<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 1, 1997
REGISTRATION NO. 333-13289
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 5
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
<TABLE>
<CAPTION>
====================================================================================
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units(2), each
consisting of......... 977,500 $6.00 $5,865,000 $1,778
(a) 1 share of Common
Stock................ 977,500 -- -- --
(b) 1 Redeemable Common
Stock Purchase
Warrant.............. 977,500 -- -- --
- ------------------------------------------------------------------------------------
Common Stock issuable
upon exercise of
Redeemable Warrants... 977,500 $9.00 8,797,500 $2,667
- ------------------------------------------------------------------------------------
Representative's
Warrants(3)........... 85,000 $.001 $85 --
- ------------------------------------------------------------------------------------
Common Stock issuable
upon exercise of
Representative's
Warrants(4)........... 85,000 $8.85 $752,250 $228
- ------------------------------------------------------------------------------------
Redeemable Warrants
issuable upon exercise
of Representative's
Warrants.............. 85,000 $0.12 $10,200 $4
- ------------------------------------------------------------------------------------
Common Stock issuable
upon exercise of
Redeemable Warrants
issuable upon exercise
of Representative's
Warrants(4)........... 85,000 $14.16 $1,203,600 $365
- ------------------------------------------------------------------------------------
Total.................. 3,272,500 $16,628,635 $5,042(5)
====================================================================================
</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 Representative's 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 Representative's Warrants.
(5) Previously paid.
--------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 APRIL 1, 1997
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 250% 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 $5.90 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 Chicago 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>
<CAPTION>
===================================================================================================
UNDERWRITING
DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit (3)............................... $ $ $
- ---------------------------------------------------------------------------------------------------
Per Share................................. $ $ $
- ---------------------------------------------------------------------------------------------------
Per Warrant............................... $ $ $
- ---------------------------------------------------------------------------------------------------
Total (3)(4)............................... $ $ $
===================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Does not include additional compensation payable to the representative (the
"Representative") 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
Representative.
(2) Before deducting estimated expenses of the offering payable by the Company
of $550,000, excluding the non-accountable expense allowance payable to the
Representative.
(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 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 offices of National Securities
Corporation on or about , 1997.
NATIONAL SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS , 1997
<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 CHICAGO 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 a 1-for-6.89 reverse stock split
of the Company's Common Stock effected in December 1996 and a 1-for-1.26
reverse split of the Company's Common Stock 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. 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, and GE in
turn resold the product to end users. In addition to sales to GE, in fiscal
1997 Isonics commenced direct sales to end users, and for the nine months ended
January 31, 1997, approximately 11% 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........... 2,366,756 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
Chicago Stock Exchange Symbols. Common Stock--INC; Warrants--INCW
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
APRIL 30, ENDED JANUARY 31,
------------- -----------------
1995 1996 1996 1997
----- ------ -------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................. $ 738 $5,567 $ 5,145 $ 3,355
Operating income (loss)...................... (343) 522 712 (435)
Net income (loss)............................ (143) 281 412 (714)
Net income (loss) per share(2)............... (.09) .16 .23 (.41)
Shares used in computing per share
information(2).............................. 1,668 1,781 1,781 1,761
Pro forma (loss) per share(2)................ (.25)
Shares used in computing pro forma
information(2).............................. 2,055
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1997
----------------------
ACTUAL AS ADJUSTED(3)
------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 66 $2,556
Working capital (deficiency)............................ (481) 2,692
Total assets............................................ 3,840 5,644
Long-term debt, less current portion.................... 619 206
Total shareholders' equity.............................. 45 3,610
</TABLE>
- --------
(1) Based on shares outstanding as of March 1, 1997. Includes 76,441 shares of
Common Stock issued in December 1996 upon conversion of outstanding
preferred stock. Does not include 228,270 shares of Common Stock issuable
at a weighted average exercise price of $2.26 per share upon exercise of
options granted under the Company's employee benefit plan as of March 1,
1997, 275,000 additional shares of Common Stock reserved for future grants
under the Company's employee benefit plans, 328,678 shares of Common Stock
issuable upon the exercise of outstanding warrants at a weighted average
exercise price of $2.19 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 6 and 8 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, 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 $5.90 per Share and $0.10 per Warrant and the issuance of
Representative's Warrants to purchase 170,000 shares of Common Stock at an
assumed weighted average exercise price of $11.57, 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 signed an
agreement dated July 1996 (the "Supply 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
Supply 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. The Company entered into an agreement in February 1997
reflecting the most recent negotiations. The agreement provides, among other
things, that the plant will not sell DZ to third parties located in North
America or to other parties for resale in North America, that as long as the
plant is able to meet all of the Company's requirements for DZ at prices
competitive with other potential suppliers the Company will not buy DZ from
other third parties located in the Russian Federation, and that any disputes
arising under the agreement will be resolved by arbitration conducted in
Sweden under the arbitration rules of the Stockholm Chamber of Commerce. The
enforceability of the agreement might be subject to a greater degree of
uncertainty than if the agreement was with a U.S. company and disputes were
resolved in the United States. 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
5
<PAGE>
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 were privatized, the Company cannot predict
whether any such privatization would result in a favorable or an 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 67%, 59% and 88% of net
revenues for the nine months ended January 31, 1997, and the years ended April
30, 1995 and 1996, respectively. One other customer accounted for 14% of net
revenues for the nine months ended January 31, 1997. 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. Consistent with the Company's historical experience, the Company's
results for the quarter ended April 30, 1997 are expected to be affected
materially by the level of orders received from significant DZ users during
such quarter and product shipments by the Company during such quarter in
response to any such orders, factors which cannot be predicted with certainty
until the third month of the quarter. 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, had net income of $281,000 for the fiscal year ended April 30, 1996 and
had a net loss of $714,000 for the nine months ended January 31, 1997. At
January 31, 1997, the Company had negative working capital of $481,000 and an
accumulated deficit of $747,000. In addition, the Company expects that it will
incur a net loss for the fiscal year ended April 30, 1997, largely as a result
of expected significant increases in expenses associated with anticipated
growth in research and development, marketing and sales efforts, interest 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."
6
<PAGE>
Factors Affecting Operating Results; Fluctuations in Quarterly Results. The
Company's operating results could be materially adversely affected by a number
of factors, including failure of its suppliers to process a sufficient volume
of products in a timely manner; introduction of new products by competitors;
adequacy of the Company's suppliers manufacturing capacity; changes in pricing
policies of the Company, its customers, competitors or suppliers; economic
conditions in the markets that the Company serves; the need to increase
expenditures for research and development; failure to introduce new or
improved products on a timely basis; and the rescheduling or cancellation of
orders by its customers. The Company's quarterly operating results have varied
in the past and may in the future vary significantly, depending on factors
such as the size and timing of customer orders, pricing and other competitive
conditions and the timing of new product announcements and releases by the
Company and its competitors. The Company operates with little order backlog.
Moreover, a significant portion of the Company's total revenues have been, and
the Company believes will continue to be, derived from a limited number of
orders in any particular quarter, and the timing of such orders and their
fulfillment has caused, and is likely to continue to cause, material
fluctuations in the Company's operating results, particularly on a quarterly
basis. As has been the case in prior quarters, these factors will affect the
Company's operating results for the quarter ended April 30, 1997 as well as
future periods. 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."
7
<PAGE>
Competition. The markets for the Company's products are highly competitive,
and the Company expects that competition will continue and increase as markets
grow and new opportunities are realized. Some of the Company's current
competitors, and many of the Company's potential competitors, have
significantly greater financial, marketing, product development, testing and
other resources than the Company. As a result, they may have the capacity to
respond more quickly to changes in customer requirements or to devote greater
resources to the development, testing, marketing and sale of their products
than the Company. Some of the Company's competitors may form partnerships or
alliances with larger companies, with the resulting entity possessing more
market strength than the Company. New competitors will likely emerge, and some
new competitors may gain significant market share. There can be no assurance
that the Company will be able to compete successfully against current and
future competitors, or that competitive pressures will not have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business--Competition." Increased competition could result in
price reductions, reduced transaction size, fewer customer orders and reduced
gross margins, any of which could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company's competition varies greatly depending on which product or
industry is considered. At present, the Company believes it supplies
substantially all of the DZ used in nuclear power plants worldwide, but
believes that other entities or persons may begin producing DZ. Several such
possible producers have adequate technical and financial resources to become
viable competitors of the Company in the near future. In particular, GE, which
to date has been the Company's largest customer, has indicated that it may
seek to sell DZ to end users independently of the Company or may seek
alternative sources of DZ other than the Company. The Company has several
larger and numerous smaller competitors in the area of stable isotope labeled
compounds and supplying materials for diagnostic breath test products. Due to
the early stage of the electronic and optical materials opportunities, the
Company has not identified material competitors in these markets. However, if
viable commercial markets emerge for such products, the Company anticipates
that substantial competition will emerge.
