conditions herein set forth, the office space known as Suite 119 on
the First floor of the PAULSEN OFFICE PARK Building, herein after referred to as
the "Building," located at 4010 Moorpark Avenue, California 95117 as outlined
on the floor plan attached hereto as Exhibit "A" and hereby made a part hereof,
such office space referred to as the "Premises."
2. TERMS: The term of this Lease shall be for a period of Two (2)
Years commencing on the 1st day of February, 1996 and terminating on the 31st
day of January, 1998.
3. RENT: Tenant will pay to Landlord, at the office of the Building,
as rent for the premises. Payable Two Thousand Three Hundred Six Dollars and
00/100 ($2,306.00) concurrent herewith as and for rent for the first month of
the lease term, and Two Thousand Three Hundred Six Dollars @ 00/100 ($2,306.00)
per month on the first day of each and every month thereafter during the full
term thereof Tenant agrees that he will promptly pay said rent at the times
above stated; that he will pay all other charges, if any, for the premises
during the term of this Lease.
The parties agree that in the event Tenant fails to make any rental payment
within ten days of the due date, it will be impracticable and extremely
difficult to fix the actual damages to Landlord. Therefore, the parties agree
that Tenant will pay Landlord the sum of $50.00 if the rent payment is not
received within ten (10) days of the due date, and an additional sum of $50.00
if the rent is not received within twenty (20) days of the due date. The
assessment of the damages herein above set forth shall be in addition to
remedies available to Landlord as set forth on paragraph # 25 hereof.
4. DEPOSIT: As additional consideration for the execution of this
Lease agreement by Landlord, Tenant has paid to Landlord the sum of Two Thousand
Three Hundred Six Dollars and 00/100 ($2,306.00) concurrent herewith, receipt
whereof is hereby acknowledged. Landlord may apply any portion or all of said
deposit to unperformed obligations of Tenant under this Lease, and in said event
Tenant shall replace the portion so applied within ten (10) days of notice from
Landlord. At the end of the Lease term, any portion of the deposit remaining
shall be returned to Tenant.
5. TAXES: Landlord shall pay all taxes and assessments levied upon
the real property and Landlords improvements only, of which the Premises
represents 3.6 %(3.6%) of the total area, as they exist at the commencement
-----------
date of this Lease, However, in the event that such taxes shall be increased
above the 1994-1995 fiscal year figures, Tenant shall pay Landlord his propor-
---------
tionate share of said increase during the term of the Lease within twenty (20)
days of receipt of a bill therefore from Landlord setting forth the computations
of Tenants obligation in accordance with this paragraph. Tenant shall pay the
pro rata amount of such increase for the number of months of the Lease term
within the fiscal tax year when less than twelve (12) months. Tenant shall pay
all taxes and assessments levied against any personal property, trade fixtures,
or other improvements on the Premises belonging to Tenant. Tenant shall also pay
any sales, use or rental tax which may be assessed by any governmental body
during the time of this Lease.
6. UTILITIES: Landlord will use reasonable efforts to provide the
Premises with hot and cold water, heat air conditioning, ventilation, gas, light
and janitor service during such hours and of such character and amounts a
Landlord, in its sole judgment, may deem reasonable, without liability for
failures or interruptions resulting from any cause or from good faith acts or
decisions of Landlord.
<PAGE>
-2-
7. USE: Tenant will use the Premises only for office purposes,
unless the Landlord shall give Tenant previous written consent for a different
use. In connection with his use of and activities in and about the Premises and
the Building, Tenant at his expense will comply and will cause his employees,
agents and invitees to comply, with all applicable rules and regulations of
governmental agencies, and Tenant will conduct himself and cause his employees,
agents and invitees to conduct themselves, with full regard for the rights,
convenience, and welfare of all other tenants in the Building.
8. SIGNS: Tenant will not permit any signs, advertisements or
notices to be displayed, inscribed upon or affixed on any part of the outside or
inside of the premises, or in the building of which they are a part, except on
the directory board to be provided by Landlord and on the entrance doors of the
Premises, and then only of such size, color and style as Landlord may approve.
9. CONDITION OF PREMISES AT COMMENCEMENT: Tenant acknowledges that
his acceptance of possession of the Premises constitutes a conclusive admission
that he has inspected the Premises and has found it in good condition and repair
in all respects in accordance with the obligation of Landlord under this Lease.
10. UNDERTAKINGS BY TENANT-INDEMNIFICATION OF LANDLORD: Tenant will
hold Landlord and all other tenants of the Building, and their employees, agents
and invitees, harmless from any loss, damage, or liability caused by Tenant or
his employees, agents or invitees. Tenant will not claim damages, other than a
prorated abatement of the rent, if delivery of possession of the Premises will
be delayed beyond commencement of the term of this Lease, regardless of the
cause.
11. NOTICE OF DISREPAIR: Upon observing that any part of the Premises
or of the Building, including the fixtures and facilities, is or appears to be
defective, damaged or in disrepair, regardless of the nature or cause, Tenant
will notify Landlord immediately.
12. ACTS AFFECTING INSURANCE: Tenant will not conduct any activities
or keep any materials, substances, or articles in or about the Premises which
will impair or invalidate, or increase the premium cost of, insurance policies
carried by Landlord.
13. MAINTENANCE: During the term Tenant will maintain the Premises in
good condition and repair in compliance with Landlord's written instructions,
except such repair and maintenance which are the obligations of Landlord as
provided hereafter in Paragraph 19 of this Lease and except for damage not
caused by any negligence of Tenant or of any employee, agent, or invitee of
Tenant. Tenant will maintain all of his furniture, furnishings, and equipment
located in the Premises in good, neat, and attractive condition and in good
repair.
14. ALTERATIONS: Tenant will not make any alterations or additions
to or install partitions or built-in fixtures or facilities in the Premises
without Landlord's previous written consent. Any alterations, partitions, or
built-in fixtures or facilities made to or installed in the Premises by Tenant
with Landlord's consent will be, done in accordance with and subject to the
written directions and conditions issued by Landlord, and shall become a part of
the Building and the property of Landlord. Landlord may repair, alter, improve
or remodel any portion of the Premises or the Building, but without obligation
so to do, without liability to Tenant for any damage or convenience to or
temporary impairment of enjoyment of the Premises by Tenant.
15. LIENS: Tenant will not cause or permit any lien to be imposed
upon the Premises or the Building and will pay all taxes and license fees
imposed by reason of any improvements made by Tenant to the Premises or imposed
upon any personal property located in the Premises. Tenant agrees to give
Landlord
<PAGE>
not less than (5) days notice prior to commencement of any alteration or repair
permitted under the terms of the Lease so that Landlord may post Notice of Non-
Responsibility.
16. REIMBURSEMENT: Tenant will reimburse Landlord for all expenditures
made by Landlord for the account or benefit of Tenant.
17. CONDEMNATION: Should any part of the Premises or the Building be
taken from Landlord as a result of condemnation proceedings, threatened or
filed, Tenant does and will relinquish to Landlord any interest in the proceeds
or the award. Should all or a substantial part of the Premises be taken or
relinquished by a public utility or a governmental agency by condemnation or
otherwise, Landlord or Tenant may terminate this Lease on not less than thirty
(30) days' written notice to Tenant.
18. RIGHT OF ENTRY: Tenant will permit any officer, agent, or employee
of Landlord to enter the Premises, with a passkey or otherwise at any reasonable
time for inspection, janitor service, or other reasonable purposes and Tenant
releases Landlord from any responsibility for any resulting theft or damage,
excepting only willful misconduct or negligence of landlord.
19. UNDERTAKINGS BY LANDLORD-RULES AND SERVICE: Landlord will
endeavor, but without liability for failure, to establish, maintain, and enforce
rules and regulations in connection with the use and occupancy of the Building
which will be conducive to the welfare and comfort of all tenants of the
Building, and shall furnish the Premises during reasonable and usual business
hours the following services at Landlord's sole expense.
(a) Heat - Heat and air conditioning during the customary periods of the
year, Monday through Friday, when and to the same extent Landlord
furnishes heat and air conditioning for other portions of the
Building of which the Premises are a part should Tenant require heat
or cooling.
