<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1996
REGISTRATION NO. 333-13289
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
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 INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
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 94306 (212) 977-6600
(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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PROPOSED
TITLE OF EACH CLASS OF MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE
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<S> <C> <C> <C> <C>
Units(2), each
consisting of......... 977,500 $8.00 $7,820,000 $2,697
(a) 1 share of Common
Stock................ 977,500 -- -- --
(b) 1 Redeemable Common
Stock Purchase
Warrant.............. 977,500 -- -- --
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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(3)........... 85,000 $.001 $85 --
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Common Stock issuable
upon exercise of
Representatives'
Warrants(4)........... 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
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Common Stock issuable
upon exercise of
Redeemable Warrants
issuable upon exercise
of Representatives'
Warrants(4)........... 85,000 $11.85 $1,007,250 $348
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Total.................. 3,272,500 $21,226,710 $7,322(5)
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</TABLE>
(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 and 127,500 Redeemable Warrants
issuable upon exercise of the Representatives' Over-Allotment Option.
(3) No registration fee required pursuant to Rule 457 under the Securities
Act.
(4) 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.
(5) Previously paid.
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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 NOVEMBER 20, 1996
850,000 SHARES OF COMMON STOCK AND
850,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
(AS UNITS, EACH CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE WARRANT)
[LOGO OF ISONICS CORPORATION]
This Prospectus relates to the offering by Isonics Corporation, a California
corporation ("Isonics" or the "Company"), of 850,000 shares (the "Shares") of
common stock, no par value (the "Common Stock"), and 850,000 redeemable common
stock purchase warrants (the "Warrants") initially as units, each unit
consisting of one share of Common Stock and one Warrant. 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, but will trade separately immediately upon
the closing of the offering. 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 ending immediately before the notice of redemption.
Prior to this offering, there has been no public market for the Securities,
Common Stock or Warrants, and there is no assurance that such a market will
develop or be maintained following the offering. After completion of this
offering, there will be no public market for the Securities as units. 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, and
has also applied for listing of the Common Stock and Warrants on the Boston
Stock Exchange under the symbols "INC" and "INCW," respectively.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON
PAGE 5 AND "DILUTION" ON PAGE 16.
----------
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.
<TABLE>
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UNDERWRITING
DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Unit (3)............................... $ $ $
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Per Share................................. $ $ $
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Per Warrant............................... $ $ $
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Total (3)(4)............................... $ $ $
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</TABLE>
(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 intends to sell the Warrant included in the Units at an initial
public offering price of $0.10 per Warrant, with the balance of the initial
public offering price per Unit constituting the purchase price of the Share
included in the Unit.
(4) The Company has granted the Underwriters an over-allotment option,
exercisable within 45 days after the date of this Prospectus, to purchase
up to 127,500 shares of Common Stock and/or 127,500 Warrants, solely to
cover over-allotments, if any. The over-allotment option may be exercised
to purchase units (each consisting of one share of Common Stock and one
Warrant), or shares of Common Stock or Warrants or any combination thereof.
To the extent that the option is exercised, the Underwriter will offer the
additional Common Stock 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>
A Stable isotope labeled compounds used to determine structure of molecules
B Ion implant tool utilizing stable isotopes
C A carbon-13 diagnostic breath test sample being provided by a small child
D Xenon and carbon stable isotope products packaged and ready for shipment
E Depleted zinc in the form of sintered oxide pellets
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, THE BOSTON STOCK
EXCHANGE 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 pursuant to sales orders, 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. The amount of future direct sales of DZ to certain end user
customers may be limited by, among other things, certain rights or agreements
of GE, and future direct sales could also be affected by GE's future intentions
regarding sales or purchases of DZ independently of the Company, see "Risk
Factors--Number of DZ Customers."
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 October 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. After completion of this offering,
there will be no public market for the
Securities as units. See "Description of
Capital Stock."
Common Stock to be outstanding
after this offering.......... 2,761,111 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
Boston Stock Exchange Symbols. Common Stock--INC; Warrants--INCW
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
APRIL 30, ENDED JULY 31,
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1995 1996 1995 1996
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<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).................................. 2,218 2,360 2,360 2,361
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1996
----------------------
ACTUAL AS ADJUSTED(3)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 147 $3,654
Working capital (deficiency)............................ (134) 3,373
Total assets............................................ 2,138 5,645
Long-term debt, less current portion.................... 177 177
Total shareholders' equity.............................. 213 4,945
</TABLE>
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(1) Based on shares outstanding as of October 1, 1996. Includes 96,315 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, 414,134 shares of Common Stock issuable upon the
exercise of outstanding warrants at a weighted average exercise price of
$1.74 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
414,134 shares of Common Stock, the sale by the Company in this offering of
850,000 Shares and 850,000 Warrants to purchase Common Stock at 150% of the
initial public offering price per Share, 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 an
assumed weighted average exercise price of $9.38, the exercise of options,
after July 31, 1996, to purchase 97,671 shares of Common Stock at an
exercise price of $2.07 per share, 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, which is owned by the
Ministry of Atomic Energy of the Russian Federation, which is part of the
cabinet of the government of the Russian Federation. The Company recently
signed an agreement under which the plant and AO Techsnabexport, Co., Ltd.
("Techsnabexport") which is a commercial department of the Ministry, have
agreed to supply the Company with zinc, cadmium, silicon, and carbon isotopes
over the next three years. Under the agreement, the Company negotiates with
the plant management 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. If such an agreement is
entered into, the agreement is expected to provide, among other things, that
the plant will exclusively supply the Company and that any disputes arising
under the agreement will be resolved by arbitration conducted in Europe under
international commercial arbitration rules. Even if such an agreement is
negotiated, the enforceability of such an 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. The plant is generally
subject to the same government laws, policies, controls and regulations as
apply to private enterprises in Russia. To date, these laws, policies,
controls and regulations have not had any material adverse effect on the
Company's business or relations with the plant, although there can be no
assurance that this will be the case in the future. 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 the processing plant in Russia or with the
Ministry of Atomic Energy will be successfully maintained, even apart from
these political, economic or military factors. In addition, there have been
certain privatization programs in certain countries of the former Soviet
Union, although the Company is not aware of any current proposals to privatize
the plant or other government-controlled isotope production facilities in
Russia. If at some future date the plant was privatized, the Company cannot
predict whether any such privatization would result in a favorable or an
5
<PAGE>
unfavorable impact on the Company. Disruption or termination of the Company's
supply sources could have a material adverse effect on the Company's business,
financial condition and results of operations. 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 GE accounted for 66%, 59% and 88% of net
revenues for the three months ended July 31, 1996, and the years ended April
30, 1995 and 1996, respectively. One other customer accounted for 20% of net
revenues for the three months ended July 31, 1996. A second customer accounted
for 10% of net revenues for the three months ended July 31, 1996. A third
customer accounted for 11% of net revenues for the years ended April 30, 1995
and 1996. A fourth customer accounted for 26% of net revenues for the year
ended April 30, 1995. 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. In particular, the Company's
sales of DZ to GE have been pursuant to sales orders placed from time to time
by GE, and the Company does not have any written purchase or sales agreements
with GE relating to sales of DZ or other 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, and an extraordinary charge relating to payment of the Placement
Notes upon completion of this offering. 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."
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
6
<PAGE>
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, and as a result the Company expects to have a
significant net loss for the quarter in which the offering occurs. See
"Capitalization--Recent Financing Transactions."
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. GE could, among other actions, seek alternative sources of DZ to compete
with the Company and seek to sell or purchase DZ independently of the Company.
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 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
7
<PAGE>
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, 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
8
<PAGE>
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 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.
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
9
<PAGE>
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
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
10
<PAGE>
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 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 45.7% of
the Company's outstanding Common Stock (approximately 43.3% 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." The Company's bylaws provide that
so long as the Company is a "listed company" as defined by applicable
California law, there will not be cumulative voting in connection with the
election of directors. Upon the closing of this offering, however, the Company
will not be a listed company as so defined, and therefore cumulative voting
will apply in connection with the election of directors. See "Description of
Capital Stock--Common Stock."
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 and the Boston Stock Exchange, 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 on the Boston Stock Exchange
(assuming the Company
11
<PAGE>
continued to be listed on such exchange) and 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.
Under the blue sky laws of most states, public sales of Common Stock and
Warrants after this offering by persons other than the Company in "nonissuer
transactions" must either be qualified under applicable blue sky laws, or
exempt from such qualification requirements. Applicable exemptions for
secondary trading of the Common Stock and Warrants may differ from state to
state depending on the particular statutes and regulations of that state. In
many states, secondary trading will be permitted only so long as information
about the Company is published in a recognized manual such as manuals
published by Moody's Investor Service or Standard & Poor's Corporation. The
Company has applied for listing in a recognized manual and will attempt to be
so listed as soon after the closing of this offering as reasonably
practicable, but secondary trading in many states will be restricted for some
period of time after the date of this Prospectus.
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 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 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 1,911,111
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 587,134 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 $5.30 per share. To the extent
options or warrants to purchase Common Stock are exercised, there may be
further dilution. See "Dilution."
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<PAGE>
RECENT DEVELOPMENTS
Based on preliminary sales, operating and other data through October 31,
1996, the Company believes that total revenues for the three months ended
October 31, 1996 were approximately $800,000. In addition to sales to GE of
approximately 30% to 35% of net revenues, the Company continued direct sales
of DZ to end users, and for the three months ended October 31, 1996,
approximately 20% to 25% of net revenues were from sales made directly to end
users. Sales of cadmium and stable isotope labeled compounds represented
approximately 40% to 50% of net revenues during the period. Net revenues
decreased from approximately $1.6 million for the three months ended July 31,
1996. The decrease was due to the timing of DZ orders and the size of such
orders. The decrease in DZ net revenues was offset in part by increases in
sales of cadmium and stable isotope labeled compounds. Based upon such data,
the Company believes that it will incur a net loss for the period of
approximately $300,000 to $400,000.
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 ($5,403,000 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
APPROXIMATE PERCENTAGE OF NET
APPLICATION OF NET PROCEEDS DOLLAR AMOUNT PROCEEDS
--------------------------- ------------- -----------------
<S> <C> <C>
Repayment of outstanding debt(1)............... $1,372,000 29%
Facilities and capital expenditures(2)......... $ 930,000 21%
Research and development(3).................... $1,000,000 21%
Working capital and general corporate
purposes(4).................................... $1,375,000 29%
</TABLE>
- --------
(1) The Company intends to apply these proceeds to repay approximately
$1,372,000 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, estimated at approximately $300,000,
purchase equipment, estimated at approximately $550,000, and upgrade
management information systems, estimated at approximately $80,000. See
"Business--Manufacturing and Supply."
(3) The Company intends to use an estimated approximately $850,000 of the net
proceeds to further develop and select technology associated with the
diagnostic breath test market, an estimated approximately $100,000 of the
net proceeds to develop and test isotopically pure silicon and an
estimated approximately $50,000 of the net proceeds to continue research
and development of existing products.
(4) The Company intends to use a portion of the proceeds for general corporate
purposes which may, among other purposes, include inventory purchases,
accounts receivable financing and administrative salaries.
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.
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<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 and $0.10 per
Warrant, the issuance of Representatives' Warrants to purchase 170,000 shares
of Common Stock at a weighted average exercise price of $9.38 per share, the
exercise of options, after July 31, 1996, to purchase 315,377 shares of Common
Stock at a weighted average exercise price of $1.69 per share and the issuance
of 96,315 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 $1,155 $ 177
==== ====== ======
Shareholders' equity:
Class A 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 actual and pro forma, no
shares issued or outstanding 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, 2,761,111 as
adjusted................................. 78 78 5,412
Warrants.................................. -- 394 394
Common stock subscriptions receivable..... -- -- (330)
Retained earnings (accumulated deficit)..... 10 10 (531)
---- ------ ------
Total stockholders' equity................ 213 607 4,945
---- ------ ------
Total capitalization.................... $390 $1,762 $5,122
==== ====== ======
</TABLE>
- --------
(1) The Placement is reflected in the Pro Forma amounts as a borrowing and a
sale of securities. See "--Recent Financing Transactions." The $1,372,000
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
$394,000. Expenses and discounts related to the issuance of the Placement
Notes were $147,000. 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 $541,000, 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) 414,134 shares of Common Stock
issuable upon the exercise of outstanding warrants at a weighted average
exercise price of $1.74 per share, (iv) 170,000 warrants to purchase shares of
Common Stock issuable to the Representatives upon exercise of the
Representatives' Warrants 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.
14
<PAGE>
RECENT FINANCING TRANSACTIONS
In an August and September 1996 private placement (the "Placement"), the
Company issued approximately $1,372,000 principal amount of 12% nonconvertible
promissory notes (the "Placement Notes") and warrants (the "Placement
Warrants") to acquire 286,414 shares (the "Placement Shares") of Common Stock
to a small number of sophisticated investors (the "Placement Investors"). Net
proceeds were approximately $1,225,000.
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 12% per annum is due and payable
monthly from September 1996 through May 1997 and (ii) principal and accrued
but unpaid interest at 15% per annum 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 143,207 Placement Shares are exercisable in
whole at any time or in part at $.4217 per share, and Placement Warrants to
purchase 143,207 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 377,458 additional Placement Shares (such warrants referred to
as "Default Warrants") at $.01 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."
An aggregate discount of $541,000 will be amortized to interest expense over
the contractual life of the Placement Notes. This discount is comprised of
$394,000 representing the fair value of the warrants issued in connection with
the Placement, $137,000 representing discounts on the Placement Notes and
$10,000 representing expenses of the Placement. 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 (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,
and as a result the Company expects to have a significant net loss for the
quarter in which the offering occurs.