Expansion of the Company's Product Offerings. The Company's future success
will depend in part on its ability to enhance its current product offerings on
a timely basis. The expansion of the Company into new products and processes
will require significant future capital commitments. Substantial development
work must be undertaken before such products are ready for commercial
introduction. There can be no assurance that the Company will successfully
develop new products or that it will be able to improve or expand its initial
products to keep pace with the demands of the marketplace. Moreover, there can
be no assurance that commercial markets will emerge for the potential products
that the Company is developing and considering developing. In addition, other
products or technologies currently exist, and will be developed in the future,
that compete directly with the Company's current products and products that
the Company may develop in the future.
The Company has entered into an agreement with Yale University through which
the Company has the right, subject to satisfaction of certain conditions, to
acquire an exclusive license for two U.S. patents entitled Isotopically
Enriched Semiconductor Devices. The Company's right to exercise its option is
dependent upon the attainment of certain milestones, which the Company
believes it will achieve before expiration of the option term in July 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 July 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,
8
<PAGE>
financial condition or results of operations. In addition, the Company's
future operating results depend, in part, upon its ability to attract and
retain qualified personnel for its operations. The failure to attract or
retain such persons could materially adversely affect the Company's business,
financial condition and results of operations.
Reliance on Strategic Collaborations and Relationships. The Company's
strategy for the development, processing and marketing of certain of its
products includes entering into various collaborations with corporate
partners, processors, suppliers and others. The Company has developed
strategic relationships, including cooperative research and development
projects, with certain third parties. There can be no assurance that existing
collaborative arrangements will continue, or that the Company will be able to
negotiate other successful collaborative arrangements in the future. The loss
of any of these relationships could adversely affect the Company's business,
financial condition and results of operations. If the Company is not able to
maintain or establish such arrangements, it would likely face increased
capital requirements to undertake such activities at its own expense, and
could also encounter significant delays in development, processing, marketing
or sale of products into certain markets. See "Business--Manufacturing and
Supply."
Third Party Reimbursement of Healthcare Costs. Some of the Company's
potential products, such as DBT products, are expected to compete in the
medical diagnostics and healthcare markets. Demand for such products, and the
prices at which such products can be sold, may depend in large part upon the
extent to which purchasers will be reimbursed by governmental agencies and
insurance companies for use of such products. Future federal or state
legislation could result in a substantial restructuring of the healthcare
delivery system. While the Company cannot predict whether any legislative or
regulatory proposals will be adopted or the effect such proposals may have on
its business, uncertainty regarding such proposals, as well as the adoption of
such proposals, could have a material adverse effect on the Company's ability
to develop and sell products that compete in these markets. Such reforms, if
adopted, and ongoing changes in the healthcare industry, could adversely
affect the pricing of therapeutic or diagnostic products in the United States
or the amount of reimbursement available from governmental agencies or third
party insurers, and consequently could have a material adverse effect on the
Company. In both domestic and foreign markets, sales of such products, if any,
will depend in part on the availability of reimbursement from third party
payers, such as government and private insurance plans and other
organizations.
Product and Other Liability; Minimal Insurance Coverage. The Company's
business exposes it to potentially substantial product, environmental,
occupational and other liability risks which are inherent in research and
development, preclinical study, clinical trials, manufacturing, marketing,
distribution and use, of the Company's current and potential products,
including, but not limited to, products for pharmaceutical, medical device and
nuclear energy markets. The Company currently does not have product liability
insurance, but may seek such coverage as it deems prudent in light of future
operations. There can be no assurance that insurance coverage will be
available at an acceptable cost, if at all, or that a product liability or
other claim would not materially and adversely affect the business, financial
condition and results of operations of the Company even if such insurance has
been 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
9
<PAGE>
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
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.
Representative's Warrants. At the consummation of this offering, the Company
will sell to the Representative for nominal consideration the Representative's
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 Representative's Warrants will be exercisable for a period of five
years after the date of this Prospectus. Each Representative's Warrant will
entitle the holder to purchase one share of Common Stock at a price of $ per
share, which is 150% 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 240% of the IPO Price Per Share. As long as the Representative's
Warrants or other outstanding warrants remain unexercised, the Company's
ability to obtain additional capital might be adversely affected. Moreover,
the Representative 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
Representative's 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
10
<PAGE>
longer receivable collection periods and greater difficulty in accounts
receivable collections, unexpected changes in regulatory requirements,
dependence on independent resellers, risks of foreign currency fluctuations
relative to the U.S. dollar, import and export restrictions and tariffs,
difficulties and costs of staffing and managing foreign operations,
potentially adverse tax consequences, political instability, the burdens of
complying with multiple, potential conflicting laws and the impact of business
cycles and economic instability outside the United States.
Government Regulation. The Company's operations are subject to extensive
government regulations pertaining to product manufacture, marketing and
distribution, and environmental, worker safety, export control and other
matters. Certain of the Company's technology and products, especially those
having nuclear energy or military applications, are subject to substantial
controls, including requirements to obtain governmental approvals and licenses
on their use, distribution, dissemination and export. Furthermore, the
diagnostic and other medical products that the Company may develop in the
future are subject to stringent regulation by the FDA and its foreign
counterparts, and within the United States by certain state agencies.
Regulations by the FDA and its counterparts impose significant restrictions on
the development, testing, manufacture, marketing, distribution and export of
such products, including in most cases the need for prior approval from such
government agencies to manufacture, test and distribute such products.
Regulatory approvals for commercial distribution of medical and diagnostic
products generally require substantial preclinical and human clinical testing
to demonstrate their safety and effectiveness. There can be no assurance that
clinical data from such studies will demonstrate the safety or efficacy of any
product that the Company may in the future develop or of products utilizing
components that the Company may desire to supply, nor could there be any
assurance that the FDA or its foreign counterparts will approve the commercial
distribution of any such products in a timely manner, if at all. Likewise, to
the extent that other foreign or domestic government approvals or permits are
required for the manufacture, export, import, distribution and marketing of
the Company's products and operations, there can be no assurance that the
Company will be able to obtain or maintain such approvals or permits or meet
applicable requirements or standards, or that such approvals or permits will
not contain restrictions or limitations that materially affect the 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 61.3% of
the Company's outstanding Common Stock assuming no exercise of the
overallotment option. 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
11
<PAGE>
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 Chicago Stock Exchange. If such applications are
approved, the Common Stock and Warrants may trade on one or both of these
markets, each of which may be significantly less liquid than the Nasdaq
National Market. Moreover, if the Common Stock and Warrants should be listed
on the Nasdaq SmallCap Market and on the Chicago Stock Exchange, and commence
trading on both markets, but the Company is unable to maintain the standards
for continued trading on one of these markets, the Common Stock and Warrants
would be subject to removal from the Nasdaq SmallCap Market or the Chicago
Stock Exchange, as the case may be, and an investor could find it more
difficult to dispose of the Common Stock or Warrants. Furthermore, if the
Company were unable to maintain the standards for trading on either market,
trading, if any, in the Common Stock and Warrants would therefore be conducted
in the over-the-counter market on an electronic bulletin board established for
securities that do not meet the Nasdaq SmallCap Market listing requirements,
commonly referred to as the "pink sheets." As a result, an investor would find
it more difficult to dispose of, or to obtain accurate quotations as to the
price of, the Common Stock or Warrants. In addition, depending on several
factors including the future market price of the Common Stock and Warrants,
the Common Stock and Warrants could become subject to the so-called "penny
stock" rules that impose additional sales practices and market making
requirements on broker-dealers who sell and/or make a market in such
securities, which could affect the ability or willingness of broker-dealers to
sell or make a market in the Common Stock and Warrants and the ability of
purchasers of the Common Stock and Warrants to sell their securities in the
secondary market.
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.