(b) Electricity - Electric current consisting of 110/208 service for
lighting and ordinary business appliances;
(c) Janitorial Services - Usual janitorial and maintenance service
including the sweeping and waxing of floors. Landlord shall also
maintain and keep lighted the common stairs, entries, and toilet
rooms in the Building;
(d) Repairs - Tenant will, at his sole cost and expense, supply chair
mats for all desk chairs, keep and maintain the said leased
premises, and every part thereof, including the interior of the
premises, glazing, and plumbing and electrical fixtures, in good and
sanitary order, condition and repair. Lessor will, at his sole cost
and expense, keep and maintain the structure, roof and exterior
walls of the Building (excluding glazing), the heating and air
conditioning equipment, the off premises sewer and water lines, and
the landscaping, sidewalks and parking areas used in common by other
tenants, in good and sanitary order, condition and repair.
20. FLOORLOAD: Tenant will not overload the floors, nor install
any heavy business machines or any heavy equipment of any kind, without prior
written approval of Landlord, which, if granted, may be conditioned upon moving
by skilled licensed handlers and installation and maintenance at Tenant's
expense of special reinforcing and settings adequate to absorb and prevent noise
and vibration. In no event will Tenant be allowed to place a load exceeding
fifty (50) pounds per square inch on any floor of the building without prior
written consent.
21. NONLIABILITY OF LANDLORD: Excepting only willful misconduct or
negligence of Landlord shall not be liable to Tenant for any damage to Tenant's
property, or for any disruption of Tenant's business or professional activities
in the Premises, resulting from leaky plumbing, gas, water, steam,
<PAGE>
electrical, heating, cooling, ventilating or air-conditioning fixtures,
facilities or conduits, from disrepair or faulty construction of the building;
from acts of officers, agents, or employees of Landlord or of other tenants in
the building or their employees, agents or invitees; or from any trespass or
public offense committed in or about the Premises of the building except that
Landlord agrees to take reasonable steps to correct any such condition after
first receiving written notice thereof from Tenant.
22. (A) ASSIGNMENT AND SUBLETTING: Tenant shall not voluntarily assign
or encumber its interest in this Lease or in the Premises, or sublease all or
any part of the Premises, or allow any other person or entity to occupy or use
all or any part of the Premises, without first obtaining Landlord's prior
written consent. Any assignment, encumbrance, or sublease without Landlord's
prior written consent shall be voidable, at Landlord's election, and shall
constitute a default. No consent to any assignment, encumbrance, or sublease
shall constitute a further waiver of the provisions of this paragraph. Tenant
shall notify Landlord in writing of Tenant's intent to sublease, encumber or
assign this Lease and Landlord shall, within thirty (30) days of receipt of such
written notice, elect one of the following:
(a) Consent to such proposed assignment, encumbrance or sublease;
(b) Refuse such consent, which refusal shall be on reasonable grounds; or
(a) Elect to terminate this Lease.
As a condition for granting its consent to any assignment, encumbrance or
sublease, Landlord may require that the sublessee or assignee remit directly to
Landlord on a monthly basis, all monies due to Tenant by said assignee or
sublessee. If for any proposed assignment or sublease Tenant receives rent or
other consideration, either initially or over the term of the assignment or
sublease, in excess of the rent called for hereunder, or, in case of the
sublease of a portion of the ]Premises, in excess of such rent fairly allocable
such portion, after appropriate adjustments to assure that all other payments
called for hereunder are taken into account, Tenant shall pay Landlord as
additional rent hereunder ninety percent (90%) of the excess of each such
payment of rent or other consideration received by
Tenant promptly after its receipt. Landlord's waiver or consent to any
assignment or subletting shall not relieve Tenant from any obligation under this
Lease. Occupancy of all or part of the Premises by parent, subsidiary, or
affiliated companies of Tenant shall not be deemed an assignment or subletting.
(B) SUBORDINATION: Without the necessity of any additional document
being executed by Tenant for the purpose of effecting a subordination, and at
the election of Landlord or any first mortgagee with a lien on the Building or
any ground Lessor with respect to the building, this Lease shall be subject and
subordinate at all times to: (a) all ground leases or underlying leases which
may now exist or hereafter be executed affecting the building or the land upon
which the Building is situated or both, and (b) the lien of any mortgage or deed
of trust which may now exist or hereafter be executed in any amount for which
the Building, land, ground leases or underlying leases, or Landlords interest or
estate in any of said items is specified as security. Notwithstanding the
foregoing, Landlord shall have the right the subordinate or cause to be
subordinated any such ground leases or underlying leases or any such lions to
this Lease. In the event that any ground lease or underlying lease terminates
for any reason or any mortgage or deed of trust is foreclosed or a conveyance in
lien of foreclosure is made for any reason, Tenant shall, notwithstanding any
subordination, attorn to and becomes the Tenant of the successor in interest to
Landlord, at the option of such successor in interest. Tenant covenants and
agrees to execute and deliver, upon demand by Landlord and in the form requested
by Landlord, any additional documents evidencing the priority or subordination
of this Lease with respect to any such ground leases or underlying leases or the
lien of any such mortgage or deed of trust. Tenant hereby irrevocably appoints
Landlord as attorney-in-fact of Tenant to execute, deliver and record any such
documents in the name and on behalf of Tenant.
23. DESTRUCTION OF LEASEHOLD: Should the leasehold, or any part of the
building, be damaged or destroyed, Landlord may elect to terminate this Lease or
continue it in force and, without affecting Tenant's liability under Paragraph
10, repair or rebuild the leasehold or Building, provided Tenant, upon giving to
Landlord written notice within 10 days after the damage or destruction, may
terminate this Lease if the leasehold cannot be made tenantable within 120 days.
Landlord may occupy as much of the
<PAGE>
leasehold as may be necessary to accomplish the repair or reconstruction,
pending the completion of which an equitable reduction or abatement of the rent
will be made by Landlord if this Lease should not be terminated under this
paragraph. Landlord shall not be liable to Tenant for any loss or damage to or
destruction of the leasehold or from the repairing or rebuilding of the
leasehold or Building.
24. RULES AND REGULATIONS: Tenant will comply, and will cause his
employees, agents and invitees to comply, with all reasonable rules and
regulations adopted by Landlord in connection with the use and occupancy of the
Premises and of the Building, and with all supplements and amendments which
Landlord may adopt hereafter. Any violation by Tenant, or by his employees,
agents, or invitees, of any rule or regulation heretofore or hereafter adopted,
amended, or supplemented by Landlord, shall constitute a default under this
Lease and shall make available to Landlord the remedies provided herein.
25. DEFAULT: If tenant should become in default under this Lease,
Landlord, at its option and without notice, (1) may terminate this Lease, take
possession of the Premises at any rent obtainable, recovering from Tenant, in
successive actions or a single action, any deficit between the rent received and
the rent provided to be paid under this Lease, plus all the expenses, including
attorney's fees, incurred in the taking of possession and reletting; or (2)
without attempting to relet the premises and with Or without terminating this
Lease, may (a) sue, at regular or irregular intervals and in successive suits,
to recover the unpaid installments of rent, or (b) bring a single action to
recover unpaid rent for the remaining term of this Lease, or (e) sue for general
and special damages. If Landlord should take possession of the Premises under
the provisions of this paragraph or at the end of the term, Land may remove to
any place of storage, or any dumping ground, at Tenant's s risk and expense and.
without incur any responsibility to Tenant for loss, damage, or theft, all
property in or about the leasehold belonging to or in custody of Tenant. The
remedies provided in this paragraph are cumulative and may be exercised
simultaneously with, in addition to, or independently of, any other legal
remedy.
26. ABANDONMENT: Tenant covenants that he will occupy the premises
continuously except for normal vacation periods and agrees that any absence
therefrom for more than one week, during any part of which time rental is
delinquent shall be conclusively presumed to be an abandonment of the premises
at the option of the Landlord.
27. RESTORATION OF PREMISES: Upon termination of this Lease or by
expiration of the term or by election of Landlord, Tenant will restore the
Premises to Landlord in the same condition as it existed at the commencement of
the term except as otherwise permitted or required by this Lease, and except for
reasonable use and wear.
28. HOLDING OVER: Should Tenant hold over the Premises after the term of
this Lease, he will be a Tenant by sufferance from day to day, with a rental of
120% of the then current daily rental rate unless Landlord shall consent in
writing to a different tenancy.