Certain of the Company's directors, employees, and other related persons
participated in the Placement. See "Certain Transactions."
15
<PAGE>
DILUTION
The net tangible book value of the Company as of July 31, 1996 was $17,000
or $.01 per share of Common Stock. The July 31, 1996 book value was adjusted
for the following items: (i) the 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 $2.07 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 $4,694,000 or $1.70 per share. This represents an
immediate increase in net tangible book value of $1.69 per share to existing
shareholders and an immediate dilution of $5.30 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............ $ .01
Increase in net tangible book value per share attributable to
new investors................................................ $1.69
Pro forma net tangible book value per share after the offering.. 1.70
-----
Net tangible book value dilution per share to new investors..... $5.30
=====
</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.. 1,911,111 69.2% $ 735,000 11.0% $0.38
New investors.......... 850,000 30.8% $5,950,000 89.0% $7.00
--------- ----- ---------- -----
Totals............. 2,761,111 100.0% $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 414,134 shares of Common Stock issuable at a weighted
average exercise price of $1.74 per share, (iii) additional warrants to
purchase 850,000 shares of Common Stock at an exercise price of 150% of the
IPO Price Per Share, (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 and (v) options to purchase 40,000
shares of Common Stock at an exercise price equal to 110% 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."
16
<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............................... 2,218 2,360 2,360 2,361
===== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
------------ --------
1995 1996 1996
----- ----- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
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>
17
<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 GE accounted for 66%, 59% and 88% of net revenues for the three
months ended July 31, 1996, and the years ended April 30, 1995 and 1996,
respectively. One other customer accounted for 20% of net revenues for the
three months ended July 31, 1996. A second customer accounted for 10% of net
revenues for the three months ended July 31, 1996. A third customer accounted
for 11% of net revenues for the years ended April 30, 1995 and 1996. A fourth
customer accounted for 26% of net revenues for the year ended April 30, 1995.
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. Isoserve was the
only other supplier of DZ in the world at the
18
<PAGE>
acquisition date. By virtue of its acquisition of the Isoserve assets and
assumption of liabilities, the Company effectively became the sole source for
DZ worldwide. Management believes this acquisition has had a significant
positive impact on the Company's net revenues in fiscal 1996 as compared to
1995, and the Company cannot determine what the results of operations from
sales of DZ would have been in fiscal 1996 had the Company not acquired
Isoserve. Net sales of DZ were approximately $4.9 million in fiscal 1996 as
compared to $430,000 in fiscal 1995. By virtue of its position as the sole
worldwide supplier of DZ in 1996, the Company was able to increase unit
shipments and per unit selling price while keeping production costs stable,
thus increasing its gross margin on sales of DZ.
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) 3.2 4.3 2.0
----- ----- ----- -----
Net income (loss)............................... (19.4)% 5.0% 7.0% 2.7%
===== ===== ===== =====
</TABLE>
Net Revenues. Net revenues increased from $738,000 in fiscal 1995 to $5.6
million in fiscal 1996. The increase was due primarily to demand for energy
products. Unit shipments of energy products increased by a factor of
approximately seven and average unit prices increased slightly as a result of
additional processing performed by the Company. The increase in shipments and
average unit prices was in part attributable to the acquisition of Isoserve.
To a lesser extent, net sales in fiscal 1996 increased from the introduction
of a new product, cadmium, which is used for laser holography applications.
Cadmium sales represented less than 15% of net revenues in fiscal 1996.
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 primarily to demand for
energy products and cadmium. Net revenues from energy product sales increased
approximately $213,000 as a result of increased unit shipments and average
unit prices. Average unit prices of energy products were positively affected
by the Company's direct sales to end users. Net revenues from cadmium
increased approximately $107,000 on increased unit shipments, but average unit
prices decreased significantly as a result of competition in the market.
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.
19
<PAGE>
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.
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 working capital limitations which prevented additional research and
development expenditures.
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 3.2% 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.
20
<PAGE>
Extraordinary Item. As a result of the Placement Notes issued in the
Placement, the Company is amortizing to interest expense an aggregate discount
of $541,000 over the contractual life of the Placement Notes. In the quarter
in which this offering is completed, the amount of the discount which has not
already been amortized will be recorded as a charge to operations for debt
restructuring and is expected to 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 adverse effect on the Company's reported earnings
for that quarter, and as a result the Company expects to have a significant
net loss for the quarter in which the offering occurs. As of October 31, 1996,
approximately $490,000 of the discount remained to be amortized. See
"Capitalization--Recent Financing Transactions."
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 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.
The Company is required to make royalty payments to Isoserve for each gram
of depleted zinc metal sold until March 2000. Minimum annual royalty payments
of $100,000 are required regardless of sales volume until the Company has paid
$500,000 in the aggregate. The maximum royalty payments under the agreement
are $1,000,000. As of July 31, 1996, the Company has paid cumulative royalties
of $241,000 to Isoserve, of which $45,000 was paid in the three months ended
July 31, 1996.
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. These
working capital deficiencies were the result of the significant losses from
operations in the Company's early stages as it incurred expenses to establish
its market position. The Company believes that the net proceeds of this
offering will eliminate these working capital deficiencies upon the closing of
this offering. 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
21
<PAGE>
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."
22
<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 pursuant to sales orders, 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.
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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;
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. 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;
. 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.
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.
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").
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
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<PAGE>
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.
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. The Company's sales of
DZ to GE have been pursuant to sales orders placed from time to time by GE,
and the Company does not have any written purchase or sales agreements with GE
relating to sales of DZ or other products. 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.
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. 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
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
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<PAGE>
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.
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
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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.
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 facilities that can, and do,
manufacture stable isotopes, 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. Since the original impetus for new applications of stable
isotopes in health care frequently comes from the drug manufacturers, 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
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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.
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 funds research and development
to improve technologies for isotope separation and materials processing
technologies performed at Moscow State University and has retained consultants
to supervise the progress of such research. The Company's arrangements with
the university do not obligate the Company to fund any particular level of
expenditures, and payments to fund such research at the university have not
been in amounts material to the Company. 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
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<PAGE>
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.
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.
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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.
MANUFACTURING AND SUPPLY
Consistent with the Company's strategy to minimize capital expenditures, the
Company obtains stable isotopes through a multi-year supply agreement and, to
a lesser extent, from time to time from a variety of other 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 Russia and the
Republic of Georgia (which was part of 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 Techsnabexport and an isotope
enrichment plant located in Russia, which is owned by the Ministry of Atomic
Energy of the Russian Federation, which is part of the cabinet of the
government of the Russian Federation. 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 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. If such an agreement is entered into,
the agreement is expected to provide, among other things, that the plant will
exclusively supply the Company and that disputes arising thereunder will be
resolved by arbitration conducted in Europe under international commercial
arbitration rules. Even if such an agreement is negotiated, 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.
The plant with which the Company has the agreement described above is one of
four similar plants which were designed to address the needs of the former
Soviet Union and certain other countries' needs for low enriched uranium for
commercial nuclear power plant fuel and for highly enriched uranium for
military purposes. Following the nuclear accident at Chernobyl, certain of the
Russian nuclear power plants have been shut down,
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reducing demand on these enrichment plants. In addition, in recent years the
demand on these plants to produce products for military purposes has declined.
In part in response to these trends, the plant has converted a portion of its
capacity to processing stable isotopes, and the Company believes that
additional capacity could be converted if the plant decided to do so. The
Company believes that the plant has the potential capacity to meet all of the
Company's foreseeable needs for processing of stable isotopes. The Company
believes that one or more of the other similar enrichment plants may convert
part of its capacity to the production of stable isotopes should market demand
grow substantially. Certain other facilities elsewhere in the world, including
the Oak Ridge National Laboratory in Oak Ridge, Tennessee, and certain private
and pseudo-governmental organizations in Great Britain, Germany, The
Netherlands and South Africa, have the potential to produce stable isotopes
and, in certain cases, actually produce isotopes.
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.
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.
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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.
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
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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.
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.
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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.
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
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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.
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. The Company believes it
is in compliance in all material respects with applicable federal and state
environmental regulatory requirements. 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
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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.
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 leases office and laboratory space on a
month-to-month basis at Moscow State University where it performs its research
on isotope separation.
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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
Daniel J. Grady 42 Vice President, Medical, Research & Diagnostics
Paul J. Catuna 32 Chief Financial Officer, Director of Administration and Secretary
Lindsay A.
Gardner(1)(2) 45 Director
Larry J. Wells(1)(2) 52 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
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
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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.
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. Mr. Wells, together with
entities with which he is affiliated, owns approximately 6% of the equity
securities of National Securities Corporation, one of the Representatives.
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
40
<PAGE>
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 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
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 $50,000 or 10% of such Named Person's annual compensation.
The following table sets forth information with respect to the options
granted to each Named Person during fiscal 1996.
41
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE
OPTION/SARS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED(#)(1) FISCAL YEAR SHARE($)(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.
In September 1996, Mr. Alexander and Mr. Rubizhevsky each exercised his
option to acquire 108,853 shares at $1.52 per share. In payment of the
exercise price, the Company accepted a full recourse promissory note from each
officer in the principal amount of approximately $165,000. The principal bears
interest at the minimum applicable federal rate, which is payable in annual
installments over the term of the note. All accrued and unpaid interest and
all principal is due five years after the exercise date. The purchased shares
have been pledged to secure repayment of the loan. Upon a sale of any shares,
a portion of the net proceeds equal to the exercise price per share of the
shares sold will be used to repay the loan. See "--Certain Transactions."
No stock options were exercised during fiscal 1996 by any Named Person.
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 and employees, 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
42
<PAGE>
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.
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.
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 November 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 50,000
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
43
<PAGE>
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), 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) Savings &
Retirement 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 November 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 matching 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
44
<PAGE>
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.
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 (the
"Commission"), such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
45
<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 Placement, Placement Notes in an aggregate principal
amount of $370,000 were issued to Lindsay Gardner, a director of the Company,
one employee of the Company and four affiliates of directors or officers of
the Company at a discount totalling approximately $41,000 and otherwise on the
same terms as the other Private Investors. In addition, DayStar Partners, 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 41,745 shares of Common Stock on the same terms as
other Private Investors, and the Company entered into a consulting agreement
with Larry Wells Co., Inc., another entity of which Mr. Wells is an affiliate,
pursuant to which the Company paid the entity $85,000. Pursuant to the
consulting agreement, that entity advised the Company concerning the Placement
and following completion of the Placement has consulted with the Company as
requested concerning financing matters and acquisition opportunities. 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 equal to the exercise
price per share of the shares sold 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 and the amount of
taxes payable as a result of such compensation.
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."
46
<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)(9)........... 890,390 34.5 890,390 19.8
Boris Rubizhevsky(3)(7)(8)......... 791,035 30.7 791,035 17.5
Lindsay Gardner(4)................. 95,760 3.7 95,760 2.1
Larry Wells(5)..................... 41,745 1.6 41,745 0.9
All executive officers and
directors as a group (7
persons)(6)........................ 2,022,123 78.4 2,062,123 45.7
</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 23,192 shares of Common Stock issued in
connection with the Placement.
(5) Includes 41,745 shares issuable upon the exercise of Placement Warrants
held by an entity with which Mr. Wells is affiliated.
(6) 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 111,318 shares of Common Stock issued in
connection with the Placement, 38,526 shares of Common Stock issuable upon
conversion of Preferred Stock held by Mr. Rubizhevsky's wife and options
to purchase 40,000 shares of Common Stock issuable at the closing of this
offering.
(7) Includes 38,526 shares of Common Stock issuable upon conversion of
Preferred Stock held by Mr. Rubizhevsky's wife.
(8) Includes 23,192 shares issuable upon the exercise of Placement Warrants
held by the mother, father, mother-in-law and father-in-law of Mr.
Rubizhevsky.
(9) Includes 23,192 shares issuable upon the exercise of Placement Warrants
held by the brother-in-law, mother-in-law and father-in-law of Mr.
Alexander.
47
<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
1,814,796 shares of Common Stock held of record by five shareholders, 6,250
shares of Class A Non-Voting Preferred Stock which will convert into 96,315
shares of Common Stock upon the closing of this offering, options and warrants
to purchase 686,268 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 414,134 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.
Under cumulative voting for the election of directors, upon a proper and
timely request by a shareholder, each shareholder is entitled to cast a number
of votes equal to the number of shares held multiplied by the number of
directors to be elected. The votes may be cast for one or more candidates.
Thus, under cumulative voting, a majority of the outstanding shares will not
necessarily be able to elect all of the directors, and minority shareholders
may be entitled to greater voting power with respect to election of directors
than if cumulative voting did not apply. The Company's bylaws provide that so
long as the Company is a "listed company" as defined by applicable California
law, there will not be cumulative voting in connection with the election of
directors. Upon the closing of this offering, however, the Company will not be
a listed company as so defined, and therefore cumulative voting will continue
to apply 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.
48
<PAGE>
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. 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
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Common Stock), for at least 20 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.
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 all
reasonable 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
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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
COMMON STOCK AND WARRANTS 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. 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.
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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.
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. The Company has also applied to list the Common Stock and
Warrants on the Boston Stock Exchange under the trading symbols "INC" and
"INCW," respectively.
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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 2,761,111
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
1,911,111 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 issued and outstanding 1,911,111 shares upon the completion
of this offering (except for 309,144 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 414,134 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 587,134 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 2,761,111 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.