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 March 1, 1997, 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 1,343,972
currently outstanding shares will be eligible for public sale 12 months after
the initial closing date of this offering. Additional shares of Common Stock
will become eligible for public sale at various times thereafter, and
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." The Company also intends to register on a
registration statement on Form S-8, shortly after the effective date of this
offering, a total of approximately 793,570 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 $4.77 per share. To the extent
options or warrants to purchase Common Stock are exercised, there may be
further dilution. See "Dilution."
12
<PAGE>
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
$3,887,000 ($4,503,000 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)............... $1,397,000 36%
Facilities and capital expenditures(2)......... $ 600,000 15%
Research and development(3).................... $ 890,000 23%
Working capital and general corporate
purposes(4).................................... $1,000,000 26%
</TABLE>
- --------
(1) The Company intends to apply these proceeds to repay approximately
$1,397,000 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 $150,000,
purchase equipment, estimated at approximately $400,000, and upgrade
management information systems, estimated at approximately $50,000. See
"Business--Manufacturing and Supply."
(3) The Company intends to use an estimated approximately $640,000 of the net
proceeds to further develop and select technology associated with the
diagnostic breath test market, an estimated approximately $200,000 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.
13
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of January 31, 1997, and as adjusted to give effect to the sale and
application of the 850,000 Shares and 850,000 Warrants offered hereby at an
assumed initial public offering price of $5.90 per Share and $0.10 per Warrant
and the issuance of Representatives' Warrants to purchase 170,000 shares of
Common Stock at a weighted average exercise price of $11.57 per share, after
deducting underwriting discounts and commissions and other estimated expenses
of the offering.
<TABLE>
<CAPTION>
JANUARY 31, 1997
----------------------
ACTUAL AS ADJUSTED(1)
------ --------------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt...................................... $1,258 $ 575
Long-term debt....................................... 619 206
Shareholders' equity:
Class A Preferred stock, no par value, 10,000,000
shares authorized actual and as adjusted; no
shares issued or outstanding actual and as
adjusted ......................................... -- --
Common stock, no par value actual and as adjusted,
20,000,000 shares authorized actual and as
adjusted: 1,516,756 shares issued and outstanding
actual and 2,366,756 as adjusted.................. 1,129 5,016
Notes receivable from shareholders................. (337) (337)
Accumulated deficit................................ (747) (1,069)
------ ------
Total stockholders' equity......................... 45 3,610
------ ------
Total capitalization............................. $1,922 $4,391
====== ======
</TABLE>
- --------
(1) The "As Adjusted" amount includes a charge to retained earnings and the
statement of operations of $322,000, representing the unamortized value of
the Warrants and discounts relating to the Placement.
The foregoing table excludes (i) 228,270 shares of Common Stock issuable
upon exercise of outstanding options at a weighted average exercise price of
$2.26 per share, (ii) 275,000 shares reserved for future grants under the
Company's employee benefit plans, (iii) 328,678 shares of Common Stock
issuable upon the exercise of outstanding warrants at a weighted average
exercise price of $2.19 per share, (iv) 170,000 shares of Common Stock
issuable upon the exercise of the Representative's Warrants and the warrants
included therein at a weighted average exercise price of $11.57 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 a fiscal 1997 private placement (the "Placement"), the Company issued
approximately $1,397,000 principal amount of 12% nonconvertible promissory
notes (the "Placement Notes") and warrants (the "Placement Warrants") to
acquire 227,313 shares (the "Placement Shares") of Common Stock to a small
number of sophisticated investors (the "Placement Investors"). Net proceeds
were approximately $1,239,000.
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 113,656 Placement Shares are exercisable in
whole at any time or in part at $0.5313 per share, and Placement Warrants to
purchase 113,656 Placement Shares are exercisable in whole at any time or in
part at $4.2495 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 299,570 additional Placement Shares (such warrants referred to
as "Default Warrants") at $0.01 per share, and can require the holders of
approximately 1,267,078 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 101,366 shares of Common Stock exercisable for a period
of five years at $1.736 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 $552,000 is to be amortized as 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
$21,000 representing expenses of the Placement. Accordingly, in the quarter in
which this offering is completed, the unamortized discount 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 pro forma net tangible book value of the Company as of January 31, 1997
was $(976,000) or $(.64) per share of Common Stock. Pro forma net tangible
book value per share represents the amount of the Company's stockholders'
equity, after deducting the value of intangible assets of $1,021,000, divided
by 1,516,756 shares of Common Stock outstanding at January 31, 1997. 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 $6.00 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 January 31, 1997 would have been $2,911,000 or $1.23 per
share. This represents an immediate increase in net tangible book value of
$1.87 per share to existing shareholders and an immediate dilution of $4.77
per share to new investors purchasing Common Stock and Warrants at the assumed
initial public offering price. The following table illustrates the per share
dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $6.00
Net tangible book value per share at January 31, 1997........ $(.64)
Increase in net tangible book value per share attributable to
new investors............................................... $1.87
Pro forma net tangible book value per share after the offering. 1.23
-----
Net tangible book value dilution per share to new investors.... $4.77
=====
</TABLE>
The following table summarizes, on a pro forma basis as of January 31, 1997,
the difference between the existing shareholders and the purchasers of shares
of Common Stock and Warrants in this offering (at an assumed initial public
offering price of $6.00 per share and ascribing no value to the Warrants) with
respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
----------------- ------------------ AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
--------- ------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.. 1,516,756 64.1% $ 735,000 12.6% $0.48
New investors.......... 850,000 35.9% $5,100,000 87.4% $6.00
--------- ----- ---------- -----
Totals............. 2,366,756 100.0% $5,835,000 100.0%
========= ===== ========== =====
</TABLE>
The foregoing table assumes no exercise of the Underwriters' over-allotment
option and no other exercise of options and warrants. After giving effect to
the Placement and this offering, as of January 31, 1997, there were (i)
228,270 shares of Common Stock issuable at a weighted average exercise price
of $2.26 per share upon exercise of options granted under the Company's
employee benefit plan, (ii) 328,678 shares of Common Stock issuable at a
weighted average exercise price of $2.19 per share upon the exercise of
Placement Warrants and warrants issued in conjunction with the Placement,
(iii) 850,000 shares of Common Stock issuable at an exercise price of 150% of
the IPO Price Per Share upon exercise of the Warrants, (iv) 170,000 shares of
Common Stock issuable upon exercise of the Representatives' Warrants, 85,000
of which have an exercise price of 150% of the IPO Price Per Share and 85,000
of which have an exercise price of 240% of the IPO Price Per Share, and (v)
40,000 shares of Common Stock issuable 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 January 31, 1997 and for the nine months ended January 31, 1996 and
1997 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 nine months ended
January 31, 1997 are not necessarily indicative of the results that may be
expected for the entire year.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED JANUARY
APRIL 30, 31,
------------- -------------
1995 1996 1996 1997
----- ------ ------ ------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................................. $ 738 $5,567 $5,145 $3,355
Cost of revenues.............................. 626 3,835 3,530 2,579
----- ------ ------ ------
Gross margin................................ 112 1,732 1,615 776
Operating expenses:
Selling, general and administrative......... 293 902 656 890
Research and development.................... 162 308 247 321
----- ------ ------ ------
455 1,210 903 1,211
----- ------ ------ ------
Operating income (loss)....................... (343) 522 712 (435)
Other expenses, net........................... (15) (66) (43) (226)
----- ------ ------ ------
Income (loss) before income taxes............. (358) 456 669 (661)
Income tax expense (benefit).................. (215) 175 257 53
----- ------ ------ ------
Net income (loss)............................. $(143) $ 281 $ 412 $ (714)
===== ====== ====== ======
Net income (loss) per share ................ $(.09) $ .16 $ .23 $ (.41)
===== ====== ====== ======
Shares used in computing per share
information................................ 1,668 1,781 1,781 1,761
===== ====== ====== ======
Pro forma (loss) per share.................. $ (.25)
======
Shares used in computing pro forma
information................................ 2,055
======
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
------------ -----------
1995 1996 1997
----- ----- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 38 $ 116 $ 66
Working capital (deficiency)....................... (248) (61) (481)
Total assets....................................... 1,057 1,788 3,840
Long-term debt..................................... 352 276 619
Accumulated deficit................................ (314) (33) (747)
Total shareholder's equity (deficit)............... (111) 170 45
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations, as well as other portions of this Prospectus,
contains certain forward-looking statements that involve substantial risks and
uncertainties. When used herein, unless the context otherwise requires, words
such as "anticipates," "believes," "estimates," "expects" and similar
expressions as they relate to the Company or its management are intended to
identify such forward-looking statements. The Company's actual results,
performance or achievements could differ materially from the results expressed
in, or implied by, these forward-looking statements. Factors that could cause
or contribute to such differences include those discussed in "Risk Factors."