29. INSURANCE: Tenant agrees to and shall secure from a responsible
company or companies doing insurance business in the State of California, and
maintain during the entire term of this Lease, public liability insurance in the
minimum amount of One Million Dollars and 00/100 ($1,000,000.00) and fire and
extended coverage insurance upon Tenant's personal property in an amount
sufficient to cover all losses. Tenant agrees that Landlord shall be named as
an additional insured on the aforementioned policies of insurance. On securing
said coverage the Tenant shall deliver to Landlord a copy of the appropriate
policies, or certificates of said insurance, which shall provide that same shall
not be cancelled without ten (10) days' prior written notice to Landlord.
30. INTEREST ON MONETARY OBLIGATION: All monetary obligations of Tenant
to Landlord under this Lease shall carry nine percent (9%) interest per annum
from the due date until paid.
31. TIME OF ESSENCE: Time is of the essence of this Lease.
<PAGE>
32. CONDITION: Each term of this Lease shall constitute a condition.
33. NOTICES: Notices shall be deemed served upon Tenant when left at the
Premises or mailed, postage prepaid, addressed to Tenant at 4010 Moorpark
Avenue, Suite 119, San Jose, California 95117.
34. LANDLORD DEFAULT: In the event of any default by the Landlord
hereunder Tenant agrees to give notice of such default, by registered mail, to
the holder of any first deed of trust covering the demised premises and to said
holder a reasonable opportunity to cure such default on Landlords behalf.
35. WAIVER: No waiver, benefit, privilege, or service, voluntarily
granted or performed by Landlord to or for Tenant, or any other tenant in the
Building shall be construed to vest any contractual right in Tenant by custom,
estoppel, or otherwise. No waiver by Landlord of a default by Tenant under this
Lease shall constitute a waiver of a subsequent default and after a waiver,
expressed or implied, no notice need be given that strict compliance in the
future will be required.
36. ATTORNEY'S FEES: In any action or proceeding between Landlord and
Tenant the prevailing party shall be awarded costs and attorney's fees.
37. PARTIAL INVALIDITY: No partial invalidity of this Lease shall affect
the remainder.
38. HEADINGS: Headings shall not limit or affect any paragraph in this
Lease.
39. ENTIRE AGREEMENT: This Lease contains the complete agreement between
Landlord and Tenant and no supplement, amendment, or other commitment will be
binding unless in writing and signed by the Irrigated party, except that Tenant
shall be bound, without signature, to all supplements and amendments to the
rules and regulations hereafter adopted by Landlord in accordance with Paragraph
24.
Executed on ___________________, 1996, at the Paulsen Office Park.
LESSEE: LESSOR:
A & R MATERIALS, INC. PAULSEN OFFICE PARK
BY: _____________________________ BY: ________________________________
James E. Alexander Peter Paulsen BY: Linda Stockhus
ATTORNEY IN FACT
TITLE: __________________________
DATE: __________________________ DATE: _____________________________
<PAGE>
ADDENDUM
--------
This lease addendum is attached hereto and becomes a part hereof, that certain
lease agreement commencing February 1, 1996, by and between A & R MATERIALS,
INC. as Lessee, and PAULSEN OFFICE PARK, as Lessor, for property located at 4010
Moorpark Avenue, Suite 119, San Jose, California:
It is agreed between Lessee and Lessor-.
1) RENT SCHEDULE:
February, 1996 - January, 1997 $2,306,00
February, 1997 - January, 1998 CPI**
**On the anniversary of the commencement date of this lease,
the rent shall be increased according to the then current
Consumer Price Index (CPI) for the preceding twelve months for
the San Francisco, Oakland and San Jose area published by the
U.S. Department of Labor.
Said increase shall not be less that 4%, or more than 7%.
Therefore, If the then current CPI reflects 2%, the increase
shall be 4%, and if the CPI reflects 12%, the 'increase shall
be 7%.
2) All other terms and conditions to remain the same and in full force
and effect.
LESSEE LESSOR
A & R MATERIALS, INC. PAULSEN OFFICE PARK
BY: __________________________ BY: _____________________________
James E. Alexander Peter Paulsen By:
Linda Stockhus
ATTORNEY IN FACT
TITLE: __________________________
DATE: __________________________ DATE: ___________________________
<PAGE>
SERVICE: The landlord will furnish services as follows: Heat, electric
service, janitorial service, water, and air conditioning at the Landlord's
expense. Air conditioning will be supplied during the season when needed in the
normal business week. Monday through Friday from 8:00 a.m. to 6:00 p.m.
RULES AND REGULATIONS
The Tenant agrees to abide by the following rules and regulations:
1. The sidewalks, entrances, passages, courts, elevators, vestibules, stair-
ways, corridors, and halls shall not be obstructed or encumbered by any
Tenant or used for any purpose other than ingress and egress to and from
the demised premises.
2. No awnings of other projections shall be attached to the outside walls of
the building without the prior written consent of the landlord. No
curtains, blinds shades, or screens shall be attached to or hung in, or
used in connection with, any window or door of the demised premises,
without the prior written consent of the landlord, such awnings,
projections, curtains, blinds, shades, screens, or other fixtures must be
of a quality, type design, and color, and attached in the manner approved
by the Landlord.
3. No sign, advertisement, notice, or other lettering shall be exhibited,
inscribed, painted, or affixed by the Tenant on any part of the outside or
inside of the demised premises or building without the prior written
consent of the Landlord. In the event of the violation of the foregoing, by
any Tenant, Landlord may remove same without any liability, and may charge
the expense incurred by such removal to the Tenant or Tenants violating
this rule. Interior sign on doors and directory tablet shall be inscribed,
painted, or affixed at the expense of the Tenant, and shall be of a size,
color, and style acceptable to the Landlord.
4. The utility sinks and other plumbing fixtures shall not be used for any
purposes other than those for which they were constructed and no sweepings,
rubbish, rags, or other substances shall be thrown therein. All damages
resulting from any misuse of the fixtures shall be borne by the Tenant who,
or whose servants, employees, agents, visitors, or licensees shall have
caused the same.
5. No Tenant shall mark, paint, drill into, or in any way deface any part of
the demised premises of the building of which they form a part. No boring,
cutting or stringing of wires shall be permitted, except with the prior
written consent of the Landlord, and as it may direct.
6. No bicycles, vehicles, or animals of any kind shall be brought into or kept
in or about the premises, and no cooking shall be done or permitted by any
Tenant on said premises. No Tenant shall cause or permit any unusual or
objectional odors to be produced upon or permeate from the demised
premises.
7. No Tenant shall make, or permit to be made, any unseemly or disturbing
noises or disturb or interfere with occupants of this neighboring buildings
or premises or those having business with them, whether by the use of any
musical instrument, radio, talking machine, unmusical noise, whistling,
singing or in any other way.
8. In the event of the loss of any keys furnished by the Landlord, Tenant
shall pay to the Landlord the cost thereof.
9. All removals, or the carrying in or out of any safes, freight, furniture,
or bulky matter of any description must take place during the hours which
the Landlord or its agent may determined from time to time. The Landlord
reserves the right to prescribe the weight and position of all safes, which
must be placed upon 2-inch-thick plank strips to distribute the weight. The
moving of safes or other fixtures or bulky matter of any kind must be made
after previous notice to the Manager of the building. Any damage done to
the building or to the tenants or to other persons in bringing in removing
safes, furniture, or other bulky or heavy articles shall be paid for by
Tenant.
10. No Tenant shall occupy or permit any portion of the premises demised to him
to be used for manufacturing or for the possession, storage, manufacturer,
or sale of liquor or narcotics, or as a barber or manicure shop, or as an
employment
<PAGE>
bureau. No Tenant shall engage or pay any employees on the demised
premises, except those actually working for such Tenant on said premises,
nor advertise for laborers giving an address at said premises.
11. Each Tenant, before leaving the said premises at any time, shall see that
all windows, sliding doors, and hall doors are securely locked, and that
all front and rear doors are locked after 6PM.
12. The premises shall not be used for gambling, lodging, or sleeping or for
any immoral or illegal purposes.
13. The requirements of Tenants will be attended to only upon application at
the office of the building. Landlord's employees shall not perform any work
or do anything outside of the regular duties, unless under special
instructions from the office of the Landlord.
14. canvassing, soliciting, and peddling in the building are prohibited, and
each Tenant shall cooperate to prevent the same.
15. Tenants or tenants' guests shall park between designated parking lines
only, and shall not occupy two parking spaces with one car. Vehicles in
violation of the above shall be subject to tow away, contact San Jose
Police at 277-4000 or Schaller Towing at 294-3102.