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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 the
Underwriters an over-allotment option, exercisable within 45 days of the date
of this Prospectus, to purchase up to 127,500 shares of Common Stock and/or
127,500 Warrants at the public offering price per share of Common Stock and
per Warrant, respectively, offered hereby, less underwriting discounts and the
non-accountable expense allowance, for the sole purpose of covering over-
allotments, if any. The over-allotment option may be exercised to purchase
units (each consisting of one Share of Common Stock and one Warrant), or
shares of Common Stock or Warrants or any combination thereof. 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
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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.
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 2,579,591 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 more than one year after the effective
date of this Prospectus, which exercise was solicited by a Representative, and
to the extent not inconsistent with the guidelines of the NASD or the Rules
and Regulations of the Commission, the Company has agreed to pay the
Representative a commission which shall not exceed 5% of the aggregate
exercise price of such Warrants in connection with bona fide services provided
by the Representative relating to any Warrant solicitation. In addition, the
individual must designate the firm entitled to payment of such Warrant
solicitation fee. No compensation, however, will be paid to a Representative
in connection with the exercise of Warrants if (a) the market price of the
Common Stock is lower than the exercise price, (b) the Warrants were held in a
discretionary account or (c) the Warrants were exercised in an unsolicited
transaction. 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 from nine
business days (or other such applicable periods as Rule 10b-6 may provide)
before the solicitation activity until the latter of the termination of such
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. 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 undertakes to waive unconditionally its
rights to receive a commission on the exercise of such Warrants.
The Company has agreed to engage Pryor, McClendon, Counts & Co., Inc., one
of the Representatives, as a management and financial consultant for three
years from the closing of this offering and to pay that firm a consulting fee
of $3,000 per month for such services.
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The foregoing is a summary of the material terms of the agreements described
above but does not purport to state all of the terms of such agreements.
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.
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 Commission 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.
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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.
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.
57
<PAGE>
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.
58
<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
GOODWILL (net of accumulated amortization of none,
$79, and $99)..................................... 472 393 373
OTHER ASSETS....................................... 8 4 33
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.............................. 2,218 2,360 2,360 2,361
===== ====== ========= =========
</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 87 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 4 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.
GOODWILL
Goodwill resulted from the acquisition of Isoserve, Inc., (see Note 10) and
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 returns and
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 $ 8 $ --
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 of
Series A Preferred were outstanding at April 30, 1995 and 1996, respectively.
Each 10 shares of Series A preferred stock along with $5 per share 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)
RESERVED COMMON STOCK
<TABLE>
<CAPTION>
JULY 31,
1996
--------
<S> <C>
Conversion of outstanding convertible preferred stock............ 100,780
Exercise of stock options........................................ 725,690
-------
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 for 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 $1,372,000 in
nonconvertible promissory notes, collateralized by the Company's assets.
Interest is payable monthly at 12% through May 1, 1997. If the notes are not
paid in full by May 1, 1997, the remaining principal and interest at 15% is
payable in equal monthly payments from June 1997 through May 1998. In the
event of an initial public offering of the Company's common stock, all
principal and accrued but unpaid interest is due five days after the closing
of such offering. In connection with the issuance of the promissory notes, the
Company issued warrants to the noteholders to purchase a total of 286,414
shares of common stock, exercisable for a period of five years commencing in
August 1996. Of the warrants issued, 143,207 are exercisable at $0.4217 per
share and 143,207 are exercisable at $3.3727 per share. If the Company
defaults in its payment obligations, then additional warrants totaling 377,458
are exercisable at $.01 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 $394,000 and will be amortized to operations as additional interest
expense over the term of the promissory notes. Of the total amount issued,
promissory notes in the amount of $570,000 were issued to officers, directors
and affiliates of the Company or such persons. Of the warrants issued, 127,552
were received by related parties.
In September 1996, two executive officers of the Company exercised stock
options to each acquire 108,853 shares of Common Stock at an exercise price of
$1.52 per share. In each case, the Company loaned the executive officer
$165,000, representing the exercise price of the option, and the officer
executed a promissory note reflecting the loan. Each executive officer pledged
the purchased shares as collateral for the loan pursuant to a pledge
agreement. Each loan bears 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. Until
each note has been paid in full and upon any sale of such option shares by the
respective executive, 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
each such officer, 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 him as a result of exercising such option, and to pay
compensation to such officer equal to the amount of interest payable under his
loan and the amount of taxes payable as a result of such compensation.
F-15
<PAGE>
The gas centrifuge plant owned by a third party where Isonics products are
processed.
<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
Recent Developments....................................................... 13
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 13
Capitalization............................................................ 14
Dilution.................................................................. 16
Selected Financial Data................................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 23
Management................................................................ 39
Certain Transactions...................................................... 46
Principal Shareholders.................................................... 47
Description of Capital Stock.............................................. 48
Shares Eligible for Future Sale........................................... 53
Underwriting.............................................................. 54
Legal Matters............................................................. 56
Experts................................................................... 56
Additional Information.................................................... 56
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
(AS UNITS, EACH CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE WARRANT)
[LOGO OF ISONICS CORPORATION]
---------------
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
Boston Stock Exchange Listing Fee.................................. 15,000
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..................... 5,000
Miscellaneous...................................................... 70,035
--------
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 1,378,809 $ 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
1 Investor 8/96 Common Stock 48,379 100,000 Cash
1 Investor 9/96 Common Stock 49,292 $ 101,885 Cash
2 Investors 9/96 Common Stock 217,706 $ 330,000 Notes
11 Investors 9/96 Notes and Warrants 286,414 $1,372,000 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 315,377 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 Amended and Restated Articles of Incorporation.***
3.02 Registrant's Bylaws.
3.03 Registrant's Amended and Restated Articles of Incorporation, to be in
effect at the closing of this offering.
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 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.***
10.14 Security Agreement dated March 31, 1995 between the Company and
Isoserve, Inc.
10.15 Consulting Agreement between the Registrant and Larry Wells Co., Inc.
11.01 Statement regarding computation of per share earnings.***
21.01 Subsidiaries of the Registrant.***
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.
*** Previously filed.
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 AMENDMENT TO
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN THE
CITY OF SAN JOSE, STATE OF CALIFORNIA, ON NOVEMBER 19, 1996.
Isonics Corporation
/s/ James E. Alexander
By: _________________________________
JAMES E. ALEXANDER, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT TO
REGISTRATION STATEMENT WAS SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES
AND ON THE DATES STATED.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ James E. Alexander President, Chief November 19, 1996
- ------------------------------- Executive Officer
JAMES E. ALEXANDER and Director
PRINCIPAL FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER:
/s/ Paul J. Catuna Chief Financial November 19, 1996
- ------------------------------- Officer and
PAUL J. CATUNA Director of
Administration
ADDITIONAL DIRECTORS
Boris Rubizhevsky* Senior Vice November 19, 1996
- ------------------------------- President and
BORIS RUBIZHEVSKY Director
Lindsay A. Gardner* Director November 19, 1996
- -------------------------------
LINDSAY A. GARDNER
Larry J. Wells* Director November 19, 1996
- -------------------------------
LARRY J. WELLS
</TABLE>
*By: /s/ Paul Catuna
---------------------------------
PAUL CATUNA, ATTORNEY-IN-FACT
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE PAGE
------- ------------- ----
<C> <S> <C>
1.01 Form of Underwriting Agreement.
3.01 Registrant's Amended and Restated Articles of Incorporation.***
3.02 Registrant's Bylaws.
3.03 Registrant's Amended and Restated Articles of Incorporation, to
be in effect at the closing of this offering.
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 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.***
10.14 Security Agreement dated March 31, 1995 between the Company and
Isoserve, Inc.
10.15 Consulting Agreement between the Registrant and Larry Wells
Co., Inc.
11.01 Statement regarding computation of per share earnings.***
21.01 Subsidiaries of the Registrant.***
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.
*** Previously filed.
<PAGE>
EXHIBIT 1.01
______SHARES OF COMMON STOCK
AND ______ REDEEMABLE WARRANTS
ISONICS CORPORATION
UNDERWRITING AGREEMENT
San Jose, California
November ___, 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, no par value 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 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).
<PAGE>
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, which must be purchased together on the basis of one share and one
Warrant, 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. 333-13289) 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 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
-2-
<PAGE>
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
(i) 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, or (ii) statements made in the initial preliminary
prospectus which were revised in any subsequent preliminary prospectus or the
Registration Statement and 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, except where the failure to
have such authorizations, approvals, orders, licenses, certificates, franchises
or permits would not have a material and adverse effect on the Business; the
Company and each of its subsidiaries have been doing business in compliance 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
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<PAGE>
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) At the dates as of which such information is set forth in the
Prospectus, the Company had 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 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
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<PAGE>
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 financial statements of the Company, together with the
related notes and schedules thereto, included in the Registration Statement,
each Preliminary Prospectus and the Prospectus fairly present the financial
position, changes in stockholders' equity and the results of operations of the
Company and its consolidated subsidiaries (of which there are none) 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. Except as disclosed in the Prospectus, 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 and unaudited 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 (except for immaterial non-
payments, if any), 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 material 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.
(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
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<PAGE>
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) could reasonably be expected to
materially and adversely affect the Business.
(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, in each of the above instances which could
reasonably be expected to materially and adversely affect the Business.
(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, and the Prospectus and the Registration Statement, the
performance of this Agreement, the Warrant Agreement, and the Representatives'
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<PAGE>
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 reasonably be expected to
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; and (vi) there has not been any material
adverse change in the Business.
(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 trade names, licenses, approvals and governmental
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<PAGE>
authorizations to conduct its business as now conducted; (ii) the expiration of
any trade names, licenses, approvals or governmental authorizations would not
have a material adverse effect on the Business; (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 reasonably be expected to have a material adverse
effect on the Business.
(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 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
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<PAGE>
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) Except for a security interest granted to Isoserve, Inc.
pursuant to a Security Agreement between Isoserve and the Company, 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 or for such as do not materially affect the value of the
Company's real and personal property, taken as a whole.
(u) To the Company's knowledge, Grant Thornton LLP ("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
as set forth in the Prospectus, 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) Except as disclosed to the Representatives, 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 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
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<PAGE>
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.
(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
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<PAGE>
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) Except for the absence of policies which are disclosed in
the Prospectus, the Company 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 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 where the failure to could reasonably be
expected to have a material adverse effect on the Business.
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, warranties,
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 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 (which shares and Warrants may only be purchased
together on the basis of one share and one 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
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<PAGE>
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 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
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<PAGE>
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, 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.
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<PAGE>
(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 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.
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<PAGE>
(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;
(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.
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<PAGE>
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.
(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.
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<PAGE>
(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 reasonable and appropriate actions 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 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 or Moody's OTC Manual and to continue such inclusion for a period
of not less than five (5) years (or, if sooner, the date on which the Common
Stock and Warrants are listed on the New York Stock Exchange, American Stock
Exchange, or Nasdaq National Market).
(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,
or except pursuant to incentive or benefit plans approved by the Board of
Directors of the Company, pursuant to options or warrants outstanding on the
Closing Date, or in connection with acquisitions of companies, products or
technologies.
(t) Until the completion of the distribution of the Securities
in connection with the initial public offering 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.
(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 Representative's
Securities (or the shares of Common Stock issuable upon exercise of the
Representative'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 Representative's Securities (or the shares of
Common Stock issuable upon exercise of the Representative'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 agreed-upon by 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.
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<PAGE>
(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. Provided that such public relations
firm performs in a commercially reasonable and satisfactory manner, 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 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,
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<PAGE>
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
Representative'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 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
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<PAGE>
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 Representative's reasonable opinion, is
material, or omits to state a fact which, in the Representative's reasonable
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
Representative's reasonable opinion, is material, or omits to state a fact
which, in the Representative'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
reasonably 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:
(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, except where the failure to be so qualified or
licensed would not have a material adverse effect on the
Company's business and (C) to 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.
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<PAGE>
(ii) except as described in the Prospectus and except for A&R
technology, a currently inactive subsidiary organized in the
former Soviet Union which, to such counsel's knowledge, does not
currently engage in any substantial activities, to such counsel's
knowledge, the Company does not own an interest in any
corporation, limited liability company, partnership, joint
venture, trust or other business entity;
(iii) to such counsel's knowledge, 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 which will be outstanding after the
Closing Date 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; and none of such securities were issued in
violation of the preemptive rights known to such counsel 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 known to such counsel, 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; 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 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
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<PAGE>
free and clear of any adverse claim, provided that the
Underwriters are purchasing such Securities in good faith and
without notice of any adverse claim;
(iv) based solely upon the oral advice of the Staff of the
Commission, 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 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 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 such counsel's knowledge, (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
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<PAGE>
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
agreements to which the Company is a party that are expressly
referred to in the Registration Statement and the Prospectus, are
accurate in all material respects; (C) there is not pending or
overtly 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 by the Regulations 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 overtly 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, operations or results of
operations of the Company, which could reasonably be expected to
materially adversely effect 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 questions 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 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, except as rights to indemnity or contribution may be
limited by applicable law, and except for other customary
exceptions set forth in such counsel's opinion), and to such
counsel's knowledge none of the Company's execution, delivery or
performance of this Agreement, the Warrant Agreement, and the
Representatives' Warrant Agreement, the
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<PAGE>
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
material breach or violation of any of the terms or provisions of,
or constitutes a material default under, or result in the creation
or imposition of any material 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 identified
by the Company to such counsel as material to the business of the
Company, to which the Company is a party or by which it is bound,
or (C) any federal, state or local statute, rule or regulation
known to such counsel to be 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, in each case where such conflict,
breach, violation or default would have a material adverse effect
on the Company's business;
(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 such counsel's knowledge, the properties of the
Company conform in all material respects to the description
thereof contained in the Registration Statement and the
Prospectus;
(x) to the knowledge of such counsel, and except as disclosed
in the Registration Statement and the Prospectus, (A) the Company
is not in material breach of, or in material default under, any
term or provision of any license, contract, agreement, 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, identified by the Company to such
counsel as material to the business of the Company, in
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each case where such breach or default would have a material
adverse effect on the business of the Company, and (B) the Company
is not in material violation of any term or provision of its
articles of incorporation or by-laws, as amended, or in material
violation of any franchise, license, permit, judgment, decree,
order, statute, rule or regulation known to such counsel to be
applicable to the Company, in each case where such breach, default
or violation would have a material adverse effect on the Company's
business;
(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; and
(xiii) to such counsel's knowledge and based upon a review of
the outstanding securities and the contracts furnished to such
counsel by the Company, except as disclosed in the Registration
Statement and Prospectus 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.