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 has been
the case in prior quarters, these factors will affect the Company's operating
results for the quarter ended April 30, 1997 as well as future periods. 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 67%, 59% and 88% of net revenues for the nine
months ended January 31, 1997, and the years ended April 30, 1995 and 1996,
respectively. One other customer accounted for 14% of net revenues for the
nine months ended January 31, 1997. 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.
Consistent with the Company's historical experience, the Company's results for
the quarter ended April 30, 1997 are expected to be materially affected by the
level of orders received from significant DZ users were during such quarter
and product shipments during such quarter in response to any such orders,
factors which cannot be predicted with certainty until the third month of the
quarter. The Company expects that if it continues to increase sales of
depleted zinc products to end users and
18
<PAGE>
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 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>
NINE MONTHS
YEAR ENDED ENDED
APRIL 30, JANUARY 31,
------------- ------------
1995 1996 1996 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenues................................... 100.0 % 100.0% 100.0% 100.0%
Cost of revenues............................... 84.8 68.9 68.6 76.9
----- ----- ----- -----
Gross margin................................. 15.2 31.1 31.4 23.1
Operating expenses:
Selling, general and administrative.......... 39.7 16.2 12.8 26.5
Research and development..................... 22.0 5.5 4.8 9.6
----- ----- ----- -----
Total operating expenses....................... 61.7 21.7 17.6 36.1
----- ----- ----- -----
Operating income (loss)........................ (46.5) 9.4 13.8 (13.0)
Other expense, net............................. (2.0) (1.2) (0.8) (6.7)
----- ----- ----- -----
Income (loss) before income taxes.............. (48.5) 8.2 13.0 (19.7)
Income tax expense (benefit)................... (29.1) 3.2 5.0 1.6
----- ----- ----- -----
Net income (loss).............................. (19.4)% 5.0% 8.0% (21.3)%
===== ===== ===== =====
</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 increased 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.
19
<PAGE>
Net revenues for the nine months ended January 31, 1997 were $3.4 million
compared to $5.1 million for the nine months ended January 31, 1996, a
decrease of approximately $1.7 million or approximately 33%. The decrease was
due primarily to reduced sales of energy products which was offset in part by
sales of stable isotope labeled compounds ("SILCs"). The decrease in net
revenues from energy products of approximately $1.9 million was the result of
reduced unit sales of approximately 43%, which was offset in part by increases
in average unit prices during the period for additional processing performed
by the Company. Average unit prices of energy products were also positively
affected by the Company's direct sales to end users. Net revenues from SILCs
increased from approximately $5,000 during the nine months ended January 31,
1996 to approximately $304,000 during the nine months ended January 31, 1997.
The increase was the result of the Company's entry into the SILC market. Net
revenues from cadmium decreased approximately $190,000 on increased unit
shipments, as average unit prices decreased significantly as a result of
competition in the market.
After the nine month period ended January 31, 1997, the Company received and
shipped its first repeat DZ order from an end user. The order represented
revenue in excess of $280,000. The Company also received a repeat purchase
order from one of the largest end users of DZ in the world. The purchase order
provides for delivery of DZ by the end of May 1997 and will result in revenues
totaling approximately $1.5 million during the quarters ended April 30, 1997
and July 31, 1997. In addition, during February and March 1997, sales of SILCs
were approximately $300,000.
International sales represented approximately 14%, 13%, 12% and 14% of net
revenues for fiscal 1995 and 1996 and the nine months ended January 31, 1996
and 1997, respectively. International sales were principally to Asia and
Israel and are denominated in U.S. dollars.
Gross Margin. Gross margin is affected by the volume of product sales,
product mix and average selling price. The Company's gross margin increased
from 15.2% of net revenues in fiscal 1995 to 31.1% in fiscal 1996. The gross
margin in fiscal 1995 was negatively impacted by competitive pricing
pressures. Gross margin in fiscal 1996 increased in part from the acquisition
of Isoserve, a supplier of depleted zinc oxide, which contributed to increased
per unit selling price and relatively stable production costs. Gross margin
for fiscal 1996 also improved from sales of cadmium.
The Company's gross margin percentage decreased to 23.1% in the nine month
period ended January 31, 1997, from 31.4% in the comparable period of the
prior year, due to increased raw material and processing costs associated with
energy related products which was offset in part by increased per unit sales
prices. The gross margin percentage was also negatively affected by the
increased proportion of net revenues associated with SILCs. During the nine
months ended January 31, 1997, approximately 9% of net revenues was generated
from sales of SILCs, which at present have lower gross margins due to the
product costs which are attributed to smaller purchase order quantities.
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 $656,000, or
approximately 12.8% of net revenues, to $890,000, or approximately 26.5% of
net revenues, for the nine months ended January 31, 1996 and 1997,
respectively. The increase was due to additional staffing for medical,
research and diagnostics products and for finance and administration. The
Company anticipates that 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
20
<PAGE>
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 $247,000, or approximately
4.8% of revenues, to $321,000, or approximately 9.6% of revenues, for the nine
months ended January 31, 1996 and 1997, 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, but may vary as a percentage of net revenues.
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, but remained materially
consistent as a percentage of net revenues. Net other expense increased from
$43,000 to $226,000 for the nine months ended January 31, 1996 and 1997
respectively. The increase was due to interest on debt issued principally in
fiscal 1997 as well as amortization of approximately $130,000 of debt issuance
costs.
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 $257,000 and $53,000 for the nine months
ended January 31, 1996 and 1997, respectively. The Company's effective tax
rate of 39% for the nine months ended January 31, 1996 differs from the
statutory rate due to state income taxes, net of the federal benefit. The
provision for income taxes of $53,000 for the nine months ended January 31,
1997 was the result of providing a valuation allowance on deferred tax assets,
as the Company believes realization of such assets is uncertain due to
anticipated losses through fiscal 1997. The provision was offset in part by a
benefit from net operating losses which will result in a refund of certain
taxes paid in the prior year.
Extraordinary Item. As a result of the Placement Notes issued in the
Placement, the Company is amortizing to interest expense an aggregate discount
of $552,000 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 January 31, 1997,
approximately $322,000 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. Cash used by operating activities of
$1,246,000 for the nine months ended January 31, 1997 was principally the
result of a net loss, adjusted for non-cash items, increases in accounts
receivable and inventory, which was offset in part by increases in accounts
payable and accrued liabilities.
21
<PAGE>
The Company's investing activities used cash of $57,000, $7,000, $7,000 and
$10,000 in 1995 and 1996 and the nine months ended January 31, 1996 and 1997,
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 and $156,000 in fiscal 1996 and
the nine months ended January 31, 1996, respectively, and provided cash of
$187,000 and $1,206,000, in fiscal 1995 and the nine months ended January 31,
1997, respectively. Financing activities in fiscal 1996 and the nine months
ended January 31, 1996, consisted of the issuance of notes which were more
than offset by payments of principal. Financing activities during the nine
months ended January 31, 1997, consisted of the issuance of notes and common
stock which were offset in part by debt issuance costs, deferred offering
costs, and payments of principal. 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 January 31, 1997, the Company has paid cumulative
royalties of $253,000 to Isoserve, of which $55,000 was paid in the nine
months ended January 31, 1997.
As of April 30, 1995 and 1996 and January 31, 1997 the Company had negative
working capital of $248,000, $61,000, and $481,000, 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 $1,239,000 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 January 31, 1997, together with the proceeds from the
Placement and the net proceeds from this offering will be sufficient to allow
the Company to continue its expected level of operations for at least 12
months from the date of this Prospectus. Any additional equity financing may
be dilutive to shareholders, and debt financing, if available, may involve
restrictive covenants. See "Use of Proceeds" and "Risk Factors--Future
Additional Capital Requirements."
22
<PAGE>
BUSINESS
Isonics is an advanced materials and technology company which develops and
commercializes products based on enriched stable isotopes. 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 fiscal
1997, 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
fiscal 1997 Isonics commenced direct sales to end users, and for the nine
months ended January 31, 1997, approximately 11% 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.
23
<PAGE>
BACKGROUND
The following discussion utilizes several technical terms which are
explained in greater detail in the Glossary preceding the financial statements
at the end of this Prospectus.