16. Vehicles parked on premises in excess of fifteen (15) days without prior
written consent of the Landlord shall be deemed abandoned and subject to
tow away.
17. Tenant is furnished with two keys for each outside entry door, but is
responsible for providing extra keys to employees. Tenant is also
responsible for any lock changes due to employee turnover.
<PAGE>
EXHIBIT 10.08
YALE UNIVERSITY Office of Cooperative Research
246 Church Street, Suite 401
New Haven, Connecticut 06510
Telephone: 203 432-7240
Fax: 203 432-7245
14 February 1996
James E. Alexander
President & CEO
A&R Materials, Inc.
4606 Meridian Ave. Suite K
San Jose, CA 95124
Re: Invention of TP Ma (OCR 315) - Isotopically Purified
Semiconductors Patent No. 5,442,191
Dear Jim:
Thank you for your letter of 10 February.
I understand from Professor Ma that A&R has had some difficulty obtaining
bulk isotopically pure Si but that he can prove the feasibility of his invention
with the epitaxial films that you propose to provide.
Yale agrees to the change in wording of section 4.1 of the Option Agreement
that you propose in the above-mentioned letter and to the extension of the
Agreement by 6 months so that A&R can provide the basic materials and that Dr.
Ma can complete his testing of them.
I look forward to further progress reports on this project.
Best regards.
Sincerely,
Henry S. Lowendorf
Associate Director
203-432-7244
<PAGE>
EXHIBIT 10.09
ISONICS CORPORATION
INDEMNITY AGREEMENT
-------------------
THIS INDEMNITY AGREEMENT (this "Agreement") is entered into as of
_________ ___, 1996 between Isonics Corporation, a California corporation (the
"Company"), and ________________________("Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as
directors, officers and other agents the most capable persons available; and
WHEREAS, Indemnitee is a director, officer and/or other agent of the
Company, and both the Company and Indemnitee recognize the risk of litigation
and other claims being asserted against such person; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability and to enhance Indemnitee's continued and effective
service to the Company, the Company desires to provide for the indemnification
of, and the advancing of expenses to, Indemnitee to the fullest extent permitted
by law, subject to certain very limited exceptions, as set forth in this
Agreement.
NOW, THEREFORE, in consideration of the above premises and the promises
set forth herein, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the capitalized
-------------------
terms listed below shall have the meanings ascribed to them as follows:
1.1 Board. The Board of Directors of the Company.
-----
1.2 Expenses. Any expense, liability, or loss, including
--------
attorneys' fees, judgments, fines, ERISA excise taxes and penalties, amounts
paid or to be paid in settlement, any interest, assessments, or other charges
imposed thereon, and any federal, state, local, or foreign taxes imposed as a
result of the actual or deemed receipt of any payments under this Agreement,
paid or incurred in connection with investigating, defending, being a witness
in, or participating in (including on appeal), or preparing for any of the
foregoing, in any Proceeding relating to any Indemnifiable Event.
1.3 Indemnifiable Event. Any event or occurrence that takes place
-------------------
either prior to or after the execution of this Agreement, related to the fact
that Indemnitee:
(a) is or was a director, officer or other agent of the
Company; or
(b) while a director, officer or other agent of the Company is
or was serving at the request of the Company as a director, officer, employee,
trustee, agent, or fiduciary of another foreign or domestic corporation,
partnership, joint venture, employee benefit plan, trust, or other enterprise;
or
<PAGE>
(c) was a director, officer or other agent of a foreign or
domestic corporation that was a predecessor corporation of the Company or was a
director, officer, employee, trustee, agent, or fiduciary of another enterprise
at the request of such predecessor corporation; and
related to anything done or not done by Indemnitee in any such capacity, whether
or not the basis of the Proceeding is alleged action in an official capacity
while serving as described in clauses (a) through (c) above.
1.4 Proceeding. Any threatened, pending, or completed action,
----------
suit, or proceeding, or any inquiry, hearing, or investigation that Indemnitee
in good faith believes might lead to the institution of any such action, suit,
or proceeding, whether civil, criminal, administrative, investigative or other.
2. AGREEMENT TO INDEMNIFY. In the event Indemnitee was, is, or becomes
----------------------
a party to, or witness or other participant in, or is threatened to be made a
party to, or witness or other participant in, a Proceeding by reason of (or
arising in part out of) an Indemnifiable Event, the Company shall indemnify
Indemnitee from and against any and all Expenses to the fullest extent permitted
by law, as the same exists or may hereafter be amended or interpreted (but in
the case of any such amendment or interpretation, only to the extent that such
amendment or interpretation permits the Company to provide broader
indemnification rights than were permitted prior thereto). The rights to
receive indemnification and the advancement of Expenses under this Agreement are
not exclusive of any other rights which Indemnitee may be entitled or
subsequently entitled under any statute, the Company's Articles of Incorporation
or Bylaws, by vote of the shareholders or the Board, or otherwise. To the
extent that a change in applicable law (whether by statute or judicial decision)
or the Bylaws permits greater indemnification than is currently provided for an
Indemnifiable Event, Indemnitee shall be entitled to such greater
indemnification under this Agreement.
2.1 Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for a portion of
Expenses, but not, however, for the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion of such Expenses to which
Indemnitee is entitled.
2.2 Contribution. If the Indemnitee is not entitled to the
------------
indemnification provided in this Agreement for any reason, then in respect of
any threatened, pending or completed Proceedings in which the Company is jointly
liable with the Indemnitee (or would be if joined in such Proceedings), the
Company shall contribute to the amount of Expenses payable by the Indemnitee in
such proportion as is appropriate to reflect (i) the relative benefits received
by the Company on the one hand and the Indemnitee on the other hand from the
transaction from which such Proceeding arose and (ii) the relative fault of the
Company on the one hand and of the Indemnitee on the other hand in connection
with the Indemnifiable Events which resulted in such Expenses, as well as any
other relevant equitable considerations. The relative fault of the Company on
the one hand and of the Indemnitee on the other hand shall be determined by
reference to, among other things, the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent the circumstances
resulting in such Expenses. The Company agrees that it would not be just and
equitable if contribution pursuant to this section
-2-
<PAGE>
were determined by pro rata allocation or any other method of allocation which
does not take account of the foregoing equitable considerations.
2.3 Mandatory Indemnification. Notwithstanding any other
-------------------------
provision of this Agreement, to the extent that Indemnitee has been successful
on the merits (within the meaning of Section 317(d) of the California
Corporations Code) in defense of any Proceeding relating in whole or in part to
an Indemnifiable Event or in defense of any issue or matter therein, Indemnitee
shall be indemnified against all Expenses incurred in connection therewith.
3. EXPENSE ADVANCES.
----------------
3.1 Advance of Expenses to Indemnitee. Expenses incurred by
---------------------------------
Indemnitee in any Proceeding for which indemnification may be sought under this
Agreement shall be advanced by the Company to Indemnitee within 30 days after
receipt by the Company of a statement or statements from Indemnitee requesting
such advance and reasonably evidencing the Expenses incurred by Indemnitee (an
"Expense Advance"). If it is ultimately determined by a final judicial decision
(from which there is no right of appeal) that Indemnitee is not entitled to be
indemnified by the Company, Indemnitee hereby agrees to repay any amounts
advanced by the Company under this Section 3. Indemnitee agrees to execute any
further agreements regarding the repayment of Expenses as the Company may
reasonably request prior to receiving any such advance.
3.2 Exceptions. Notwithstanding Section 3.1, the Company shall
----------
not be obligated for any Expense Advance under this Section 3 for any expenses
incurred by the Indemnitee to the extent such arise from a lawsuit filed
directly by the Company against the Indemnitee if an absolute majority of the
members of the Board reasonably determines in good faith, within forty-five (45)
days of Indemnitee's request to be advanced expenses, that the facts known to
them at the time such determination is made demonstrate clearly and convincingly
that the Indemnitee acted in bad faith. The Company may not avail itself of
this Section 3.2 as to a given lawsuit if, at any time after the occurrence of
the activities or omissions that are the primary focus of the lawsuit, the
Company has undergone a change in control. For this purpose a change in control
shall mean a given shareholder or group of affiliated shareholders increasing
their beneficial ownership interest in the Company by at least 20 percentage
points without advance Board approval.