In rendering such opinion, such counsel (A) need not express any
opinion as to matters involving the application of laws other than the laws,
rules and regulations of the United States (with such exceptions and limitations
as are set forth in such counsel's opinion) and the laws, rules and regulations
of the State of California; and (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.
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,
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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) except as disclosed on the Registration Statement prospectus,
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) except as disclosed in the
Registration Statement Prospectus, 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
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 overtly
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 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;
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<PAGE>
(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; and
(iii) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, and except as described in or specifically
contemplated by the Registration Statement and 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 material
loss or damage to its property or assets, whether or not insured,
(f) there is no litigation which is pending or overtly 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;
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(ii) stating that it is their opinion that the financial
statements 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;
(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 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
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<PAGE>
(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 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 that have been executed and
delivered to the Company 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.
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<PAGE>
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, 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 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 mutual: employees, counsel and hold harmless the Company, each of
its directors, employees, each of its officers who has signed the Registration
Statement, counsel to the Company, 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. 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
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<PAGE>
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.
(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 been advised in writing by counsel that
a conflict of interest exists between the indemnifying party and the indemnified
parties making representation of such parties by the same counsel inappropriate
(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
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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 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,
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the Company, any controlling person of either the Underwriter or the Company,
and shall 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 Representative's reasonable opinion will in the
immediate future have a material and adverse effect on the securities markets
generally; 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 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 Representative'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, in
each case having a material and adverse effect on the securities markets
generally, as in the Representative's good faith 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.
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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 non-defaulting
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 Representative'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
Floor, New York, New York 10019, Attention: Daniel I. De Wolf, Esq. Notices to
the Company shall be directed
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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.
-35-
<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.
-36-
<PAGE>
SCHEDULE A
NUMBER OF SHARES OF
COMMON STOCK TO BE NUMBER OF WARRANTS TO
NAME OF UNDERWRITERS PURCHASED BE PURCHASED
- -------------------- --------- ------------
Pryor, McClendon, Counts &
Co., Inc.
National Securities
Corporation
TOTAL
SCH. A-1
<PAGE>
EXHIBIT 3.02
BYLAWS
OF
A & R MATERIALS, INC.
<TABLE>
<CAPTION>
History of Actions Taken
Related to Bylaws Date
- ------------------------ ----
<S> <C>
Bylaws Adopted April 14, 1993
Bylaws Amended and Restated in Entirety October 3, 1994
Bylaws Amended September 12, 1996
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 number of directors of the corporation shall be set at not less than
four and not more than seven by resolution of the Board of Directors. Any
amendment to these Bylaws which would alter the maximum number of directors set
forth in the preceding sentence or change the Board to a fixed Board may only be
adopted by approval of the outstanding shares (as defined in Section 152 of the
Code); provided, however, that a Bylaw or amendment of 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 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 the 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 3.03
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
ISONICS CORPORATION
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 Thirty Million (30,000,000), which
shall consist of:
(a) Twenty Million (20,000,000) shares which shall be
designated as Common Stock; and
(b) Ten Million (10,000,000) shares which shall be
designated as Preferred Stock.
Upon the filing of these articles, each issued and outstanding
share of Common Stock shall be split into .145138 shares of Common Stock.
ARTICLE IV
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.
<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.
<PAGE>
EXHIBIT 4.03
ISONICS CORPORATION
AND
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
AND
PRYOR, McCLENDON, COUNTS & CO., INC.
AND
NATIONAL SECURITIES CORPORATION
_______________________
WARRANT AGREEMENT
Dated as of __________ __, 1996
<PAGE>
THIS WARRANT AGREEMENT (the "Agreement"), dated this ___ day of
____________ 1996, by and among ISONICS CORPORATION, a California corporation
(the "Company"), CONTINENTAL STOCK TRANSFER & TRUST COMPANY, as Warrant Agent
(the "Warrant Agent"), PRYOR, McCLENDON, COUNTS & CO., INC. ("Pryor McClendon")
and NATIONAL SECURITIES CORPORATION ("National"), its successors and assigns
(Pryor McClendon and National are collectively referred to herein as the
"Representatives").
W I T N E S S E T H:
WHEREAS, in connection with (i) the Company's underwritten initial
public offering pursuant to a registration statement on Form SB-2 of
____________ shares of Common Stock (as defined in Section 1), and ____________
redeemable common stock purchase warrants (the "Warrants"), each warrant
entitling the holder thereof to purchase one additional share of Common Stock;
(ii) the over-allotment option to purchase up to an additional ___________
shares of Common Stock and ____________ Warrants (the "Over-allotment Option");
and (iii) the sale to the Representatives of warrants (the "Representatives'
Warrants") to purchase up to ___________ shares of Common Stock and/or
____________ Warrants, the Company will issue up to _____________ Warrants
(subject to adjustment as provided herein and in the Representatives' Warrant
Agreement); and
WHEREAS, the Company desires to provide for the issuance of
certificates representing the Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the Warrants
and the rights of the holders thereof.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, the
Representatives, the holders of certificates representing the Warrants and the
Warrant Agent, the parties hereto agree as follows:
1. Definitions. As used herein, the following terms shall have the
-----------
following meanings, unless the context shall otherwise require:
(a) "Act" shall mean the Securities Act of 1933, as amended.
1
<PAGE>
(a) "Common Stock" shall mean the authorized stock of the
Company of any class, whether now or hereafter authorized, which has the right
to participate in the voting and in the distribution of earnings and assets of
the Company without limit as to amount or percentage which at the date hereof
consists of shares of ___________ Common Stock, no par value per share.
(a) "Commission" shall mean the Securities and Exchange
Commission.
(a) "Corporate Office" shall mean the office of the Warrant
Agent (or its successor) at which at any particular time its business
in_____________, shall be administered, which office is located on the date
hereof c/o Continental Stock Transfer & Trust Company, ______________.
(a) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(a) "Exercise Date" shall mean, subject to the provisions of
Section 5(b) hereof, as to any Warrant, the date on which the Warrant Agent
shall have received both (i) the Warrant Certificate representing such Warrant,
with the exercise form thereon duly executed by the Registered Holder hereof or
his attorney duly authorized in writing, and (ii) payment in cash or by official
bank or certified check made payable to the Warrant Agent for the account of the
Company, of the amount in lawful money of the United States of America equal to
the applicable Purchase Price (as hereinafter defined) in good funds.
(a) "Exercise Price" shall mean, subject to modification and
adjustment as provided in Section 8, $______ per share and further subject to
the Company's right, in its sole discretion, to decrease the Exercise Price for
a period of not less than 30 days on not less than 30 days' prior written notice
to the Registered Holders and National.
(a) "Initial Warrant Exercise Date" shall mean the Effective
Date of the Prospectus.
(a) "Initial Warrant Redemption Date" shall mean the Effective
Date of the Prospectus.
2
<PAGE>
(a) "Market Price" shall mean the last reported sale price, or,
in case no such reported sale takes place on such day, the average of the last
reported sales prices for the last three (3) trading days, in either case as
officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to trading or by the Nasdaq SmallCap Market, or, if
the Common Stock is not listed or admitted to trading on any national securities
exchange or quoted by the Nasdaq, the average closing bid price as furnished by
the Nasdaq or similar organization if Nasdaq is no longer reporting such
information, or if the Common Stock is not quoted on Nasdaq, as determined in
good faith (using customary valuation methods) by resolution of the members of
the Board of Directors of the Company, based on the best information available
to it.
(a) "NASD" shall mean the National Association of Securities
Dealers, Inc.
(a) "Nasdaq" shall mean the Nasdaq SmallCap Market.
(a) "Redemption Date" shall mean the date (which may not occur
before the Initial Warrant Redemption Date) fixed for the redemption of the
Warrants in accordance with the terms hereof.
(a) "Redemption Price" shall mean the price at which the Company
may, at its option, redeem the Warrants, in accordance with the terms hereof,
which price shall be $0.05 per Warrant, subject to adjustment from time to time
pursuant to the provisions of Section 9 hereof.
(a) "Registered Holder" shall mean the person in whose name the
Warrant Certificate representing the Warrant(s) in question shall be registered
on the books maintained by the Warrant Agent pursuant to Section 6.
(a) "Representative's Warrant Agreement" shall mean the
agreement dated as of ___________ __, 1996 between the Company and the
Representatives relating to and governing the terms and provisions of the
Representatives' Warrants.
(a) "Transfer Agent" shall mean Continental Stock Transfer &
Trust Company, or its authorized successor.
3
<PAGE>
(a) "Underwriting Agreement" shall mean the underwriting
agreement dated as of ____________ __, 1996 between the Company and the several
underwriters listed therein relating to the Offering.
(a) "Warrant Certificate" shall mean a certificate representing
one or more of the Warrants substantially in the form annexed hereto as Exhibit
A.
(a) "Warrant Expiration Date" shall mean, unless the Warrants
are redeemed as provided in Section 9 hereof prior to such date, 5:00 p.m. (New
York time), on ___________ [5 years from the date of the Prospectus], or the
Redemption Date as defined herein, whichever date is earlier; provided that if
such date shall in the State of New York be a holiday or a day on which banks
located in the State of New York are authorized to close, then 5:00 p.m. (New
York time) on the next following day which, in the State of New York, is not a
day on which such banks are authorized to close. Upon five business days' prior
written notice to the Registered Holders, the Company shall have the right to
extend the Warrant Expiration Date.
1. Warrants and Issuance of Warrant Certificates.
---------------------------------------------
(a) Each Warrant shall initially entitle the Registered Holder
of the Warrant Certificate representing such Warrant to purchase at the Exercise
Price therefor from the Initial Warrant Exercise Date until the Warrant
Expiration Date one share of Common Stock upon the exercise thereof in
accordance with the terms hereof, subject to modification and adjustment as
provided in Section 8.
(a) Upon execution of this Agreement, Warrant Certificates
representing the number of Warrants sold pursuant to the Underwriting Agreement
(subject to modification and adjustment as provided in Section 8) shall be
executed by the Company and delivered to the Warrant Agent.
(a) Upon exercise of the Representatives' Warrants as provided
therein, Warrant Certificates representing all or a portion of Warrants to
purchase up to an aggregate of shares of Common Stock (subject to modification
and adjustment as provided in Section 8 hereof and in the Representative's
Warrant Agreement), shall be countersigned, issued and delivered by the Warrant
Agent upon written order of the Company signed by its Chairman of the Board,
Chief Executive Officer, President or a Vice President and by its Chief
Financial Officer, Treasurer or an Assistant Treasurer or its Secretary or an
Assistant Secretary.
4
<PAGE>
(a) From time to time, up to the Warrant Expiration Date, the
Warrant Agent shall countersign and deliver Warrant Certificates in required
denominations of one or whole number multiples thereof to the person entitled
thereto in connection with any transfer or exchange permitted under this
Agreement. Except as provided herein, no Warrant Certificates shall be issued
except (i) Warrant Certificates initially issued hereunder and those issued on
or after the Initial Warrant Exercise Date, upon the exercise of fewer than all
Warrants held by the exercising Registered Holder, (ii) Warrant Certificates
issued upon any transfer or exchange of Warrants, (iii) Warrant Certificates
issued in replacement of lost, stolen, destroyed or mutilated Warrant
Certificates pursuant to Section 7, (iv) Warrant Certificates issued pursuant to
the Representative's Warrant Agreement, and (v) at the option of the Company,
Warrant Certificates in such form as may be approved by its Board of Directors,
to reflect any adjustment or change in the Exercise Price, the number of shares
of Common Stock purchasable upon exercise of the Warrants or the Redemption
Price therefor made pursuant to Section 8 hereof.
5
<PAGE>
1. Form and Execution of Warrant Certificates.
------------------------------------------
(a) The Warrant Certificates shall be substantially in the form
annexed hereto as Exhibit A (the provisions of which are hereby incorporated
herein) and may have such letters, numbers or other marks of identification or
designation and such legends, summaries or endorsements printed, lithographed or
engraved thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
law or with any rule or regulation made pursuant thereto or with any rule or
regulation of any stock exchange on which the Warrants may be listed, or to
conform to usage. The Warrant Certificates shall be dated the date of issuance
thereof (whether upon initial issuance, transfer, exchange or in lieu of
mutilated, lost, stolen or destroyed Warrant Certificates) and issued in
registered form. Warrants shall be numbered serially with the letter "W" on the
Warrants.