An isotope is one of two or more species of the same chemical element which
differ from one another only in the number of neutrons in the nucleus of the
atom. The different number of neutrons can create significantly different
nuclear physics characteristics. To take advantage of some of these different
characteristics, it is usually necessary to increase ("enrich") or decrease
("deplete") the concentration of a particular isotope. There are over 280
naturally occurring stable isotopes of 83 elements. Some elements have only
one naturally occurring stable isotope, while others have many. Stable
isotopes are not radioactive.
Stable isotopes of an element differ in mass and diameter as well as several
nuclear properties, such as cross-section, spin and magnetic moment.
Differences in these properties can result in substantially different effects,
and some of these differences have the potential for commercial application.
For example, in ultra chemically pure crystals grown for electronics or
optical applications, isotopic impurities are the greatest contributor to
crystal disorder due to mass and diameter variations. Eliminating this
disorder by using a single enriched isotope results in increased thermal
conductivity and optical transparency, and thus in improved product
performance. Similarly, enriching or depleting isotopes based upon their
cross-sections allows materials to be engineered for applications in the
nuclear power industry, for controlled doping of some semiconductors and for
use as targets to produce radioisotopes for medicine and industry.
Stable isotopes of an element do not differ significantly in their chemical
behavior. Tagging of materials can be performed by varying the natural
abundance of isotopes to give a compound its own mass or nuclear magnetic
signature without changing its chemical properties. Though chemically
equivalent, the "tagged" or labeled compound is discernible from its unlabeled
twin through the use of several types of instruments called spectrometers.
COMPANY STRATEGY
The Company believes that its strength is the ability to bring the necessary
elements together to identify, evaluate, develop, engineer and successfully
commercialize applications for stable isotopes and value-added products
manufactured from stable isotopes. This is evidenced by management's
experience (at the Company and in prior employment) in developing DZ from a
cost prohibitive concept to a commercial product. DZ is now one of the largest
worldwide commercial applications of a stable isotope product.
The Company believes it has created a product development model that can
serve as a basis for current and future expansion efforts of the Company.
Isonics believes that coordination with the ultimate user to establish a
product specification and, with the Company's Russian partners, to establish a
cost effective product manufacturing process to meet that specification, has
the potential to make the Company a viable competitor. This coordination
process also includes initiating and managing development projects necessary
to adapt existing manufacturing methods to new missions, assembling and
coordinating necessary project-specific product and service suppliers,
obtaining appropriate regulatory approvals, and verifying product conformance
to stringent customer requirements.
To capitalize on the commercial opportunities that have been identified for
stable isotopes, the Company has adopted a business strategy designed to
maximize the value of its technologies, business development and management
resources, while attempting to minimize capital costs arising from addressing
multiple markets. This strategy involves:
. focusing on development of high value-added products which have a
perceived competitive advantage in large or growing markets;
24
<PAGE>
. 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
diagnostic breath test substrates and kits, manufactured labeled compounds,
electronic materials and isotopically pure semiconductor fabrication
materials).
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 24 of the approximately 95 BWRs in the world
including 22 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. One PWR is currently adding DZ on a routine basis. The Company
believes that six to eight more PWRs will begin zinc injection by the end of
1997, and that most will use DZ. Programs to evaluate the effectiveness of
utilizing DZ at PWRs are underway in the United States and certain foreign
countries. These programs have demonstrated 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
25
<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 78% of net revenues in fiscal 1995 and
1996 and the nine months ended January 31, 1997, 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 fiscal 1997, 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 represented approximately 11%, 11% and 14% of net
revenues in fiscal 1995 and 1996 and the nine months ended January 31, 1997,
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 approximately 30% and the laser light
coherence length 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.
26
<PAGE>
. 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. As 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. One company in the U.S. has recently received FDA approval
for a carbon-13 UBT. The Company believes that another company has applied for
FDA approval for a carbon-13 UBT, and that several companies in Europe,
including Sanofi and Inbiomed in France, are also pursuing regulatory
approval. The Company intends first to enter this market as a carbon-13 and a
pharmaceutical-grade substrate supplier. The initial step in pursuing
27
<PAGE>
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
28
<PAGE>
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
29
<PAGE>
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 July 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. Payments to fund such research at the university have not been,
and are not currently expected to be, 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
30
<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. One company in the U.S. has recently received FDA approval for
a carbon-13 UBT. The Company believes that another company has applied for FDA
approval for a carbon-13 UBT. Several companies in Europe are also pursuing
regulatory approval. The Company's principal current competitors and potential
competitors also include massTrace, euriso.top, Aldrich Chemicals, Icon
Services, 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.
31
<PAGE>
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 the Supply Agreement dated July 1996 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 Supply Agreement is through 1999. Under the Supply 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 Supply Agreement, the specific terms for each year's
production, including pricing terms, are negotiated between the parties by
November 1 of the preceding year. The Company entered into an agreement in
February 1997 reflecting the most recent negotiations. The agreement provides,
among other things, that the plant will not sell DZ to third parties located
in North America or to other parties for resale in North America, that as long
as the plant is able to meet all of the Company's requirements for DZ at
prices competitive with other potential suppliers the Company will not buy DZ
from other third parties located in the Russian Federation, and that disputes
arising thereunder will be resolved by arbitration conducted in Sweden under
the arbitration rules of the Stockholm Chamber of Commerce. 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.
32
<PAGE>
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, 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.
33
<PAGE>
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
34
<PAGE>
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.
35
<PAGE>
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
36
<PAGE>
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
37
<PAGE>
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 March 1, 1997, the Company had 11 full-time employees, of whom 4 have
Ph.D.s and 4 others 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 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 3,000 square feet of administrative and technical space
in San Jose, California. The lease expires January 1999. The Company leases
650 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.
38
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The members of the Board of Directors ("Board") and the executive officers
of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James E. Alexander 48 President, Chief Executive Officer and Chairman of the Board
Boris Rubizhevsky 46 Senior Vice President, Vice Chairman and Director
Joe Friscia 64 Vice President, Energy and Environmental Products
Daniel J. Grady 42 Vice President, Medical, Research & Diagnostics
Paul J. Catuna 33 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 and became Vice
Chairman in March 1997. 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
39
<PAGE>
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 received his bachelor's
degree in Economics and earned a master's degree in Business Administration
from Stanford University. Mr. Wells, together with entities with which he is
affiliated, owns approximately 6% of the equity securities of National
Securities Corporation, the Representative.
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 received a bachelors degree in Mathematics and Physics from the
Massachusetts Institute of Technology and earned his masters degree in
Theoretical Physics from Columbia University and 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 earned 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 earned a masters degree, and
Ph.D. in Nuclear Engineering 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 earned a 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 received his bachelors degree in Chemistry from Eastern Michigan University
and earned 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 received his bachelors degree in Engineering from the University of
Kerala, India, and earned 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 $ -- 86,392
President and Chief
Executive Officer
Boris Rubizhevsky....... 1996 $ 90,000 $36,666 $ -- 86,392
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............ 86,392 26.1% $1.91 Jan. 2001
Boris Rubizhevsky............. 86,392 26.1% $1.91 Jan. 2001
</TABLE>
- --------
(1) Mr. Alexander's and Mr. Rubizhevsky's options, which have been exercised,
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 86,392 shares at $1.91 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, Jacques Delente and Stephen Burden. 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
42
<PAGE>
at any time by either party. The agreements provide for a rate of annual
compensation, which the Company will review annually. Under the agreements,
the employees are entitled to participate in the Company's standard plans and
policies. The agreements also include customary confidentiality and invention
assignment provisions.
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 eight months after the date of this
offering. The agreement provides for payments to Mr. Hateley totalling
$210,000, $90,000 of which will be paid upon the closing of this offering and
the balance of which will be paid ratably monthly during the eight month term
of the agreement. Of the total payments, approximately $105,000 is expected to
be paid and $52,500 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 101,366 shares of Common Stock,
exercisable at any time until September 2000 at an exercise price of $1.74 per
share, and received approximately $54,000 for legal services during fiscal
1996 and the first nine 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 Plans, 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 $395,000 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 $225,000 principal amount of Placement Notes and Placement Warrants
to acquire approximately 33,131 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 86,392
and 86,392 shares, respectively, of Common Stock at an exercise price of $1.91
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 601,862 and 492,432 shares of Common Stock,
respectively.