4. NOTIFICATION AND DEFENSE OF PROCEEDING.
--------------------------------------
4.1 Notice of Claim. Indemnitee shall give written notice to the
---------------
Company promptly after Indemnitee has actual knowledge of any Proceeding as to
which indemnification may be sought under this Agreement. The failure of
Indemnitee to give notice, as provided in this Section 4.1, shall not relieve
the Company of its obligations to provide indemnification under this Agreement;
however, the amounts to which Indemnitee may be indemnified shall be reduced to
the extent that the Company has been prejudiced by such failure.
4.2 Defense. With respect to any Proceeding, the Company will be
-------
entitled to participate in the Proceeding at its own expense and, except as
otherwise provided below, to the extent the Company so desires, the Company may
assume the defense thereof with counsel
-3-
<PAGE>
reasonably satisfactory to Indemnitee. However, the Company shall not be
entitled to assume the defense of any Proceeding (a) brought by the Company, or
(b) as to which Indemnitee has reasonably determined that there may be a
conflict of interest between Indemnitee and the Company in the defense of the
Proceeding and Indemnitee does in fact assume and conduct the defense.
4.2.1 If the Company assumes the defense, Indemnitee shall
furnish such information regarding Indemnitee or the Proceeding in question, as
the Company may reasonably request and as may be required in connection with the
defense or settlement of such Proceeding and shall fully cooperate with the
Company in every other respect. Except as provided in Section 4.3 below, if the
Company assumes the defense of the Proceeding, the Company shall take all
necessary steps in good faith to defend, settle or otherwise dispose of the
Proceeding.
4.2.2 After notice from the Company to Indemnitee of its
election to assume the defense of any Proceeding, the Company will not be liable
to Indemnitee under this Agreement or otherwise for any Expenses in excess of
$10,000 subsequently incurred by Indemnitee in connection with the defense of
such Proceeding other than reasonable costs of investigation or as otherwise
provided in clauses (a) through (c) below. Indemnitee shall have the right to
employ Indemnitee's own counsel in such Proceeding, but all Expenses related
thereto in excess of $10,000 incurred after notice from the Company of its
assumption of the defense shall be at Indemnitee's expense, unless: (a) the
employment of counsel by Indemnitee has been authorized by the Company; (b)
Indemnitee has reasonably determined that there may be a conflict of interest
between Indemnitee and the Company in the defense of the Proceeding, but
Indemnitee does not, in fact, assume and conduct the defense; or (c) the Company
has not, in fact, assumed and is not conducting the defense of such Proceeding.
5. ENFORCEMENT. The Company expressly confirms and agrees that it has
-----------
entered into this Agreement and assumed the obligations imposed on it hereby in
order to induce Indemnitee to continue as a director, officer or other agent of
the Company, and acknowledges that Indemnitee is relying upon this Agreement in
continuing in such capacity. Indemnitee shall have the right to enforce his
indemnification rights under this Agreement by commencing litigation in any
court in the State of California having subject matter jurisdiction thereof and
in which venue is proper. Likewise, the Company may seek judicial determination
of its obligations under this Agreement. The Company and Indemnitee each hereby
consent to service of process and to appear in any such proceeding.
5.1 Defenses; Burden of Proof. It shall be a defense to any
-------------------------
action brought by Indemnitee or the Company concerning enforceability of this
Agreement that it is not permissible under applicable law for the Company to
indemnify Indemnitee for the amount claimed. In connection with any such action
or any determination as to whether Indemnitee is entitled to be indemnified
hereunder, the burden of proof shall be on the Company.
5.2 Presumptions. Neither the failure of the Company (including
------------
its Board or shareholders) to have made a determination prior to the
commencement of such action that indemnification is proper under the
circumstances because Indemnitee has met the standard of conduct set forth in
applicable law, nor an actual determination by the Company (including its Board
or shareholders) that Indemnitee has not met such applicable
-4-
<PAGE>
standard of conduct, shall be a defense to the action or create a presumption
that Indemnitee has not met the applicable standard of conduct. For purposes of
this Agreement, the termination of any claim, action, suit or proceeding, by
judgment, order, settlement (whether with or without court approval),
conviction, or upon a plea of nolo contendere, or its equivalent, shall not
create a presumption that Indemnitee did not meet any particular standard of
conduct or have any particular belief or that a court has determined that
indemnification is not permitted by applicable law.
5.3 Equitable Relief. The Company agrees that the Company's
----------------
failure to make indemnification payments or Expense Advances to Indemnitee shall
cause irreparable damage to Indemnitee, the exact amount of which is impossible
to ascertain, and for this reason agrees that Indemnitee shall be entitled to
such injunctive or other equitable relief as shall be necessary to adequately
provide for payment or reasonably anticipated payments.
5.4 Indemnification for Expenses Incurred in Enforcing Rights.
---------------------------------------------------------
Except as set forth in Sections 3.2 and 6, the Company shall indemnify
Indemnitee against any and all Expenses and, if requested by Indemnitee, shall
(within thirty days after such request) advance such Expenses to Indemnitee,
that are incurred by Indemnitee in connection with any claim or action asserted
against or brought by Indemnitee for indemnification of Expenses or payment of
Expense Advances by the Company under this Agreement or any other agreement or
under applicable law or the Company's Articles of Incorporation or Bylaws now or
hereafter in effect relating to indemnification for Indemnifiable Events. Any
Expenses so paid shall be considered Expense Advances under Section 3 above.
6. EXCEPTIONS. Subject only to Section 2.3 above and notwithstanding
----------
any other provision of this Agreement, the Company shall not be obligated
pursuant to the terms of this Agreement:
6.1 Claims Initiated by Indemnitee. To indemnify or advance
------------------------------
expenses to the Indemnitee in connection with any Proceeding initiated by
Indemnitee unless the Company has joined in, or the Board has consented to, the
initiation of such Proceeding, or the Proceeding is one to enforce rights under
this Agreement;
6.2 Unauthorized Settlements. To indemnify Indemnitee to the
------------------------
extent Indemnitee settles or otherwise disposes of a Proceeding or causes the
settlement or disposal of a Proceeding without the Company's express prior
written consent (which shall not be unreasonably withheld) unless Indemnitee
receives court approval for such settlement or other disposition where the
Company had the opportunity to oppose Indemnitee's request for such court
approval;
6.3 No Opportunity to Defend. To indemnify or advance expenses to
------------------------
Indemnitee with regard to any judicial award if the Company was not given a
reasonable and timely opportunity, at its expense, to participate in the defense
of such action unless the Company's participation in such Proceeding was barred
by this Agreement or the court in such Proceeding;
6.4 Securities Law Actions. To indemnify the Indemnitee on
----------------------
account of any suit in which judgment is rendered against the Indemnitee for an
accounting of profits made from the purchase or sale by the Indemnitee of
securities of the Company pursuant to the provisions of
-5-
<PAGE>
Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or
similar provisions of any federal, state or local statutory law;
6.5 Proceeding to Enforce Agreement. To indemnify or advance
-------------------------------
expenses to the Indemnitee for any expenses incurred by the Indemnitee with
respect to any Proceeding instituted by Indemnitee to enforce or interpret this
Agreement, if a court of competent jurisdiction determines that each of the
material assertions made by the Indemnitee in such Proceeding was not made in
good faith or was frivolous; or
6.6 Unlawful Indemnification. To indemnify or advance expenses
------------------------
for any acts, omissions, transactions or circumstances for which indemnification
is prohibited by applicable state or federal law or until any preconditions
imposed upon, or agreed to by, the Company by or with any court or governmental
agency are satisfied.
7. INSURANCE; SUBROGATION. The Company shall not be liable under this
----------------------
Agreement to make any payment in connection with any claim made against
Indemnitee to the extent Indemnitee has otherwise received payment (under any
insurance policy, Bylaw, or otherwise) of the amounts otherwise indemnifiable
hereunder. In the event of payment under this Agreement, the Company shall be
subrogated to the extent of such payment to all of the rights of recovery of
Indemnitee, who shall execute all papers required and shall do everything that
may be necessary to secure such rights, including the execution of such
documents necessary to enable the Company effectively to bring suit to enforce
such rights.