(a) Warrant Certificates shall be executed on behalf of the
Company by its Chairman of the Board, Chief Executive Officer, President or any
Vice President and by its Chief Financial Officer, Treasurer or an Assistant
Treasurer or its Secretary or an Assistant Secretary, by manual signatures or by
facsimile signatures printed thereon, and shall have imprinted thereon a
facsimile of the Company's seal. Warrant Certificates shall be manually
countersigned by the Warrant Agent and shall not be valid for any purpose unless
so countersigned. In any case any officer of the Company who shall have signed
any of the Warrant Certificates shall cease to be such officer of the Company
after the date of signature but before the date of issuance of the Warrant
Certificates or before countersignature by the Warrant Agent and issue and
delivery thereof, such Warrant Certificates, nevertheless, may be countersigned
by the Warrant Agent, issued and delivered with the same force and effect as
though the person who signed such Warrant Certificates had not ceased to be such
officer of the Company. After countersignature by the Warrant Agent, Warrant
Certificates shall be delivered by the Warrant Agent to the Registered Holder
promptly and without further action by the Company, except as otherwise provided
by Section 4(a) hereof.
1. Exercise.
--------
(a) Warrants in denominations of one or whole number multiples
thereof may be exercised by the Registered Holder
6
<PAGE>
thereof commencing at any time on or after the Initial Warrant Exercise Date,
but not after the Warrant Expiration Date, upon the terms and subject to the
conditions set forth herein and in the applicable Warrant Certificate. Warrants
may be exercised by their holders or redeemed by the Company as follows:
Exercise of Warrants shall be accomplished upon surrender of the Warrant
Certificate evidencing such Warrants, with the Form of Election to Purchase on
the reverse side thereof duly filled in and executed, to the Warrant Agent at
its business office, together with payment to the Warrant Agent of the Exercise
Price (as of the date of such surrender) of the Warrants then being exercised
and an amount equal to any applicable transfer tax and, if requested by the
Company, any other taxes or governmental charges which the Company may be
required by law to collect in respect of such exercise. Payment of the Exercise
Price and other amounts may be made by wire transfer of good funds, or by
certified or bank cashier's check, payable in lawful money of the United States
of America to the order of the Warrant Agent, who shall in turn make prompt
payment to the Company. No adjustment shall be made for any cash dividends,
whether paid or declared, on any securities issuable upon exercise of a Warrant.
A Warrant shall be deemed to have been exercised immediately prior to the close
of business on the Exercise Date and upon exercise thereof, the person entitled
to receive the securities deliverable upon such exercise shall be treated for
all purposes as the holder of the securities issued thereby as of the close of
business on the Exercise Date. If Warrants in denominations other than whole
number multiples thereof shall be exercised at one time by the same Registered
Holder, the number of full shares of Common Stock which shall be issuable upon
exercise thereof shall be computed on the basis of the aggregate number of full
shares of Common Stock issuable upon such exercise. As soon as practicable on or
after the Exercise Date and in any event within five business days after such
date, if one or more Warrants have been exercised in the manner described in
this subsection (a), the Warrant Agent on behalf of the Company shall cause to
be issued to the person or persons entitled to receive the same a Common Stock
certificate or certificates for the shares of Common Stock deliverable upon such
exercise, and the Warrant Agent shall deliver the same to the person or persons
entitled thereto. Upon the exercise of any one or more Warrants, the Warrant
Agent shall promptly notify the Company in writing of such fact and of the
number of securities delivered upon such exercise and, subject to subsection (b)
below, shall cause payment in cash or by check made payable to the order of the
Company, equal to the Exercise Price of such Warrants, to
7
<PAGE>
be deposited promptly in the Company's bank account or paid directly to the
Company, as specified by the Company.
(a) The Company shall engage the Representatives as Warrant
solicitation agents, and, at any time upon the valid exercise of any Warrants
after one year from the date hereof, excluding any Warrant (i) exercise at a
time when the Exercise Price exceeds the Market Price, (ii) held in a
discretionary account or (iii) exercised in an unsolicited transaction, the
Company shall instruct the Warrant Agent to, and the Warrant Agent shall, on a
daily basis, within two business days after such exercise, notify the
Representatives of the exercise of any such Warrants and shall, on a weekly
basis (subject to collection of funds constituting the tendered Exercise Price,
but in no event later than five business days after the last day of the calendar
week in which such funds were tendered), remit to the Representatives an amount
equal to five percent (5%) of the Exercise Price of such Warrants then being
exercised unless the Representatives shall have notified the Warrant Agent that
the payment of such amount with respect to such Warrant is violative of the
General Rules and Regulations promulgated under the Exchange Act, or the rules
and regulations of the Nasdaq or applicable state securities or "blue sky" laws,
or the Warrants are those underlying the Representatives' Warrants in which
event, the Warrant Agent shall have to pay such amount to the Company; provided,
that, the Warrant Agent shall not be obligated to pay any amounts pursuant to
this Section 4(b) during any week that such amounts payable are less than $1,000
and the Warrant Agent's obligation to make such payments shall be suspended
until the amount payable aggregates $1,000, and provided further, that, in any
event, any such payment (regardless of amount) shall be made not less frequently
than monthly. Notwithstanding the foregoing, the Representatives shall be
entitled to receive the commission contemplated by this Section 4(b) as Warrant
solicitation agent only if: (i) the Representatives have provided actual
services in connection with the solicitation of the exercise of a Warrant by a
Registered Holder and (ii) the Registered Holder exercising a Warrant
affirmatively designates in writing on the exercise form on the reverse side of
the Warrant Certificate that the exercise of such Registered Holder's Warrant
was solicited by the Representatives.
(a) The Company shall not be required to issue fractional shares
on the exercise of Warrants. Warrants may only be exercised in such multiples as
are required to permit the issuance by the Company of one or more whole shares.
If one or
8
<PAGE>
more Warrants shall be presented for exercise in full at the same time by the
same Registered Holder, the number of whole shares which shall be issuable upon
such exercise thereof shall be computed on the basis of the aggregate number of
shares purchasable on exercise of the Warrants presented. If any fraction of a
share would, except for the provisions provided herein, be issuable on the
exercise of any Warrant (or specified portion thereof), the Company shall pay an
amount in cash equal to such fraction multiplied by the then current Market
Price of a share of Common Stock, determined as follows:
(1) If the Common Stock is listed, or admitted to unlisted
trading privileges on a national securities exchange, or is traded on Nasdaq,
the current market value of a share of Common Stock shall be the closing sale
price of the Common Stock at the end of the regular trading session on the last
business day prior to the date of exercise of the Warrants on whichever of such
exchanges or Nasdaq which had the highest average daily trading volume for the
Common Stock on such day; or
(1) If the Common Stock is not listed or admitted to unlisted
trading privileges on any national securities exchange, or listed, quoted or
reported for trading on Nasdaq, but is traded in the over-the-counter market,
the current market value of a share of Common Stock shall be the average of the
last reported bid and asked prices of the Common Stock reported by the National
Quotation Bureau, Inc. on the last business day prior to the date of exercise of
the Warrants; or
(1) If the Common Stock is not listed, admitted to unlisted
trading privileges on any national securities exchange, or listed, quoted or
reported for trading on Nasdaq, and bid and asked prices of the Common Stock are
not reported by the National Quotation Bureau, Inc., the current market value of
a share of Common Stock shall be an amount, not less than the book value thereof
as of the end of the most recently completed fiscal quarter of the Company
ending prior to the date of exercise, determined by the members of the Board of
Directors of the Company exercising good faith and using customary valuation
methods.
1. Reservation of Shares; Listing; Payment of Taxes; etc.
------------------------------------------------------
(a) The Company covenants that it will at all times reserve and
keep available out of its authorized Common Stock, solely for the purpose of
issue upon exercise of Warrants, such number of shares of Common Stock as shall
then be issuable
9
<PAGE>
upon the exercise of all outstanding Warrants. The Company covenants that all
shares of Common Stock which shall be issuable upon exercise of the Warrants
shall, at the time of delivery thereof, be duly and validly issued and fully
paid and nonassessable and free from all preemptive or similar rights, taxes,
liens and charges with respect to the issue thereof, and that upon issuance such
shares shall be listed on each securities exchange, if any, on which the other
shares of outstanding Common Stock of the Company are then listed.
(a) The Company covenants that if any securities to be reserved
for the purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any federal securities law before
such securities may be validly issued or delivered upon such exercise, then the
Company will file a registration statement under the federal securities laws or
a post-effective amendment, use its best efforts to cause the same to become
effective and to keep such registration statement current on or after the
Initial Warrant Exercise Date and while any of the Warrants are outstanding and
deliver a prospectus which complies with Section 10(a)(3) of the Act, to the
Registered Holder exercising the Warrant (except, if in the opinion of counsel
to the Company, such registration is not required under the federal securities
law or if the Company receives a letter from the staff of the Commission stating
that it would not take any enforcement action if such registration is not
effected; provided, however, that (i) if at the time of exercise of any Warrants
-------- -------
the Company does not have in place an effective registration statement or is
otherwise, in the good faith determination of the Board of Directors of the
Company, precluded by applicable laws from issuing the underlying shares of
Common Stock, the Company may, in lieu of issuance of the shares of Common
Stock, elect to redeem the Warrants duly surrendered for exercise for a price
per Warrant equal to the difference between the Market Price of the securities
for which such Warrant is exercisable on the date of such submission and the
Exercise Price of such Warrants, and in the event of such redemption, the
Company will pay to the holder of such Warrants the above described redemption
price in cash within 10 business days after receipt of notice from the Warrant
Agent that such Warrants have been submitted for exercise, and (ii) if the
Market Price of the Common Stock is less than the Exercise Price, then the
Company need not take such actions to file a registration statement (or a
post effective amendment to a registration statement) with respect to the
issuance of Common Stock upon exercise of the Warrants until such time as the
Company has been subject to the requirements of Section 12 or 15(d) of the
Securities Exchange Act of 1934, as amended, for a period of at least twelve
calendar months immediately preceding the filing of the registration statement).
The Company will use its best efforts to obtain appropriate approvals or
registrations under state "blue sky" securities laws with respect to any such
securities. However, Warrants may not be exercised by,
10
<PAGE>
or shares of Common Stock issued to, any Registered Holder in any state in which
such exercise would be unlawful.
(a) The Company shall pay all documentary, stamp or similar
taxes and other governmental charges that may be imposed with respect to the
issuance of Warrants, or the issuance or delivery of any shares of Common Stock
upon exercise of the Warrants; provided, however, that if shares of Common Stock
-------- -------
are to be delivered in a name other than the name of the Registered Holder of
the Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if any;
provided, however, that the Company shall not be required (i) to pay any tax
which may be payable in respect of any transfer involved in the transfer and
delivery of Warrant Certificates or (ii) to issue or deliver any certificate for
shares of Common Stock or other securities upon the exercise of any Warrant
Certificate until any such tax shall have been paid, all such tax being payable
by the holder of such Warrant Certificate at the time of surrender.
(a) The Warrant Agent is hereby irrevocably authorized as the
Transfer Agent to requisition from time to time certificates representing shares
of Common Stock or other securities required to be issued upon exercise of the
Warrants, and the Company will comply with all such requisitions.
1. Exchange and Registration of Transfer.
-------------------------------------
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office,
and, promptly following satisfaction of the terms and provisions hereof, the
Company shall execute and the Warrant Agent shall countersign, issue and deliver
in exchange therefor the Warrant Certificate or Certificates which the
Registered Holder making the exchange shall be entitled to receive.
(a) The Warrant Agent shall keep, at its office, books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof in accordance with customary
practice. Upon due presentment for registration of transfer of any Warrant
Certificate at such office, the Company shall execute and the Warrant Agent
shall issue and deliver to the transferee or
11
<PAGE>
transferees a new Warrant Certificate or Certificates representing an equal
aggregate number of Warrants of the same class.
(a) With respect to all Warrant Certificates presented for
registration of transfer, or for exchange or exercise, the subscription or
exercise form, as the case may be, on the reverse thereof shall be duly endorsed
or be accompanied by a written instrument or instruments of transfer and
subscription, in form satisfactory to the Company and the Warrant Agent, duly
executed by the Registered Holder thereof or his attorney-in-fact duly
authorized in writing.
(a) A service charge may be imposed on the Registered Holder by
the Warrant Agent for any exchange or registration of transfer of Warrant
Certificates. In addition, the Company may require payment by such holder of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection therewith.
(a) All Warrant Certificates surrendered for exercise or for
exchange in case of mutilated Warrant Certificates shall be promptly canceled by
the Warrant Agent and thereafter retained by the Warrant Agent until termination
of this Agreement.
(a) Prior to due presentment for registration of transfer
thereof, the Company and the Warrant Agent may deem and treat the Registered
Holder of any Warrant Certificate as the absolute owner thereof and of each
Warrant represented thereby (notwithstanding any notations of ownership or
writing thereon made by anyone other than a duly authorized officer of the
Company or the Warrant Agent) for all purposes and shall not be affected by any
notice to the contrary.
1. Loss or Mutilation. Upon receipt by the Company and the Warrant
------------------
Agent of evidence satisfactory to them of the ownership of and the loss, theft,
destruction or mutilation of any Warrant Certificate and (in the case of loss,
theft or destruction) of indemnity satisfactory to them, and (in case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and the Warrant Agent shall (in the absence of notice to the Company and/or the
Warrant Agent that a new Warrant Certificate has been acquired by a bona fide
purchaser) countersign and deliver to the Registered Holder in lieu thereof a
new Warrant Certificate of like tenor representing an equal aggregate number of
Warrants. Applicants for a substitute Warrant Certificate shall also comply with
such other reasonable regulations and pay such other reasonable charges as the
Warrant Agent may prescribe.