The Company is also a party to several employment and consulting agreements.
See "Management--Employment and Consulting Agreements."
All future transactions between the Company and its officers, directors and
affiliates will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties and will be approved by a majority of
the independent, disinterested directors of the Company.
46
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Common Stock as of March 1, 1997, 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)(10).......... 706,660 46.0 706,660 29.6
Boris Rubizhevsky(3)(8)(9)......... 627,806 40.9 627,806 26.3
Jacques Delente(4)................. 77,516 5.1 77,516 3.3
Lindsay Gardner(5)................. 76,000 5.0 76,000 3.2
Larry Wells(6)..................... 33,131 2.1 33,131 1.3
All executive officers and
directors as a group (7
persons)(7)........................ 1,604,716 90.8 1,644,861 61.3
</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 86,392 shares of Common Stock subject to a repurchase right in
favor of the Company.
(4) Includes 72,569 shares of Common Stock subject to a repurchase right in
favor of the Company.
(5) Includes warrants to purchase 18,406 shares of Common Stock issued in
connection with the Placement.
(6) Includes 33,131 shares issuable upon the exercise of Placement Warrants
held by an entity with which Mr. Wells is affiliated.
(7) Includes 172,784 shares of Common Stock subject to a repurchase right in
favor of the Company, options to purchase 161,265 shares of Common Stock,
and warrants to purchase 88,349 shares of Common Stock issued in
connection with the Placement and 30,576 shares of Common Stock held by
Mr. Rubizhevsky's wife.
(8) Includes 30,576 shares of Common Stock held by Mr. Rubizhevsky's wife.
(9) Includes 18,406 shares issuable upon the exercise of Placement Warrants
held by the mother, father, mother-in-law and father-in-law of Mr.
Rubizhevsky.
(10) Includes 18,406 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
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock and 10,000,000 shares of Preferred Stock. As of March 1, 1997,
there were outstanding 1,516,756 shares of Common Stock held of record by
seven shareholders and options and warrants to purchase 556,948 shares of
Common Stock, which included options to purchase 228,270 shares of Common
Stock issued under the Company's employee benefit plans and warrants to
purchase 328,678 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
Representative's Warrants
In connection with this offering, the Company has authorized the issuance to
the Representative of 85,000 Representative's Warrants and has reserved
170,000 shares of Common Stock for issuance upon exercise of the
Representative's Warrants and the warrants issuable upon exercise of the
Representative's Warrants. Each Representative's 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, 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 240% of the IPO Price Per
Share. The Representative's Warrants will, subject to certain conditions, be
exercisable any time until the fifth anniversary of the date of this
Prospectus. See "Underwriting."
The Representative's 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
Representative's Warrant, and the holder thereof will not possess any rights
as a shareholder of the Company until such holder exercises the
Representative's Warrants. The other terms of the Representative's Warrants
are similar in material respects to the Warrants, except that the
Representative's 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
Representative's Warrants is qualified in its entirety by reference to the
detailed provisions of the Representative's 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 250%
of the IPO Price Per Share (subject to adjustment for stock dividends, stock
splits, combinations or reclassifications of the
49
<PAGE>
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 Representative. 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 Representative's 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
50
<PAGE>
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.
51
<PAGE>
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 Representative's Warrants (including shares
obtainable upon exercise of the Warrants included therein). The holders of the
Representative's 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
Representative's Warrants, and the second registration is at the expense of
the Representative.
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
SmallCap Market under the trading symbols "ISNX" and "ISNXW," respectively.
The Company has also applied to list the Common Stock and Warrants on the
Chicago Stock Exchange under the trading symbols "INC" and "INCW,"
respectively.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock.
Future sales of substantial amounts of Common Stock in the public market could
adversely affect market prices prevailing from time to time.
Upon completion of this offering, and assuming the conversion of the
outstanding preferred stock and no exercises of options or warrants after
March 1, 1997, the Company will have outstanding approximately 2,366,756
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
1,516,756 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 Representative.
As a result of the foregoing lock-up agreements and securities law
restrictions, assuming no exercises of options or warrants after March 1,
1997, 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). Of the 1,516,756 shares that are outstanding on the date of this
Prospectus, 83,992 shares will be eligible for resale, pursuant to Rule 144 or
Rule 701 without volume restriction and an additional 1,259,980 shares will
become eligible for resale subject to the volume limit restrictions of Rule
144 or Rule 701, beginning one year from the closing of this offering. An
additional approximately 172,784 shares will become eligible for resale
pursuant to Rule 144 at various dates thereafter. In addition to such shares
of Common Stock outstanding on March 1, 1997, 498,678 shares of Common Stock
issuable upon exercise of the warrants issued in connection with the Placement
and Representative's 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 793,570 shares of Common Stock
subject to certain outstanding options or reserved for issuance under the
Existing Plan (and the other Plans), and covering the resale of approximately
478,570 shares held by certain directors, officers and employees of the
Company that were previously acquired upon the exercise of options granted
under the Existing Plan (372,706 shares of which are currently subject to
rights of repurchase that lapse over time), 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 agreements during the Lock-up Period. Accordingly,
shares covered by such registration statement will, if and when issued, be
available for sale in the open market, subject to the volume limitations of
Rule 144 that may be applicable to the resale of such shares, immediately
following the expiration of the Lock-up Period.
In general, under Rule 144 as it will be in effect after April 29, 1997,
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 one year (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
2,366,756 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 two 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 if the other conditions of Rule 701
are satisfied. Securities issued in reliance on Rule 701 are deemed to be
restricted shares and, beginning 90 days after the date of this Prospectus
(unless subject to the lock-up agreements described above), may be sold by
persons other than affiliates subject only to the manner of sale provisions of
Rule 144 and by affiliates of the Company under Rule 144 without compliance
with its one-year minimum holding period requirements.
53
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among the
Company and the Underwriters named below, the Company has agreed to sell to
the Underwriters for whom National Securities Corporation is acting as
representative (in such capacity, the "Representative"), and the Underwriters
have severally and not jointly agreed to purchase the Securities set forth
below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER UNITS
----------- ---------
<S> <C>
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 Representative 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 Representative. 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
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 Representative has 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 Representative a non-accountable expense allowance equal
to 3% of the gross proceeds derived from the sale of the Securities
underwritten, of which $50,000 has been advanced.
The Company has agreed to sell to the Representative for $.001 each the
Representative's Warrants to purchase from the Company up to 10% of the Shares
and Warrants offered hereby. Each Representative's 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 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 240% of the IPO Price Per Share. The
Representative's 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
Representative. The Representative's Warrants
54
<PAGE>
provide for adjustment in the exercise price of the Representative's Warrants
in the event of certain mergers, acquisitions, stock dividends and capital
changes. The Representative's 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 Representative's 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 2,113,704 shares of Common Stock and
Common Stock issuable upon exercise of options and warrants 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 Representative's
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 Representative, and during
such time as the Representative has not exercised such right, the
Representative 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 Representative. The Company has agreed to reimburse designees
of the Representative 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 the 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 indicate
that the Representative solicited such person's exercise. No compensation,
however, will be paid to the 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 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."
55
<PAGE>
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.
56
<PAGE>
GLOSSARY OF TERMS
CELL GROWTH MEDIA: Substances used in a gel or solution that promote the
growth and multiplication of cells from simple or more complex organisms.
Organisms grown (fed) cell growth media labeled with enriched stable isotopes
result in new and more complex stable isotope labeled compounds.
CGMP (CURRENT GOOD MANUFACTURING PRACTICE): Part of quality assurance aimed at
ensuring that products are consistently manufactured to a quality appropriate
to their intended use; it incorporates manufacturing, engineering, quality
control and quality assurance activities.
CROSS SECTION: A fundamental property of the nucleus of an isotope, cross
section is a measure of the probability of interaction of the nucleus with
another nucleus, particle or photon.
DEPLETED STABLE ISOTOPE: An isotope of an element whose concentration or
"abundance" has been decreased with respect to that of the naturally occurring
element.
DEPLETED ZINC (DZ): Zinc oxide in which the stable isotope Zn-64 has been
depleted for application in nuclear power plants for corrosion control and the
mitigation of radiation fields.
DOPING: An impurity, such as boron, is added in small amounts to a pure
semiconductor to alter its conductive properties.
ENRICHED STABLE ISOTOPE: An isotope of an element whose concentration or
"abundance" has been increased with respect to that of the naturally occurring
element.