8. GENERAL PROVISIONS.
------------------
8.1 Amendment of this Agreement. No supplement, modification, or
---------------------------
amendment of this Agreement shall be binding unless executed in writing by both
parties hereto. No waiver of any of the provisions of this Agreement shall
operate as a waiver of any other provisions hereof (whether or not similar), nor
shall such waiver constitute a continuing waiver. Except as specifically
provided herein, no failure to exercise or any delay in exercising any right or
remedy hereunder shall constitute a waiver thereof.
8.2 Binding Effect. This Agreement shall be binding upon and
--------------
inure to the benefit of and be enforceable by the parties hereto and their
respective successors, assigns, spouses, heirs, and personal and legal
representatives. The indemnification provided under this Agreement shall
continue as to Indemnitee for any action taken or not taken while serving in an
indemnified capacity pertaining to an Indemnifiable Event even though Indemnitee
may have ceased to serve in such capacity at the time of any Proceeding.
8.3 Entire Agreement. This Agreement constitutes the entire
----------------
agreement between the parties hereto with respect to the subject matter hereof.
8.4 Remedies Cumulative. The rights and remedies provided in this
-------------------
Agreement and by law shall be cumulative and the exercise of any particular
right or remedy shall not preclude the exercise of any other right or remedy in
addition to, or as an alternative to, such right or remedy.
-6-
<PAGE>
8.5 Notices. Any notice required or permitted by this Agreement
-------
shall be given in writing and shall be deemed effectively given upon personal
delivery or, if mailed, upon deposit with the United States Post Office by
certified mail, return receipt requested, postage prepaid or a nationally
recognized express courier, to the address for the recipient set forth on the
signature page hereto or to such other address as the recipient shall hereafter
have noticed the sending party in the manner set forth above.
8.6 Headings. Descriptive headings contained herein are for
--------
convenience of reference only and shall not affect the meaning or interpretation
of this Agreement.
8.7 References. Any reference in this Agreement to the indemnity
----------
provisions of the Company's Articles of Incorporation or Bylaws, the California
Corporations Code or to any applicable law shall refer to such provisions as
they shall be amended from time to time or to any successor provision, except
that any change in the Company's Articles of Incorporation or Bylaws shall only
apply to the extent that such amendment permits the Company to provide broader
indemnification rights to Indemnitee than currently provided.
8.8 Severability. Any provision of this Agreement, which is
------------
unenforceable in any jurisdiction, shall be ineffective in such jurisdiction to
the extent of such unenforceability without invalidating the remaining
provisions of this Agreement, and any unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other jurisdiction.
8.9 Applicable Law. The rights and obligations under this
--------------
Agreement shall be governed by, and construed in accordance with, the laws of
the State of California applicable to contracts between California residents
made and to be performed entirely within such State.
8.10 Interpretation of Agreement. It is understood that the
---------------------------
parties hereto intend this Agreement to be interpreted and enforced so as to
provide indemnification and advancement of expenses to the Indemnitee to the
fullest extent now or hereafter permitted by law, except as expressly limited
herein.
8.11 Counterparts. This Agreement may be executed in one or more
------------
counterparts, which shall together constitute one agreement.
-7-
<PAGE>
IN WITNESS WHEREOF, this Indemnity Agreement has been entered into
effective as of the date first written above.
ISONICS CORPORATION
By:____________________________________
James E. Alexander
President and Chief Executive Officer
INDEMNITEE: Signature: ______________________________
Name: ___________________________________
Address: ________________________________
_________________________________________
-8-
<PAGE>
EXHIBIT 10.10
NEITHER THIS WARRANT NOR THE COMMON STOCK ISSUABLE HEREUNDER HAS BEEN
REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR WITH ANY STATE
SECURITIES COMMISSIONER. NEITHER THIS WARRANT NOR THE COMMON STOCK MAY BE SOLD
OR TRANSFERRED UNLESS REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND QUALIFIED UNDER ALL APPLICABLE STATE SECURITIES LAWS, OR UNLESS EXEMPTIONS
FROM SUCH REGISTRATION AND QUALIFICATION ARE AVAILABLE.
A&R MATERIALS, INC.
COMMON STOCK PURCHASE WARRANT
No. W1-__ September 27, 1996
Reference is hereby made to that certain $___________ Secured
Promissory Note (the "Loan Note") dated the date hereof of A&R Materials, Inc.,
---------
a California corporation (the "Company"), in favor of _______________, the terms
-------
of which are incorporated by this reference. The Loan Note is one of several
similar notes sold to DayStar Partners, L.P. ("DayStar") and other purchasers
-------
(the "Other Purchasers," who together with DayStar are referred to as the
----------------
"Purchasers") pursuant to that certain Note Purchase Agreement, of even date
----------
herewith, among the Company and the Purchasers (the "Note Purchase Agreement").
-----------------------
As used herein, an "IPO" means an offering of the Company's securities
---
registered under the Securities Act of 1933, as amended, from which the Company
receives gross proceeds of at least $3,500,000.
The Company hereby certifies that, for value received, ___________, or
any transferee who has received this Warrant (the "Holder") is entitled on the
------
terms set forth below to purchase from the Company, on or before the Expiration
Date (as defined below), at an exercise price of $.0612 (the "Exercise Price"),
--------------
____________ shares (the "Initial Warrant Shares") of common stock of the
----------------------
Company (the "Common Stock").
------------
The Company and Holder, among other parties, are entering into a
Registration Rights Agreement dated as of September 27, 1996 (the "Registration
------------
Rights Agreement"). If an IPO has been completed and the Registration Statement
- ----------------
contemplated by Section 2.1 of the Registration Rights Agreement is not
effective within one year after the effective date of the IPO, then this warrant
shall also be exercisable to acquire an additional number of shares equal to
4.0% of the Initial Warrant Shares for each whole or partial month after the
first anniversary of the effective date of the IPO during which such
Registration Statement has not been declared effective.
1. Expiration Date. This Warrant shall be exercisable in whole or in
---------------
part until 5:00 p.m. (San Francisco time) on September 27, 2001, provided,
--------
however, that notwithstanding such expiration date, this Warrant shall not
- -------
expire unless and until not less than 30 nor more than 90 days shall have passed
since the Company gave the Holder notice of the anticipated expiration hereof.
-2-
<PAGE>
2. Exercise of Warrant. This Warrant shall be exercisable in whole
-------------------
or in part at any time commencing (i) one year after the closing of the IPO, or
(ii) if the IPO does not close within six months from the date of this Warrant,
then one year after the date of this Warrant. This Warrant shall be exercised
by surrendering it to the Company at its principal office, with a duly executed
Subscription Form (in substantially the form appearing at the end of this
document), together with payment of the Exercise Price. Promptly after
exercise, the Company shall issue and deliver to or upon the order of the Holder
a certificate or certificates for the number of shares of Common Stock issuable
upon such exercise, and the Company will pay all issue taxes in connection
therewith. All shares of Common Stock which may be issued upon exercise of this
Warrant will, upon issuance by the Company in accordance with the terms of this
Warrant, be validly issued, fully paid and non-assessable, and free from all
taxes and liens with respect to the issuance thereof. To the extent permitted
by law, this Warrant shall be deemed to have been exercised immediately prior to
the close of business on the date of its surrender for exercise as provided
herein, even if the Company's stock transfer books are at that time closed, and
the Holder shall be treated for all purposes as the holder of record of the
Common Stock to be issued upon such exercise as of the close of business on such
date. Upon any partial exercise, the Company will issue to or upon the order of
the Holder a new Warrant for the number of shares of Common Stock as to which
this Warrant has not been exercised.
3. Adjustment of Exercise Price. The Exercise Price and the number
----------------------------
of shares subject to this Warrant shall be subject to adjustment from time to
time as described below.
3.1 Adjustment for Stock Splits, Stock Combinations and Common Stock
----------------------------------------------------------------
Dividends. If at any time or from time to time after the date of this Warrant
- ---------
(the "Issue Date") the number of shares of Common Stock outstanding is increased
by a stock dividend payable in shares of Common Stock (or in options to purchase
or rights to subscribe for Common Stock, or securities by their terms
convertible into or exchangeable for Common Stock, or options to purchase or
rights to subscribe for such convertible or exchangeable securities
(collectively, "Common Stock Rights")) or by a subdivision or split-up of shares
of Common Stock, then, on the date such payment is made or such change is
effective, the Exercise Price shall be decreased, and the number of shares of
Common Stock which the Holder shall be entitled to purchase hereunder shall be
increased, in direct proportion to such increase in outstanding shares; and if
the number of shares of Common Stock outstanding at any time after the date
hereof is decreased by a combination of the outstanding shares of Common Stock,
then, on the effective date of such combination, the Exercise Price shall be
increased, and the number of shares of Common Stock which the Holder shall be
entitled to purchase hereunder shall be decreased, in direct proportion to such
decrease in outstanding shares (it being assumed, in each case, for purposes of
calculating such proportional adjustments, that all Common Stock Rights
outstanding on the date the adjustments are to be made are exercised into the
maximum number of shares of Common Stock into which they may be converted).