12
<PAGE>
1. Adjustments of Number and Kind of Shares Purchasable and Exercise
-----------------------------------------------------------------
Price. The number and kind of securities or other property purchasable upon
- -----
exercise of a Warrant shall be subject to adjustment from time to time upon the
occurrence, after the date hereof, of any of the following events:
(a) Dividends, Stock Splits, Reverse Splits, Etc. In case the
--------------------------------------------
Company shall (i) pay a dividend in, or make a distribution of, shares of Common
Stock or of capital stock convertible into Common Stock on its outstanding
Common Stock, (ii) subdivide its outstanding shares of Common Stock into a
greater number of such shares or (iii) combine its outstanding shares of Common
Stock into a smaller number of such shares, the total number of shares of Common
Stock purchasable upon the exercise of each Warrant outstanding immediately
prior thereto shall be adjusted so that the Registered Holder of any Warrant
Certificate thereafter surrendered for exercise shall be entitled to receive, at
the same aggregate Exercise Price, the number of shares of Common Stock which
such holder would have owned or have been entitled to receive immediately
following the happening of any of the events described above had such Warrant
been exercised in full immediately prior to the happening of such event. Any
adjustment made pursuant to this subsection shall, in the case of a stock
dividend or distribution, become effective as of the record date therefor and,
in the case of a subdivision or combination, be made as of the effective date
thereof. If, as a result of an adjustment made pursuant to this subsection, the
Registered Holder of any Warrant Certificate thereafter surrendered for exercise
shall become entitled to receive shares of two or more classes of capital stock
of the Company, the Board of Directors of the Company (whose determination shall
be conclusive and shall be evidenced by a Board resolution filed with the
Warrant Agent) shall determine the allocation of the adjusted Exercise Price
between or among shares of such classes of capital stock.
(a) No Change in Aggregate Exercise Price. In the event of any
-------------------------------------
adjustment of the total number of shares of Common Stock purchasable upon the
exercise of Warrants pursuant to subsection (a) above, the aggregate Exercise
Price of each such Warrant shall remain unchanged, but the number of shares of
capital stock obtainable on exercise of each such Warrant shall be adjusted as
provided in subsection (a) above.
(a) Reorganization or Reclassification. In the event of a
----------------------------------
capital reorganization or a reclassification of the Common Stock (except as
provided in subsection (a) above or subsection (e) below), any Registered Holder
of a Warrant, upon exercise of such Warrant, shall be entitled to receive, in
substitution for the Common Stock to which he would have become entitled upon
exercise immediately prior to such reorganization or reclassification, the
shares (of any class or classes) or other securities or property of the Company
(or cash) that he would have been entitled to receive at the same aggregate
Exercise Price upon such reorganization or reclassification if such Warrant had
been exercised immediately prior thereto; and in any such case, appropriate
provision (as determined by the Board of Directors of the Company, whose
determination shall be conclusive and
13
<PAGE>
shall be evidenced by a certified Board resolution filed with the Warrant Agent)
shall be made for the application of this Section 8 with respect to the rights
and interests thereafter of the Registered Holders of all then outstanding
Warrants (including but not limited to the allocation of the Exercise Price
between or among shares of classes of capital stock), to the end that this
Section 8 (including the adjustments of the number of shares of Common Stock or
other securities purchasable and the Exercise Price thereof) shall thereafter be
reflected, as nearly as reasonably practicable, in all subsequent exercises of
the Warrants for any shares or securities or other property (or cash) thereafter
deliverable upon the exercise of the Warrants.
(a) Certificate of Adjustment. Whenever the number of shares of
-------------------------
Common Stock or other securities purchasable upon exercise of a Warrant is
adjusted as provided in this Section 8, the Company will promptly file with the
Warrant Agent a certificate signed by a Chairman or Co-Chairman of the Board or
the President or a Vice President of the Company and by the Chief Financial
Officer, Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary of the Company setting forth the number and kind of securities or
other property purchasable upon exercise of a Warrant, as so adjusted, stating
that such adjustments in the number or kind of shares or other securities or
property conform to the requirements of this Section 8, and setting forth a
brief statement of the facts accounting for such adjustments. Promptly after
receipt of such certificate, the Company, or the Warrant Agent at the Company's
request, will deliver, by first class, postage prepaid mail, a brief summary
thereof (to be supplied by the Company) to the registered holder's of the
outstanding Warrant Certificates; provided, however, that failure to file or to
-------- -------
give any notice required under this subsection, or any defect therein, shall not
affect the legality or validity of any such adjustments under this Section 8;
and provided, further, that, where appropriate, such notice may be given in
-------- -------
advance and included as part of the notice required to be given pursuant to
Section 12 hereof.
(a) Merger or Consolidation. In case of any consolidation of the
-----------------------
Company with, or merger of the Company into, another corporation (other than a
consolidation or merger which does not result in any reclassification or change
of the outstanding Common Stock), or in case of any sale or conveyance to
another corporation of the property of the Company as an entirety or
substantially as an entirety, the corporation formed by such consolidation or
merger or the corporation which shall have acquired such assets, as the case may
be, shall execute and deliver to the Warrant Agent a supplemental warrant
agreement provided that the Registered Holder of each Warrant then outstanding
shall have the right thereafter (until the expiration of such Warrant) to
receive, upon exercise of such Warrant, solely the kind and amount of shares of
stock and other securities and property (or cash) receivable upon such
consolidation, merger, sale or transfer by a holder of the number of shares of
Common Stock of the Company for which such Warrant might have been exercised
immediately prior to such consolidation, merger, sale or transfer. Such
supplemental warrant agreement shall provide for adjustments which shall be as
nearly equivalent as may be
14
<PAGE>
practicable to the adjustments provided in this Section. The above provision of
this Subsection shall similarly apply to successive consolidations, mergers,
sales or transfers.
(a) Effect of Adjustments on Warrant Certificates. Irrespective
---------------------------------------------
of any adjustments in the number of kind of shares issuable upon exercise of
Warrants, Warrant Certificates theretofore or thereafter issued may continue to
express the same price and number and kind of shares as are stated in the
similar Warrant Certificates initially issuable pursuant to this Warrant
Agreement.
(a) Assistance of Accounting Firm in Making Computations. The
----------------------------------------------------
Company may retain a firm of independent public accountants of recognized
standing, which may be the firm regularly retained by the Company, selected by
the Board of Directors of the Company or the Executive Committee of said Board,
and not disapproved by the Warrant Agent, to make any computation required under
this Section, and a certificate signed by such firm shall, in the absence of
fraud or gross negligence, be conclusive evidence of the correctness of any
computation made under this Section.
(a) "Common Stock". For the purpose of this Section, the term
--------------
"Common Stock" shall mean (i) the class of stock designated as Common Stock in
the Certificate of Incorporation of the Company, as amended, at the date of this
Agreement, or (ii) any other class of stock resulting from successive changes or
reclassifications of such Common Stock consisting solely of changes in par
value, or from par value to no par value, or from no par value. In the event
that at any time as a result of an adjustment made pursuant to this Section, the
Registered Holder of any Warrant thereafter surrendered for exercise shall
become entitled to receive any shares of capital stock of the Company other than
shares of Common Stock, thereafter the number of such other shares so receivable
upon exercise of any Warrant shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Common Stock contained in this Section, and all other provisions
of this Agreement, with respect to the Common Stock, shall apply on like terms
to any such other shares.
1. Redemption.
----------
(a) Commencing on the Initial Warrant Redemption Date, the
Company may, on 30 days' prior written notice, redeem all, but not less than
all, the Warrants at five cents ($0.05) per Warrant, provided, however, that
-------- -------
before any such call for redemption of Warrants can take place, the average
closing sale price for the Common Stock as reported by Nasdaq, if the Common
Stock is then traded on the Small Cap Market (or the average closing sale price,
if the Common Stock is then traded on the Nasdaq National Market or on a
national securities exchange) shall have equalled or exceeded $_____ per share
(200% of the initial public offering price
15
<PAGE>
per share of Common Stock) for any twenty (20) consecutive trading days ending
on the day prior to the date on which the notice contemplated by (b) and (c)
below is given (subject to adjustment in the event of any stock splits or other
similar events as provided in Section 8 hereof).
(a) In case the Company shall exercise its right to redeem all
of the Warrants, it shall give or cause to be given notice to the Registered
Holders of the Warrants, by mailing to such Registered Holders a notice of
redemption, first class, postage prepaid, at their last address as shall appear
on the records of the Warrant Agent. Any notice mailed in the manner provide
herein shall be conclusively presumed to have been duly given whether or not the
Registered Holder receives such notice. Not less than five (5) business days
prior to the mailing to the Registered Holders of the Warrants of the notice of
redemption, the Company shall deliver or cause to be delivered to the
Representatives a similar notice telephonically and confirmed in writing, and if
the Representatives are engaged as Warrant solicitation agents, the Company
shall also cause to be delivered to the Representatives a list of the Registered
Holders (including their respective addresses and number of Warrants
beneficially owned) to whom such notice of redemption has been or will be given.
(a) The notice of redemption shall specify (i) the redemption
price, (ii) the Redemption Date, which shall in no event be less than thirty
(30) days after the date of mailing of such notice, (iii) the place where the
Warrant Certificate shall be delivered and the redemption price shall be paid,
(iv) that the Representatives shall receive the commission contemplated by
Section 4(b) hereof, and (v) that the right to exercise the Warrant shall
terminate at 5:00 p.m. (New York time) on the business day immediately preceding
the date fixed for redemption. No failure to mail such notice nor any defect
therein or in the mailing thereof shall affect the validity of the proceedings
for such redemption except as to a holder (a) to whom notice was not mailed or
(b) whose notice was defective. An affidavit of the Warrant Agent or the
Secretary or Assistant Secretary of the Company that notice of redemption has
been mailed shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
(a) Any right to exercise a Warrant shall terminate at 5:00 p.m.
(New York time) on the business day immediately preceding the Redemption Date.
The redemption price payable to the Registered Holders shall be mailed to such
persons at their addresses of record.
16
<PAGE>
(a) If the Representatives act as the Warrant solicitation
agents for the Company, the Company shall indemnify the Representatives and each
person, if any, who controls the Representatives within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act against all loss, claim,
damage, expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which any
of them may become subject under the Act, the Exchange Act or otherwise, arising
from the registration statement or prospectus referred to in Section 5(b) hereof
to the same extent and with the same effect (including the provisions regarding
contribution) as the provisions pursuant to which the Company has agreed to
indemnify the Representatives contained in Section 7 of the Underwriting
Agreement.
(a) Five business days prior to the Redemption Date, the Company
shall furnish to the Representatives, as Warrant solicitation agents, (i) an
opinion of counsel to the Company, dated such date and addressed to the
Representatives, and (ii) a "cold comfort" letter dated such date addressed to
each of the Representatives, signed by the independent public accountants who
have issued a report on the Company's financial statements included in such
registration statement, in each case covering substantially the same matters
with respect to such registration statement (and the prospectus included
therein) and, in the case of such accountants' letter, with respect to events
subsequent to the date of such financial statements, as are customarily covered
in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities.
(a) On and after the date fixed for redemption, the Registered
Holders shall have no rights with respect to the Warrants except to receive the
$.05 per Warrant upon surrender of their Warrant Certificates.
1. Concerning the Warrant Agent.
----------------------------
(a) The Warrant Agent acts hereunder as agent and in a
ministerial capacity for the Company and the Representatives, and its duties
shall be determined solely by the provisions hereof. The Warrant Agent shall
not, by issuing and delivering Warrant Certificates or by any other act
hereunder, be deemed to make any representations as to the validity or value or
authorization of the Warrant Certificates (except its
17
<PAGE>
countersignature thereof) or the Warrants represented thereby or of any
securities or other property delivered upon exercise of any Warrant or whether
any stock issued upon exercise of any Warrant is fully paid and nonassessable.
(a) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be made
any adjustment of the Exercise Price or the Redemption Price provided in this
Agreement, or to determine whether any fact exists which may require any such
adjustments, or with respect to the nature or extent of any such adjustments,
when made, or with respect to the method employed in making the same (except
with respect to the exercise of Warrant Certificates after actual notice of any
adjustment of the Exercise Price). It shall not (i) be liable for any recital or
statement of fact contained herein or for any action taken, suffered or omitted
by it in reliance on any Warrant Certificate or other document or instrument
believed by it in good faith to be genuine and to have been signed or presented
by the proper party or parties (except its countersignature on the Warrant
Certificates and such statements or recitals as describe the Warrant Agent or
action taken or to be taken by it), (ii) be responsible for any failure on the
part of the Company to comply with any of its covenants and obligations
contained in this Agreement or in any Warrant Certificate, or (iii) be liable
for any act or omission in connection with this Agreement except for its own
negligence, bad faith or willful misconduct.
(a) The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company or for the
Representatives) and shall incur no liability or responsibility for any action
taken, suffered or omitted by it in good faith in accordance with the opinion or
advice of such counsel.
(a) Any notice, statement, instruction, request, direction,
order or demand of the Company shall be sufficiently evidenced by an instrument
signed by the Chairman of the Board of Directors, Chief Executive Officer, Chief
Financial Officer, President or any Vice President (unless other evidence in
respect thereof is herein specifically prescribed). The Warrant Agent shall not
be liable for any action taken, suffered or omitted by it in accordance with
such notice, statement, instruction, request, direction, order or demand
reasonably believed by it to be genuine.
18
<PAGE>
(a) The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; the Company further agrees to indemnify the Warrant Agent
and save it harmless from and against any and all losses, expenses and
liabilities, including judgments, costs and counsel fees, for anything done or
omitted by the Warrant Agent in the execution of its duties and powers hereunder
except losses, expenses and liabilities arising as a result of the Warrant
- ------
Agent's negligence, bad faith or willful conduct.