HIGH PURITY MATERIALS, CHEMICAL: Materials in which the relevant chemical
compound makes up more than >99.99% of the material.
H.PYLORI (Helicobacter pylori): A pathogenic bacterium found in the human
stomach, responsible for most peptic ulcers and some stomach cancers.
ISOTOPE: One of two or more naturally occurring species of atom having the
same atomic number, hence constituting the same element, but differing in mass
number. As atomic number is equivalent to the number of protons in the
nucleus, and mass number is the sum total of the protons plus the neutrons in
the nucleus, isotopes of the same element differ from one another only in the
number of neutrons in their nuclei. Isotopes may be radioactive or stable.
Isonics deals only with stable isotopes.
ISOTOPICALLY PURE MATERIALS: Materials in which a particular isotope has been
enriched to 99.5% abundance or greater in an element or in a compound.
ISOTOPICALLY ENGINEERED MATERIALS (IEM): Materials in which the natural
abundance of isotopes of constituent elements has been substantially altered
to enhance performance characteristics or provide unique properties.
MAGNETIC MOMENT: A fundamental property of the nucleus of an isotope, magnetic
moment is a vector quantity related to the intrinsic spin of a charged
particle. It is unique to each isotope and can be used to describe how a
spinning, charged particle will interact with an externally imposed magnetic
field (as in an NMR instrument or imaging scanner).
MASS SPECTROMETER: An apparatus that converts molecules and atoms into ions
and then separates the ions according to their mass-to-charge ratio. Mass
spectrometers are used to identify atoms and isotopes, and determine the
chemical composition of a sample.
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 March 26,1997)
F-2
<PAGE>
ISONICS CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30,
-------------- JANUARY 31,
1995 1996 1997
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 38 $ 116 $ 66
Accounts receivable.............................. -- 2 485
Note receivable from shareholder................. 27 33 --
Inventories...................................... 283 1,006 2,109
Prepaid expenses................................. 4 10 35
Deferred income taxes............................ 216 114 --
------ ------ ------
Total current assets........................... 568 1,281 2,695
PROPERTY AND EQUIPMENT, net........................ 9 81 77
GOODWILL (net of accumulated amortization of none,
$79, and $118).................................... 472 393 335
NOTES RECEIVABLE FROM SHAREHOLDERS................. -- -- 41
OTHER ASSETS....................................... 8 4 6
DEFERRED OFFERING COSTS............................ -- -- 565
DEBT ISSUANCE COSTS (net of accumulated
amortization of $15).............................. -- -- 121
DEFERRED INCOME TAXES.............................. -- 29 --
------ ------ ------
TOTAL.............................................. $1,057 $1,788 $3,840
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt................ $ 122 $ 176 $1,258
Accounts payable................................. 414 792 1,564
Accrued liabilities.............................. 280 285 354
Income taxes payable............................. -- 89 --
------ ------ ------
Total current liabilities...................... 816 1,342 3,176
LONG-TERM DEBT..................................... 352 276 619
COMMITMENTS........................................ -- -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Class A Preferred Stock--no par value; 100,000
shares authorized at April 1995 and 1996;
10,000,000 at January 31, 1997; issued and
outstanding: 6,250 in 1995 and 1996; none at
January 31, 1997................................ 125 125 --
Common stock--$.001 par value in 1995 and 1996;
no par value at January 31, 1997; 11,518,879
shares authorized in 1995 and 1996; 20,000,000
at January 31, 1997; issued and outstanding:
1,190,015 in 1995 and 1996; 1,516,756 at January
31, 1997........................................ 1 1 1,129
Additional paid-in capital....................... 77 77 --
Notes receivable from shareholders............... -- -- (337)
Accumulated deficit.............................. (314) (33) (747)
------ ------ ------
Total stockholders' equity (deficit)........... (111) 170 45
------ ------ ------
TOTAL.............................................. $1,057 $1,788 $3,840
====== ====== ======
</TABLE>
See Notes to Financial Statements
F-3
<PAGE>
ISONICS CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
APRIL 30, JANUARY 31,
-------------- ------------------
1995 1996 1996 1997
------ ------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues............................... $ 738 $5,567 $ 5,145 $ 3,355
Cost of revenues........................... 626 3,835 3,530 2,579
------ ------ -------- --------
Gross margin............................. 112 1,732 1,615 776
Operating expenses:
Selling, general and administrative...... 293 902 656 890
Research and development................. 162 308 247 321
------ ------ -------- --------
Total operating expenses............... 455 1,210 903 1,211
------ ------ -------- --------
Operating income (loss).................... (343) 522 712 (435)
Other income (expense)
Interest income.......................... 2 1 1 9
Interest expense......................... (17) (67) (44) (235)
------ ------ -------- --------
Total other expense, net............... (15) (66) (43) (226)
------ ------ -------- --------
Income (loss) before income taxes.......... (358) 456 669 (661)
Income tax expense (benefit)............... (215) 175 257 53
------ ------ -------- --------
NET INCOME (LOSS).......................... $ (143) $ 281 $ 412 $ (714)
====== ====== ======== ========
Net income (loss) per share................ $ (.09) $ .16 $ .23 $ (.41)
====== ====== ======== ========
Shares used in computing per share
information............................... 1,668 1,781 1,781 1,761
====== ====== ======== ========
Pro forma (loss) per share................. $ (.25)
========
Shares used in computing pro forma
information............................... 2,055
========
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
ISONICS CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
----------------- ---------------- PAID-IN FROM ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDERS DEFICIT TOTAL
-------- ------- --------- ------ ---------- ------------ ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, May 1,1994.... 1,151,888 $ 1 $ 17 $(171) $(153)
Issuance of preferred
stock................ 6,250 $ 125 125
Issuance of common
stock in connection
with acquisition..... 38,127 60 60
Net loss.............. (143) (143)
-------- ------ --------- ------ ------ ------ ----- -----
BALANCES, April 30,
1995................... 6,250 125 1,190,015 1 77 (314) (111)
Net income............ 281 281
-------- ------ --------- ------ ------ ------ ----- -----
BALANCES, April 30,
1996................... 6,250 125 1,190,015 1 77 (33) 170
Exercise of stock
options*............. 250,300 1 531 $ (330) 202
Interest on notes
receivable from
shareholders*........ (7) (7)
Conversion of
preferred stock*..... (6,250) (125) 76,441 125
Issuance of warrants
with promissory
notes*............... 394 394
Recapitalization*..... 1,127 (1,127)
Net loss*............. (714) (714)
-------- ------ --------- ------ ------ ------ ----- -----
BALANCES, January 31,
1997*.................. -- $ -- 1,516,766 $1,129 $ -- $(337) $(388) $ 45
======== ====== ========= ====== ====== ====== ===== =====
</TABLE>
- --------
* Unaudited
See Notes to Financial Statements
F-5
<PAGE>
ISONICS CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
APRIL 30, ENDED JANUARY 31,
------------ -------------------
1995 1996 1996 1997
----- ----- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................... $(143) $ 281 $ 412 $ (714)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization............. 2 87 56 202
Interest on notes receivable from
shareholders............................. -- -- -- (7)
Deferred income taxes..................... (216) 73 117 143
Changes in assets and liabilities:
Accounts and notes receivable............ (27) (8) (8) (491)
Inventories.............................. (73) (723) (205) (1,103)
Prepaid expenses......................... (2) (6) (6) (25)
Other assets............................. 4 4 8 (3)
Accounts payable......................... 202 378 (356) 772
Accrued liabilities and other............ 157 5 5 69
Income taxes payable..................... -- 89 140 (89)
----- ----- -------- ---------
Net cash provided by (used in) operating
activities............................. (96) 180 163 (1,246)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Isoserve, Inc............... (50) -- -- --
Purchases of property and equipment........ (7) (7) (7) (10)
----- ----- -------- ---------
Net cash used in investing activities... (57) (7) (7) (10)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt
and warrants.............................. 100 142 54 1,741
Payments on long-term debt................. (38) (237) (210) (66)
Proceeds from issuance of preferred stock.. 125 -- -- --
Proceeds from issuance of common stock..... -- -- -- 202
Payment of debt issuance costs............. -- -- -- (106)
Payment of deferred offering costs......... -- -- -- (565)
----- ----- -------- ---------
Net cash provided by (used in) financing
activities............................. 187 (95) (156) 1,206
----- ----- -------- ---------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS............................ 34 78 -- (50)
Cash and cash equivalents at beginning of
period..................................... 4 38 38 116
----- ----- -------- ---------
Cash and cash equivalents at end of period.. $ 38 $ 116 $ 38 $ 66
===== ===== ======== =========
Supplemental disclosure of noncash financing
activities:
Stock issued for note receivable........... -- -- -- $ 330
=========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest.................................. $ 7 $ 67 $ 44 $ 123
Income taxes.............................. 1 14 -- 9
</TABLE>
See Notes to Financial Statements
F-6
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JANUARY 31, 1997 AND FOR THE NINE MONTHS ENDED JANUARY 31,
1996 AND 1997 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 January 31,
1997.