3.2 Adjustment for Dividends in Other Stock or Property;
----------------------------------------------------
Reclassifications. In case at any time or from time to time after the holders
- -----------------
of the Common Stock receive or, on or after the record date fixed for the
determination of eligible stockholders, become entitled to receive, without
payment therefor, (i) other or additional stock or other securities or cash or
other property by way of dividend, or (ii) other or additional stock or other
securities or cash or other
-3-
<PAGE>
property by way of stock split, spin-off, split-up, reclassification,
combination of shares or similar corporate rearrangement (in each case other
than additional shares of Common Stock of the Company, or any other stock or
securities into which such Common Stock had been changed, or any Common Stock
Rights, issued as a stock dividend or stock-split), then, and in each such case,
the Holder, upon the exercise of this Warrant, will be entitled to receive the
amount of stock, securities and/or property (including cash) which the Holder
would have received on or before the date of such exercise if on the Issue Date
he had been the holder of record of the number of shares of Common Stock of the
Company which he would have been able to acquire upon exercise in full of this
Warrant and had thereafter, during the period from the Issue Date to and
including the date of such exercise, retained such shares and/or all other or
additional stock and other securities and cash or other property receivable by
him as aforesaid during such period.
3.3 Adjustment for Reorganization, Consolidation, Merger. In case of
----------------------------------------------------
any reorganization of the Company (or any other corporation, the stock or other
securities of which are at the time receivable on the exercise of this Warrant),
or in case the Company (or such other corporation) consolidates with, merges
into or conveys all or substantially all its assets to another corporation after
the Issue Date, then the Holder, upon the exercise of this Warrant at any time
after the consummation of such reorganization, consolidation, merger or
conveyance, will be entitled to receive, in lieu of the stock or other
securities and property receivable upon the exercise of this Warrant prior to
such consummation, the stock, securities or property to which the Holder would
have been entitled upon such consummation if the Holder had converted this
Warrant immediately prior thereto. The provisions of this Paragraph 3.3 shall
similarly apply to successive reorganizations, consolidations, mergers or
conveyances.
3.4 Other Restrictions Relating to Acquisitions. The Company shall
-------------------------------------------
not permit a third party to acquire substantially all of its stock or assets, or
to merge with it, prior to the Company's IPO without the written consent of the
Holder of this Warrant, unless in connection therewith the Company pays all
amounts then owing under the Loan Note. If the acquisition price for the
Company's shares is at least 250% of the exercise price of this Warrant, then
the Company may terminate this Warrant if it has not been exercised by the
Holder within 30 days following the Closing of such acquisition.
3.5 Minimal Adjustments. No adjustment in the Exercise Price need be
-------------------
made if such adjustment would result in a change in the Exercise Price of less
than one percent (1%); no adjustment in the number of shares of Common Stock
subject to this Warrant need be made if such adjustment would result in a change
of less than one percent (1%) in the number of shares subject hereto. Any
adjustment less than these amounts which is not made shall be carried forward
and shall be made at the time of and together with any subsequent adjustment
which, on a cumulative basis, amounts to an adjustment of at least this amount.
3.6 Reorganization of Company. If the Company consolidates or merges
-------------------------
with or into, or transfers or leases all or substantially all its assets to, any
person, upon consummation of such transaction this Warrant shall automatically
become exercisable for the kind and amount of securities, cash or other assets
which the Holder of a Warrant would have owned immediately after the
consolidation, merger, transfer or lease if the Holder had exercised the Warrant
immediately before the effective date of the transaction. Concurrently with the
consummation of
-4-
<PAGE>
such transaction, the corporation formed by or surviving any such consolidation
or merger if other than the Company, or the person to which such sale or
conveyance shall have been made, shall enter into a supplemental Warrant
Agreement so providing and further providing for adjustments which shall be as
nearly equivalent as may be practical to the adjustments provided for in this
Section. The successor Company shall mail to Warrant Holders a notice describing
the supplemental Warrant Agreement. If the issuer of securities deliverable upon
exercise of Warrants under the supplemental Warrant Agreement is an affiliate of
the formed, surviving, transferee or lessee corporation, that issuer shall join
in the supplemental Warrant Agreement. If this subsection applies, other
subsections of this Section 3 shall not apply.
3.7 Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment pursuant to this Paragraph 3 or pursuant to the initial paragraph of
this Warrant, the Company, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to the Holder a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, upon written request at any time of
the Holder, furnish or cause to be furnished to the Holder a like certificate
setting forth (i) such adjustments and readjustments, (ii) the then effective
number of shares of Common Stock subject to the Warrant, and (iii) the then
effective amount of securities (other than Common Stock) and other property, if
any, which would be received upon exercise of the Warrant.
4. No Dilution or Impairment. The Company will not, by amendment of
-------------------------
its Articles of Incorporation or through reorganization, consolidation, merger,
dissolution, issue or sale of securities, sale of assets or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Warrant, but will at all times in good faith assist in the carrying out
of all such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder against dilution or
other impairment. Without limiting the generality of the foregoing, the Company
will take all such action as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and non-assessable shares of
Common Stock upon the exercise of this Warrant and will take no action to amend
its Articles of Incorporation which would change to the detriment of the holders
of Common Stock (whether or not any Common Stock is outstanding at the time) the
dividend or voting rights of the Company's Common Stock as constituted on the
date hereof.
5. Reservation of Stock Issuable on Exercise of Warrant. The Company
----------------------------------------------------
will at all times reserve and keep available, solely for issuance and delivery
upon the exercise of this Warrant, all such shares of Common Stock and other
stock, securities and property as from time to time are receivable upon the
exercise of this Warrant. If at any time the number of authorized but unissued
shares of Common Stock (or other stock, securities or property) shall not be
sufficient to effect the exercise of this Warrant, the Company will use its best
efforts to take such corporate action as may be necessary, in the opinion of its
counsel, to increase its authorized but unissued shares of Common Stock (or
other stock, securities or property) to such number of shares as shall be
sufficient for such purpose.
-5-
<PAGE>
6. Fractional Shares. No fractional shares of the Common Stock will
-----------------
be issued in connection with any exercise of this Warrant, but in lieu of such
fractional shares the Company shall make a cash payment therefor upon the basis
of the Exercise Price then in effect.
7. Notice of Record Date. In case (i) the Company takes a record of
---------------------
the holders of its Common Stock (or other stock or securities at the time
receivable upon the exercise of the Warrant) for the purpose of entitling them
to receive any dividend (other than a cash dividend at the same rate as the rate
of the last cash dividend theretofore paid) or other distribution, or any right
to subscribe for or purchase any shares of stock of any class or any other
securities, or to receive any other right, or (ii) of any capital reorganization
of the Company, any reclassification of the capital stock of the Company, any
consolidation or merger of the Company with or into another corporation, or any
conveyance of all or substantially all of the assets of the Company to another
corporation, or (iii) of any voluntary dissolution, liquidation or winding-up of
the Company, then, and in each such case, the Company will mail or cause to be
----
mailed to the Holder a notice specifying, as the case may be, (a) the date on
which a record is to be taken for the purpose of such dividend, distribution or
right, and stating the amount and character of such dividend, distribution or
right, or (b) the date on which such reorganization, reclassification,
consolidation, merger, conveyance, dissolution, liquidation or winding-up is to
take place, and the time, if any is to be fixed, as of which the holders of
record of Common Stock (or such other stock or securities at the time receivable
upon the exercise of the Warrant) will be entitled to exchange their shares of
Common Stock (or such other stock or securities) for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, conveyance, dissolution, liquidation or winding-up. Such notice shall
be mailed at least fifteen (15) days prior to the date specified therein.
8. Warrant Register. The Company, or its duly appointed agent, shall
----------------
maintain a register for this Warrant and other warrants of similar tenor on
which it shall register the issuance and transfer of such warrants. The duly
registered holder ("Registered Owner") of each warrant shall be deemed the
actual owner of the warrant so registered until the Company, or its agent, is
required to record a transfer thereof.