(a) The Warrant Agent may resign its duties and be discharged
from all further duties and liabilities hereunder (except liabilities resulting
as a result of the Warrant Agent's own gross negligence or willful misconduct),
after giving 30 days' prior written notice to the Company. At least 15 days
prior to the date such resignation is to become effective, the Warrant Agent
shall cause a copy of such notice of resignation to be mailed to the Registered
Holder of each Warrant Certificate at the Company's expense. Upon such
resignation, or any inability of the Warrant Agent to act as such hereunder, the
Company shall appoint in writing a new warrant agent. If the Company shall fail
to make such appointment within a period of 15 days after it has been notified
in writing of such resignation by the resigning Warrant Agent, then the
Registered Holder of any Warrant Certificate may apply to any court of competent
jurisdiction for the appointment of a new warrant agent. Any new warrant agent,
whether appointed by the Company or by such a court, shall be a bank or trust
company having a capital and surplus, as shown by its last published report to
its stockholders, of not less than $10,000,000 or a stock transfer company.
After acceptance in writing of such appointment by the new warrant agent is
received by the Company, such new warrant agent shall be vested with the same
powers, rights, duties and responsibilities as if it had been originally named
herein as the Warrant Agent, without any further assurance, conveyance, act or
deed; but if for any reason it shall be necessary or expedient to execute and
deliver any further assurance, conveyance, act or deed, the same shall be done
at the expense of the Company and shall be legally and validly executed and
delivered by the resigning Warrant Agent. Not later than the effective date of
any such appointment the Company shall file notice thereof with the resigning
Warrant Agent and shall forthwith cause a copy of such notice to be mailed to
the Registered Holder of each Warrant Certificate.
Any corporation into which the Warrant Agent or any new warrant agent may
be converted or merged, any
19
<PAGE>
corporation resulting from any consolidation to which the Warrant Agent or any
new warrant agent shall be a party, or any corporation succeeding to the
corporate trust business of the Warrant Agent or any new warrant agent shall be
a successor warrant agent under this Agreement without any further act, provided
that such corporation is eligible for appointment as successor to the Warrant
Agent under the provisions of the preceding paragraph. Any such successor
warrant agent shall promptly cause notice of its succession as warrant agent to
be mailed to the Company and to the Registered Holders of each Warrant
Certificate.
(a) The Warrant Agent, its subsidiaries and affiliates, and any
of its or their officers or directors, may buy and hold or sell Warrants or
other securities of the Company and otherwise deal with the Company in the same
manner and to the same extent and with like effect as though it were not Warrant
Agent. Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.
(a) The Warrant Agent shall retain for a period of two years
from the date of exercise any Warrant Certificate received by it upon such
exercise.
(a) The Warrant Agent shall account promptly to the Company with
respect to Warrants exercised and concurrently pay to the Company all moneys
received by the Warrant Agent for the purchase of securities or other property
through the exercise of such Warrants.
1. Modification of Agreement.
-------------------------
The Warrant Agent and the Company may by supplemental agreement make
any changes or corrections in this Agreement (i) that they shall deem
appropriate to cure any ambiguity or to correct any defective or inconsistent
provision or manifest mistake or error herein contained; or (ii) that they may
deem necessary or desirable and which shall not adversely affect the interests
of the holders of Warrant Certificates; provided, however, that this Agreement
-------- -------
shall not otherwise be modified, supplemented or altered in any respect except
with the consent in writing of the Registered Holders representing not less than
66-2/3% of the Warrants then outstanding; provided, further, that no change in
-------- -------
the number or nature of the securities purchasable upon the exercise of any
Warrant, or to increase the Exercise Price therefor or to accelerate of the
Warrant Expiration Date, shall be made without the consent in writing of the
Registered Holder of the Warrant Certificate representing such Warrant, other
than such changes as are presenting specifically prescribed by this Agreement as
originally executed. In addition, this Agreement may not be modified, amended or
supplemented without the prior written consent of both
20
<PAGE>
of the Representatives, other than to cure any ambiguity or to correct any
provision which is inconsistent with any other provision of this Agreement or to
make any such change that is necessary or desirable and which shall not
adversely affect the interests of the Representatives and except as may be
required by law.
1. Notices.
-------
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been made when delivered or
mailed first-class registered or certified mail, postage prepaid, as follows: if
to the Registered Holder of a Warrant Certificate, at the last address of such
holder as shown on the registry books maintained by the Warrant Agent; if to the
Company at 4010 Moorpark Ave., Suite 119, San Jose, California 95113 Attention:
CEO, or at such other address as may have been furnished to the Warrant Agent in
writing by the Company; and if to the Warrant Agent, at 40 Wall Street, New
York, New York 10005. Copies of any notice delivered pursuant to this Agreement
shall also be delivered to Pryor, McClendon, Counts & Co., Inc., 3 Penn Plaza,
1515 Market Street, Suite 819, Philadelphia, Pennsylvania 19102, Attention:
Malcolmn Pryor and to National Securities Corporation, 1001 Fourth Avenue, Suite
2200, Seattle, Washington 98154-1100, Attention: General Counsel, or at such
other address as may have been furnished to the Company and the Warrant Agent in
writing.
1. Governing Law.
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the state of California without giving effect to conflicts of laws.
1. Binding Effect.
--------------
This Agreement shall be binding upon and inure to the benefit of the
Company, the Representatives, the Warrant Agent and their respective successors
and assigns and the Registered Holders from time to time of Warrant Certificates
or any of them. Nothing in this Agreement is intended or shall be construed to
confer upon any other person any right, remedy or claim, in equity or at law, or
to impose upon any other person any duty, liability or obligation.
1. Termination.
-----------
This Agreement shall terminate at the close of business on the
Expiration Date of all of the Warrants or such earlier date upon which all
Warrants have been exercised or redeemed, except that the Warrant Agent shall
account to the Company for all Warrants outstanding and all cash held by it and
the provisions of Section 10 hereof shall survive such termination.
1. Counterparts.
------------
This Agreement may be executed in several counterparts, which taken
together shall constitute a single document.
21
<PAGE>
1. Holders of Warrants Not Deemed Shareholders. No holder of a
-------------------------------------------
Warrant, as such, shall be entitled to vote, receive dividends or be deemed the
holder of Common Stock or any other securities of the Company which may at any
time be issuable on the exercise of the Warrants represented thereby for any
purpose whatever, nor shall anything contained herein or in any Warrant
Certificate be construed to confer upon any holder of a Warrant, as such, any of
the rights of a shareholder of the Company or any right to vote for the election
of directors or upon any matter submitted to shareholders at any meeting
thereof, or to give or withhold consent to any corporate action (whether upon
any recapitalization, issuance of stock, reclassification of stock, change of
par value or change of stock to no par value, consolidation, merger, conveyance
or otherwise), or to receive notice of meetings or other actions affecting
shareholders, or to receive dividend or subscription rights, or otherwise, until
such Warrant Certificate shall have been exercised in accordance with the
provisions hereof and the receipt of the Exercise Price and any other amounts
payable upon such exercise by the Warrant Agent.
1. Benefits of this Agreement. Nothing in this Agreement or in the
--------------------------
Warrant Certificates shall be construed to give to any person or corporation
other than the Company, the Representatives, the Warrant Agent, and their
respective successors and assigns hereunder and the Registered Holders of the
Warrant Certificates any legal or equitable right, remedy or claim under this
Agreement; but this Agreement shall be for the sole and exclusive benefit of the
Company, the Representatives, the Warrant Agent, their respective successors and
assigns hereunder and the Registered Holders of the Warrant Certificates.
22
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the first date first above written.
ATTEST: ISONICS CORPORATION
By:__________________________ By:__________________________
Name:________________________
Name:________________________ Title:__________________________
Title:_______________________
ATTEST: CONTINENTAL STOCK TRANSFER &
TRUST COMPANY, as Warrant Agent
By:__________________________ By:__________________________
Name:________________________ Name:________________________
Title:_______________________ Title:_______________________
PRYOR, McCLENDON, COUNTS &
CO., INC.
By:__________________________
Name: Malcolmn D. Pryor
Title: Chairman
NATIONAL SECURITIES
CORPORATION, INC.
By:__________________________
Name: Steven A. Rothstein
Title: Chairman
23
<PAGE>
EXHIBIT A
No. W _______ VOID AFTER ___________ ___, 2001
___________ WARRANTS
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
ISONICS CORPORATION
CUSIP #__________________
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or its registered assigns (the "Registered Holder") is the owner of the number
of Redeemable Warrants (the "Warrants") specified above. Each Warrant initially
entitles the Registered Holder to purchase, subject to the terms and conditions
set forth in this Certificate and the Warrant Agreement (as hereinafter
defined), one fully paid and nonassessable share of Common Stock, par value
$____ per share, of Isonics Corporation, a California corporation (the
"Company"), at any time between the date of the Prospectus (the "Initial Warrant
Exercise Date"), and the earlier to occur of the Expiration Date (as hereinafter
defined ) and the Redemption Date (as hereinafter defined) upon the presentation
and surrender of this Warrant Certificate with the Subscription Form on the
reverse hereof duly executed, at the corporate office of American Stock Transfer
& Trust Company, as Warrant Agent, or its successor (the "Warrant Agent"),
accompanied by payment of $_____ per share, subject to adjustment (the "Exercise
Price"), in lawful money of the United States of America in cash or by check
made payable to the Warrant Agent for the account of the Company.
This Warrant Certificate and each Warrant represented hereby are
issued pursuant to and are subject in all respects to the terms and conditions
set forth in the Warrant Agreement (the "Warrant Agreement"), dated ____________
__, 1996, by and between the Company, Pryor, McClendon, Counts & Co., Inc.
("Pryor McClendon") and National Securities Corporation ("National", Pryor
McClendon and National are collectively referred to herein as the
"Representatives") and the Warrant Agent.
1
<PAGE>
In the event of certain contingencies provided for in the Warrant
Agreement, the Exercise Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and shall execute and
deliver a new Warrant Certificate or Warrant Certificates of like tenor, which
the Warrant Agent shall countersign, for the balance of such Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on the
date which is five (5) years after the Initial Warrant Exercise Date or the date
fixed for redemption hereof, whichever date is earlier. If each such date shall
in the State of New York be a holiday or a day on which the banks are authorized
to close, then the Expiration Date shall mean 5:00 p.m. (New York time) the next
following day which in the State of New York is not a holiday or a day on which
banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended (the "Act'), with respect to such securities
is effective or an exemption thereunder is available. The Company has covenanted
and agreed that it will file a registration statement under the Federal
securities laws, use its best efforts to cause the same to become effective, use
its best efforts to keep such registration statement current, if required under
the Act, while any of the Warrants are outstanding, and deliver a prospectus
which complies with Section 10(a)(3) of the Act to the Registered Holder
exercising this Warrant; provided, however, that (i) if at the time of exercise
-------- -------
of any of the Warrants the Company does not have in place an effective
registration statement or is otherwise, in the good faith determination of the
Board of Directors of the Company, precluded by applicable laws from issuing the
shares of Common Stock issuable upon such exercise, the Company may, in lieu of
issuance of those shares, elect to redeem the Warrants duly surrendered for
exercise for a price per Warrant equal to the difference between the Market
Price (as defined below) of a share of the Common Stock on the date of such
submission and the Exercise Price, and in the event of such redemption, the
Company will pay to the Registered Holder the above-described redemption price
in cash within 10 business days after receipt of notice from the Warrant Agent
that such Warrants have been submitted for exercise, and (ii) if the Market
Price of the Common Stock is less than the Exercise Price, then the Company need
not take such actions to file a registration statement (or a post-effective
amendment to a registration statement) with respect to the issuance of Common
Stock upon exercise of the Warrants until such time as the Company has been
subject to the requirements of Section 12 or 15(d) of the Securities Exchange
Act of 1934, as amended, for a period of at least
2
<PAGE>
twelve calendar months immediately preceding the filing of the registration
statement. This Warrant shall not be exercisable by a Registered Holder in any
state where such exercise would be unlawful.
The term "Market Price" shall mean the last reported sale price, or,
in case no such reported sale takes place on such day, the average of the last
reported sales prices for the last three (3) trading days, in either case as
officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to trading or by the Nasdaq SmallCap Market, or, if
the Common Stock is not listed or admitted to trading on any national securities
exchange or quoted by the Nasdaq, the average closing bid price as furnished by
the Nasdaq through Nasdaq or similar organization if Nasdaq is no longer
reporting such information, or if the Common Stock is not quoted on Nasdaq, as
determined in good faith (using customary valuation methods) by resolution of
the members of the Board of Directors of the Company, based on the best
information available to it.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may
be redeemed at the option of the Company, at a redemption price of $0.05 per
Warrant, at any time commencing after _______________ [the date 12 months from
the date of the Prospectus], provided that the average closing sale price for
the Common Stock as reported by the Nasdaq Small Cap Market, if the Common Stock
is then traded on the Nasdaq SmallCap Market (or the average closing sale price,
if the Common Stock is then traded on the Nasdaq National Market or a national
securities exchange), shall have equalled or exceeded $_____ per share for any
twenty (20) consecutive trading days ending on the fifth trading day prior to
the date on which the Notice of Redemption, as defined below, is given (subject
to adjustment in the event of any stock splits or other similar events). Notice
of redemption (the "Notice of Redemption") shall be given not later than the
thirtieth day before the date fixed for redemption, or as
3
<PAGE>
provided in the Warrant Agreement. On and after the date fixed for redemption,
the Registered Holder shall have no rights with respect to the Warrants except
to receive the $0.05 per Warrant upon surrender of this Warrant Certificate.