9. Transfer.
--------
9.1 Transfer. Subject to compliance with all applicable federal and
--------
state securities laws and the terms of this Warrant, this Warrant may be
transferred, in whole or in part, without the consent of the Company. The
Company acknowledges that one or more of the Purchasers may wish to transfer
their Warrants to a stock brokerage firm which would then exercise the Warrant
and sell the underlying stock. If the Company is notified that one or more of
the Purchasers wish to proceed in this manner, the Company will cooperate with
the parties and use reasonable efforts to assist the brokerage firm in disposing
of the underlying securities in accordance with applicable law.
9.2 Registration or Exemption. This Warrant and the Warrant Shares
-------------------------
shall not be sold or transferred unless either (i) they first shall have been
registered under the Securities Act of 1933, as amended (the "Act"), or (ii) the
Company first shall have been furnished with an
-6-
<PAGE>
opinion of legal counsel, reasonably satisfactory to the Company, to the effect
that such sale or transfer is exempt from the registration requirements of the
Act.
9.3 Legend. Each certificate representing Warrant Shares shall bear
------
a legend substantially in the following form:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not
be offered, sold or otherwise transferred, pledged or hypothecated
unless and until such securities are registered under such Act or an
opinion of counsel satisfactory to the Company is obtained to the
effect that such registration is not required."
The foregoing legend shall be removed from the certificates representing any
Warrant Shares, at the request of the holder thereof, at such time as they
become eligible for resale pursuant to Rule 144(k) under the Act or otherwise.
10. Payment of Taxes. The Company will pay all documentary stamp taxes
----------------
attributable to the initial issuance of Warrant Shares upon the exercise of
Warrants; provided, however, that the Company shall not be required to pay any
-------- -------
tax or taxes which may be payable in respect of any transfer involved in the
issue of any Warrant Certificates or any certificates for Warrant Shares in a
name other than that of the registered holder of a Warrant Certificate
surrendered upon the exercise of a Warrant, and the Company shall not be
required to issue or deliver such Warrant Certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
11. Replacement of Warrant. Upon receipt of evidence reasonably
----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of loss, theft or destruction) upon delivery of
an indemnity agreement or bond in such reasonable amount as the Company may
determine or (in the case of mutilations) upon surrender and cancellation
hereof, the Company, at its expense, will issue a replacement.
12. Notices. All notices, requests, consents and other communications
-------
required or permitted hereunder shall be in writing and shall be deemed to have
been delivered one business day after deposit with a reputable overnight
delivery service, or two business days after deposit in the mail with the United
States Postal Service addressed as follows:
(a) If to any Holder, addressed to such Holder at its address as
shown on the books of the Company, or at such other address as such Holder
may specify from time to time by written notice to the Company, with a copy
to Paul Escobosa, Esq., Coblentz, Cahen, McCabe & Breyer, LLP, 222 Kearny
Street, 7th Floor, San Francisco, CA 94108.
(b) If to the Company, at the address set forth below, or at such
other address as the Company may specify from time to time by written
notice to the Holder,
-7-
<PAGE>
with a copy to Kevin Kelso, Fenwick & West LLP, Two Palo Alto Square, Palo
Alto, CA 94306;
and such notices and other communications shall for all purposes of this Warrant
be treated as being effective or having been given upon delivery, if delivered
personally, or, if sent by mail, seventy-two (72) hours after the same has been
deposited in a regularly maintained receptacle for the deposit of United States
mail, addressed and postage prepaid as aforesaid.
13. Survival of Covenants, Representations and Warranties, etc. All
----------------------------------------------------------
covenants, representations and warranties made in, pursuant to, or in connection
with this Warrant shall survive the execution and delivery hereof.
14. Severability. Should any one or more of the provisions of this
------------
Warrant be determined to be illegal or unenforceable, all other provisions of
this Warrant shall be given effect separately from the provision or provisions
determined to be illegal or unenforceable and shall not be affected thereby.
15. Parties in Interest. All the terms and provisions of this Warrant
-------------------
shall be binding upon and inure to the benefit of and be enforceable by the
respective transferees, successors, assigns, administrators, executors, heirs,
and legal representatives of the Holder and the Company, whether so expressed or
not.
16. Changes; Waiver. Neither this Warrant nor any term hereof may be
---------------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
17. Headings. The headings in this Warrant are for purposes of
--------
convenience of reference only, and shall not be deemed to constitute a part
hereof.
18. Governing Law. This Warrant shall be construed in accordance with and
-------------
governed by the laws of that State. Any litigation or arbitration between the
parties which arises out of this Warrant shall be instituted and prosecuted only
in the appropriate California or Federal court or other tribunal, situated in
San Jose, California. The Company hereby specifically submits itself and its
properties to the exclusive jurisdiction of such courts for purposes of any such
action and the enforcement of any judgment or order arising therefrom. The
parties hereto each waive any right to a change of venue and any and all
objections to the jurisdiction of the California courts. Notwithstanding the
foregoing, the Purchasers may take such actions in a foreign jurisdiction with
they deem necessary and appropriate to enforce or collect any court judgment in
any dispute arising out of the Warrant or to seek and obtain other relief as is
necessary to enforce the terms of this Warrant. Each party agrees that service
upon such party in any such action or proceeding maybe made as provided above
for the giving of notices.
19. Expiration. If the last day on which this Warrant may be exercised,
----------
or on which it may be exercised at a particular Exercise Price, is a Sunday or a
legal holiday or a day on which banking institutions doing business in the City
of San Francisco are authorized by law to close,
-8-
<PAGE>
this Warrant may be exercised prior to 5:00 p.m. (San Francisco time) on the
next succeeding full business day with the same force and effect and at the same
Exercise Price as if exercised on such last day specified herein.
[balance of page intentionally left blank]
-9-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Common Stock Purchase
Warrant to be duly executed and delivered on the date first set forth above.
A&R MATERIALS, INC.,
a California corporation
By:
--------------------------------
Its:
-----------------------------
Address: 4010 Moorpark Ave., Suite 119
San Jose, CA 95117
Attn: James E. Alexander
ACCEPTANCE BY HOLDER:
- ------------------------------------------
By:
------------------------------------
By:
------------------------------
Title:
----------------------------
Dated: _____________, 1996
-10-
<PAGE>
SUBSCRIPTION FORM
-----------------
The undersigned hereby irrevocably elects to exercise the within Warrant to
the extent of purchasing _______ shares of the Common Stock of A&R MATERIALS,
INC. and hereby delivers $______________ in payment of the Exercise Price
thereof, in accordance with the Common Stock Purchase Warrant dated
____________________, ______.
DATED: _______________, _____
------------------------------
Name of Warrant Holder
By
----------------------------
Authorized Signature
-11-
<PAGE>
EXHIBIT 11.1
ISONICS CORPORATION
STATEMENTS REGARDING CALCULATION
OF NET INCOME (LOSS) PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
APRIL 30, ENDED JULY 31,
------------- ---------------
1995 1996 1995 1996
------ ----- ------- -------
<S> <C> <C> <C> <C>
Net Income (Loss)................................ $ (143) $ 281 $ 83 $ 43
====== ===== ======= =======
Weighted Average Common Stock Outstanding........ 1,456 1,499 1,499 1,499
Dilutive Effect of Stock Options and Warrants.... -- -- -- --
Dilutive Effect of Preferred Stock............... -- 99 98 100
Dilutive effect of stock options and warrants
granted since August 1, 1995 (approximately
twelve months preceding the offering),
calculated using the treasury stock method at
$7.00 per share................................. 745 745 745 745
------ ----- ------- -------
Shares Used in Computing Per Share Information... 2,201 2,343 2,342 2,344
====== ===== ======= =======
Net Income (Loss) Per Share...................... $(0.06) $0.12 $ 0.04 $ 0.02
====== ===== ======= =======
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated May 10, 1996 (except for the first paragraph
of Note 8 as to which the date is September 30, 1996), accompanying the
financial statements of Isonics Corporation contained in this Registration
Statement and Prospectus. We consent to the use of the aforementioned report
in this Registration Statement and Prospectus, and to the use of our name as
it appears under the caption "Experts."
Grant Thornton LLP
San Jose, California
September 30, 1996