Upon certain circumstances, the Representatives may be entitled to
receive an aggregate of five percent (5%) of the Exercise Price of the Warrants
represented hereby, if it is engaged as a Warrant solicitation agent by the
Company.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in the
Warrant Agreement.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of Delaware without giving effect to
conflicts of laws.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
4
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated:
[SEAL] ISONICS CORPORATION
By:_____________________________
Name:_________________________
Title:______________________
By:_____________________________
, Secretary
COUNTERSIGNED:
_____________________________,
as Warrant Agent
By:_____________________________
Authorized Officer
5
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to
exercise ________ Warrants represented by this Warrant Certificate, and to
purchase the securities issuable upon the exercise of such Warrants, and
requests that certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
________________________________________
________________________________________
________________________________________
(please print or type name and address)
and be delivered to
__________________________________________
__________________________________________
__________________________________________
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
EXH.A-6
<PAGE>
IMPORTANT: PLEASE COMPLETE THE FOLLOWING
1. The exercise of this Warrant was solicited by:
_____________________________________. [ ]
2. The exercise of this Warrant was not solicited. [ ]
Dated: ______________________
__________________________________
__________________________________
__________________________________
Address
_________________________________
Social Security or Taxpayer Identification
Number
_________________________________
Signature Guaranteed
_________________________________
EXH.A-7
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, _____________________, hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER
_______________________________________
_______________________________________
_______________________________________
_______________________________________
(please print or type name and address)
______________________________________ of the Warrants represented by this
Warrant Certificate, and hereby irrevocably constitutes and appoints
__________________________ Attorney to transfer this Warrant Certificate on the
books of the Company, with full power of substitution in the premises.
Dated: _____________________
__________________________________
Signatured Guaranteed
__________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT
EXH.A-8
<PAGE>
OR ANY CHANGE WHATSOEVER AND MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT
UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
EXH.A-9
<PAGE>
Exhibit 5.01
November 19, 1996
Isonics Corporation
4010 Moorpark Avenue, Suite 119
San Jose, California 95117
Re: Isonics Corporation
-------------------
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
SB-2 filed with the Securities and Exchange Commission (the "SEC") on October 2,
1996 (the "Registration Statement") in connection with registration under the
Securities Act of 1993, as amended, of (1) up to 850,000 shares of your Common
Stock (the "Firm Shares"), (2) up to 850,000 Common Stock Purchase Warrants (the
"Firm Warrants"), (3) up to 127,500 shares of Common Stock (the "Option Shares")
and 127,500 Common Stock Purchase Warrants (the "Option Warrants") (the Firm
Shares and Option Shares sometimes referred to as the "Shares" and the Firm
Warrants and Option Warrants sometimes referred to as the "Warrants") issuable
upon exercise of the Underwriters' over-allotment option (the Shares and
Warrants to be sold in units, each unit to consist of one Share and one
Warrant), (4) up to 977,500 shares of Common Stock that are issuable upon
exercise of the Warrants, (5) up to 85,000 Representatives' Warrants, each
Representatives' Warrant exercisable to acquire one share of Common Stock and
one common stock purchase warrant (the "Underlying Warrant") to acquire one
share of Common Stock, and the 170,000 shares of Common Stock that are issuable
upon exercise of the Representatives' Warrants and the Underlying Warrants. All
of the foregoing securities will be referred to collectively as the
"Securities."
As your counsel, we have examined the proceedings taken by you in
connection with the issuance by you of the Securities that may be sold by you.
It is our opinion that the Securities to be issued and sold by you
pursuant to the Registration Statement, when issued, sold and paid for in the
manner referred to in the Registration Statement, will be legally issued, fully
paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us in the Registration
Statement, and the Prospectus constituting a part thereof any amendments thereto
which have been approved by us.
Very truly yours,
Fenwick & West LLP
<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:
Sublicensee Sublicense Income
- ------------------------------------------------------------------------------
Investor [Confidential]
Non-investor
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 10.14
SECURITY AGREEMENT
This Security Agreement ("Agreement") is made as of this 31st day of March,
1995, by A&R MATERIALS, INC., a California corporation ("Debtor"), in favor of
ISOSERVE, INC., a Colorado corporation ("Secured Party").
1. For valuable consideration, and to secure the payment and performance
of the obligations hereinafter described, Debtor hereby grants to Secured Party,
pursuant to Division 9 of the California Uniform Commercial Code, a security
interest in the property described in Schedule "A" attached hereto and
------------
incorporated herein by this reference (hereinafter collectively referred to as
"Collateral").
2. This Agreement and the security interest created hereby are given for
the purpose of securing payment of the Royalty and the Remaining Balance, as
those terms are defined in that certain Asset Purchase Agreement dated as of
March 31, 1995, by and between Debtor and Secured Party.
3. Debtor represents, warrants and agrees that: (a) Debtor has full title
to the Collateral; (b) upon perfection, the security interest granted hereunder
to Secured Party will constitute a valid and perfected security interest in the
Collateral; and (c) Debtor will execute all such financing statements as Secured
Party deems necessary to create and perfect a valid security interest in the
Collateral.
4. Secured Party may, at its sole discretion, permit the substitution of
any Collateral upon written request of Debtor.
5. Debtor shall be deemed to be in default hereunder upon notice of
default following the occurrence of any one or more of the following events of
default: (a) Debtor's failure to pay, within fifteen (15) days after the same
shall become due, any obligation secured hereby; (b) the making of any levy,
seizure or attachment of or on any of the Collateral; or (c) appointment of a
receiver, trustee, custodian or similar officer for all or any part of the
Collateral or the affairs of Debtor, or any assignment for the benefit of
creditors or the commencement of any proceedings under any bankruptcy or
insolvency law by or against Debtor.
6. Upon the occurrence of any event of default, Secured Party shall have,
in any jurisdiction where enforcement hereof is sought, in addition to all other
rights and remedies which Secured Party may have under law, all rights and
remedies of a secured party under the Uniform Commercial Code.
7. This Security Agreement expresses the entire understanding of the
parties hereto with respect to the subject matter hereof, and may not be altered
or amended except with the written consent of Debtor and Secured Party. This
Security Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, personal representatives, successors and
assigns. This Security Agreement shall be governed by and construed in
<PAGE>
accordance with California law. Any notices required by this Security Agreement
shall be deemed to have been duly given, made and received only when delivered
against receipt, or five (5) days after mailing if sent by registered or
certified mail, postage prepaid, return receipt requested, addressed to Debtor
at 4606 Meridian Avenue, Suite K, San Jose, California 95124, or at such other
address as Debtor may designate in writing from time to time.
IN WITNESS WHEREOF, Debtor, intending to be legally bound hereby, has
caused this Security Agreement to be executed and delivered as of the date first
above written.
"Debtor"
A&R MATERIALS, INC.
By /s/ James E. Alexander
_______________________
Its ______________________
2
<PAGE>
SCHEDULE "A"
DESCRIPTION OF COLLATERAL
1. All of the assets (other than cash, cash equivalents and receivables)
of Debtor's depleted zinc business existing as of March 31, 1995.
2. All dethyl zinc inventory which, as of March 31, 1995, is in the form
of depleted zinc product and tails and which Debtor has acquired from Secured
Party as of March 31, 1995 (collectively, the "Feed Stock").
3. All rights of Debtor to purchase depleted zinc manufactured from any
portion or all of the Feed Stock (collectively, the "Purchase Rights").
4. All of Debtor's rights and interests in, to and under all contracts and
agreements (other than the Purchase Rights) to which Secured Party is a party
and pursuant to which Secured Party has assigned to Debtor the right to purchase
or sell depleted zinc.
5. All customer lists, customer files, mailing lists, developments,
improvements, processes, techniques, methods, trade secrets and confidential
information of any nature whatsoever which relate to Secured Party's stable
isotope business and which Debtor has acquired from Secured Party as of March
31, 1995.
6. All correspondence, plans, ledgers, journals, employment records and
other books and records, inquiries from customers, manuals, procedures,
technical data, rights of copyright and proprietary information, if any,
relevant to Secured Party's stable isotope business and acquired by Debtor as of
March 31, 1995.
7. All of Debtor's rights to the name "Isoserve", as well as Debtor's
rights, if any, to variations of, or names similar to, the foregoing, and all of
Debtor's goodwill, if any, relating to such name.
8. All future proceeds of any and all of the foregoing.
<PAGE>
EXHIBIT 10.15
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") is made and entered into as of
August 28, 1996, by and between A&R Materials, Inc., a California corporation
("Company"), and Larry Wells Co., Inc., a California corporation
("Consultant"). Company desires to retain Consultant in a consulting capacity
to assist it in strategic planning and financing matters, and Consultant wishes
to be so retained.
ACCORDINGLY, THE PARTIES AGREE AS FOLLOWS:
1. DUTIES OF CONSULTANT; TERM.
Consultant hereby undertakes to assist the Company in the following
capacities:
(i) analysis of the Company's financial situation, its market
position, and its competitive position vis-a-vis its competitors and
---------
presentation of the analysis to potential private accredited investors in the
Company;
(ii) continuing interaction with the Company in assisting the
Company to strategically position and market itself to the financial community;
(iii) consult with directors at meetings of the board of directors
and board committees;
(iv) participate as requested by the Company in the selection of co-
managers and syndicate participants;
(v) participate as requested by the Company in shaping the long
term strategic direction of the Company and how it will be implemented through
the planned public offering (collectively, the "Services").
No written work product is contemplated. Consultant shall perform the Services
specified in a timely and professional manner. The Consultant may use
subcontractors, at no additional cost to the Company, to assist, from time to
time, as appropriate in rendering the Services. The term of this Agreement
shall be two years, commencing on the date first set forth above.
2. REPRESENTATIONS OF CONSULTANT.
Consultant hereby represents and warrants to Company that (i) Consultant
has (and any subcontractors engaged by Consultant will have) the expertise and
general skills necessary to perform the Services in accordance with this
Agreement, (ii) Consultant is not (and any subcontractors will not be) a party
to or bound by any agreement, obligation or understanding which restricts or
limits in any way Consultant's right to enter into this Agreement or
Consultant's right or ability to perform Consultant's obligations under this
Agreement, and (iii) neither Consultant nor any subcontractor shall use the
trade secrets, intellectual property rights, copyrights, or other proprietary
rights of any third party in the performance of Consultant's obligations under
this Agreement.
<PAGE>
3. COMPENSATION.
3.1 FEE. Company agrees to pay to Consultant on execution of this
Agreement (or, if later, when the loan proceeds are received) a consulting fee
of $30,000 plus 10% of the amount of 9.9% Loan Notes sold, excluding (a) the
first $500,000 of such Notes and (b) Notes sold to officers, directors,
employees or existing shareholders of the Company ("Insiders"). Thus, by way of
example, if a total of $1,400,000 of Loan Notes was sold, of which $250,000 was
to Insiders, the consulting fee would be $95,000 [i.e., ($30,000) + 10%
($1,400,000 - $500,000 - $250,000)]. The consulting fee shall be non-refundable
under any circumstances.
3.2 NO REIMBURSEMENT OF EXPENSES. Unless otherwise agreed in writing
by Company, Consultant shall not be reimbursed for out-of-pocket or other
expenses incurred in connection with this Agreement.
4. MISCELLANEOUS.
4.1 NOTICES.
Except as otherwise provided in the Agreement, any notice or other
communication required or permitted hereunder shall be in writing and shall be
deemed to have been duly given (i) on the date of service if served personally,
(ii) the day after transmission by telex or facsimile transmission, or (iii)
four days after mailing if mailed, by first class mail, certified or registered
with return receipt requested, postage prepaid to the follow addresses:
If to Consultant: Larry Wells
Larry Wells Co., Inc.
10600 North DeAnza Blvd., Suite 215
Cupertino, CA 95014
If to Company A&R Materials, Inc.
4010 Moorpark Avenue, Suite 119
San Jose, CA 95117
Attn: President
4.2 HEADINGS.
The headings appearing at the beginning of the several paragraphs
contained herein have been inserted for identification and reference purposes
and shall not by themselves determine the construction or interpretation of this
Agreement.
4.3 ASSIGNMENT.
This Agreement shall be binding upon and inure to the benefit of the
respective heirs, executors, administrators, successors, legal representatives
and assigns of the parties.
<PAGE>
4.4 ENFORCEMENT.
If any portion of this Agreement shall be determined to be invalid or
unenforceable, the remainder shall be valid and enforceable to the maximum
extent possible.
4.5 GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with
the laws of the State of California applicable to contracts entered into between
California residents and wholly to be performed in California.
4.6 ENTIRE AGREEMENT AND MODIFICATION.
This Agreement constitutes and contains the entire agreement of the
parties respecting the subject matter hereof and supersedes any and all prior
negotiations, correspondence, understandings and agreements between the parties
respecting the subject matter hereof. This Agreement may only be modified by a
written instrument signed by the parties hereto.
4.7 INDEPENDENT CONTRACTOR.
Consultant enters into this Agreement as, and shall continue to be, an
independent contractor. Under no circumstances shall Consultant look to Company
as Consultant's employer. Neither party has any authority to bind the other
party to any third party or otherwise to act as the agent or representative of
such other party. Consultant agrees to pay all federal, state and other income
taxes due and to properly file appropriate tax returns.
IN WITNESS WHEREOF, the parties have executed this Consulting Agreement as
of the date first set forth above.
COMPANY:
A&R MATERIALS, INC.,
a California corporation
By: /s/ James E. Alexander
-----------------------
Its: President and Chief Executive Officer
CONSULTANT:
LARRY WELLS CO., INC.,
a California corporation
By:
-------------------------
Larry Wells, President
<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
November 18, 1996