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 JANUARY 31, 1997 AND FOR THE NINE MONTHS ENDED
JANUARY 31, 1996 AND 1997 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.
Pro forma net loss per share has been presented to depict what the net loss
per share would have been had the common shares issuable upon the conversion
of the outstanding preferred stock and for debt repayment been outstanding
during that period.
UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited interim financial information as of January 31, 1997 and for
the nine months ended January 31, 1996 and 1997 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 nine months ended January 31, 1997 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,
----------- JANUARY 31,
1995 1996 1997
---- ------ -----------
<S> <C> <C> <C>
Finished goods....................................... $ 62 $ 892 $1,246
Work in process...................................... -- 107 863
Raw Materials........................................ 221 7 --
---- ------ ------
$283 $1,006 $2,109
==== ====== ======
</TABLE>
F-8
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JANUARY 31, 1997 AND FOR THE NINE MONTHS ENDED
JANUARY 31, 1996 AND 1997 IS UNAUDITED)
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
---------- JANUARY 31,
1995 1996 1997
---- ---- -----------
<S> <C> <C> <C>
Office furniture and equipment....................... $10 $88 $97
Leasehold Improvements............................... 1 3 4
--- --- ---
11 91 101
Accumulated depreciation and amortization............ (2) (10) (24)
--- --- ---
$ 9 $81 $77
=== === ===
</TABLE>
NOTE 4--ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
--------- JANUARY 31,
1995 1996 1997
---- ---- -----------
<S> <C> <C> <C>
Compensation........................................... $265 $268 $257
Other.................................................. 15 17 97
---- ---- ----
$280 $285 $354
==== ==== ====
</TABLE>
F-9
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JANUARY 31, 1997 AND FOR THE NINE MONTHS ENDED
JANUARY 31, 1996 AND 1997 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.
As of January 31, 1997, the Company has provided a valuation allowance for
its deferred tax asset as it believes realization of such asset is uncertain.
F-10
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JANUARY 31, 1997 AND FOR THE NINE MONTHS ENDED
JANUARY 31, 1996 AND 1997 IS UNAUDITED)
NOTE 6--LONG TERM DEBT
Long term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
--------- -----------
1995 1996 1997
---- ---- -----------
(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 October 31,
1996) plus 2.75%, final payment due January 2005... $ 49 $ 46 $ 44
Note payable, unsecured; payable upon demand, plus
2% per month interest.............................. 50 85 280
Note payable, secured by accounts receivable;
payable upon demand, plus 2% per month interest.... -- -- 200
Notes payable to shareholders....................... 12 -- --
Capital leases (see Note 7)......................... -- 69 55
Nonconvertible promissory notes, net of unamortized
discount of $301,000............................... -- -- 1,095
Royalty payable to Isoserve, Inc. (see Note 10)..... 363 252 203
---- ---- -----
474 452 1,877
Less current maturities............................. 122 176 1,258
---- ---- -----
$352 $276 $ 619
==== ==== =====
</TABLE>
Maturities of long-term debt as of April 30, 1996, are as follows (in
thousands):
<TABLE>
<S> <C>
1997.................................................................... $176
1998.................................................................... 111
1999.................................................................... 115
2000.................................................................... 12
2001.................................................................... 13
Thereafter.............................................................. 25
----
$452
====
</TABLE>
During Fiscal 1997, the Company issued $1,397,000 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 227,313 shares of common
stock, exercisable for a period of five years commencing in August 1996. Of
the warrants issued, 113,656 are exercisable at $0.5313 per share and 113,656
are exercisable at $4.2495 per share. If the Company defaults in its payment
obligations, then additional warrants totaling 299,570 are exercisable at $.01
per share. In conjunction with the financing, the Company issued warrants to
purchase 101,366 shares of common stock exercisable for a period of five
years, at $1.74 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 $595,000 were issued to officers, directors and affiliates of the Company
or such persons. Of the warrants issued, 101,232 were received by related
parties.
F-11
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JANUARY 31, 1997 AND FOR THE NINE MONTHS ENDED
JANUARY 31, 1996 AND 1997 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 $13,000 at January 31, 1997) 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
-----------------
OPERATING CAPITAL
--------- -------
<S> <C> <C>
1997....................................................... $35 $31
1998....................................................... 35 31
1999....................................................... 4 25
--- ---
Total minimum lease payments............................. $74 87
===
Amount representing interest............................... (18)
---
Present value of minimum lease payments.................... 69
Current portion............................................ (18)
---
Long-term portion.......................................... $51
===
</TABLE>
Rent expense for operating leases was approximately $6,000, $19,000, $8,000
and $28,000 for the years ended April 30, 1995 and 1996 and for the nine
months ended January 31, 1996 and 1997, respectively.
NOTE 8--STOCKHOLDERS' EQUITY
On September 30, 1996 and March 26, 1997, the Board of Directors approved a
1 for 6.89 and a 1 for 1.26 reverse stock split of its common shares,
respectively. All per share amounts, number of shares, stock options and
warrant data have been restated to reflect the reverse stock split. In
December 1996, the shareholders approved an increase in the authorized shares
of Preferred and Common Stock to 10,000,000 and 20,000,000, respectively.
CONVERTIBLE PREFERRED STOCK
The Articles of Incorporation authorized the issuance of 100,000 shares of
nonvoting Class A and B convertible preferred stock of which 6,250 shares of
Series A-1 and A-2 Preferred were outstanding at April 30, 1995 and 1996,
respectively. Each 10 shares of Series A-1 and A-2 preferred stock along with
$5 per share were convertible at the option of the stockholder into
approximately 128 shares of common stock. The preferred shares were redeemable
at the option of the Company for $40 per share.
The stockholders of Series A-1 and A-2 convertible preferred stock were
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-1 and A-2 preferred stock were entitled to a liquidation preference
of $5 per share, plus declared and unpaid dividends, over holders of common
shares.
In December 1996, all shares of then outstanding Series A-1 and A-2
preferred stock were converted to common stock in a cashless conversion, and
the Company concurrently eliminated the designation of rights, preferences and
restriction for such Series A-1 and A-2 preferred stock from its Articles of
Incorporation.
F-12
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JANUARY 31, 1997 AND FOR THE NINE MONTHS ENDED
JANUARY 31, 1996 AND 1997 IS UNAUDITED)
RESERVED COMMON STOCK
The Company has reserved shares of common stock for issuance as follows:
<TABLE>
<CAPTION>
JANUARY 31,
1997
-----------
<S> <C>
Exercise of stock options..................................... 325,644
Exercise of warrants.......................................... 328,678
-------
654,322
=======
</TABLE>
STOCK OPTION PLAN
The Company's 1996 Stock Option Plan authorizes the granting of 575,944
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........................................... 331,168 $1.74 - $1.91
Exercised......................................... -- --
Canceled.......................................... -- --
--------
Outstanding, April 30, 1996......................... 331,168 $1.74 - $1.91
Granted........................................... 158,921 $2.60 - $5.10
Exercised......................................... (250,300) $1.91 - $2.60
Canceled.......................................... (11,519) $2.60
--------
Outstanding, January 31, 1997....................... 228,270 $1.74 - $5.10
========
</TABLE>
Options to purchase 11,519 and 66,233 shares of common stock were not
subject to rights of repurchase at April 30, 1996 and January 31,1997,
respectively.
In September 1996, two executive officers of the Company exercised stock
options to each acquire 86,392 shares of Common Stock at an exercise price of
$1.91 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-13
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JANUARY 31, 1997 AND FOR THE NINE MONTHS ENDED
JANUARY 31, 1996 AND 1997 IS UNAUDITED)
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.
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 nine months ended January 31, 1996, two customers accounted
for 87% and 13% of net revenues. In the nine months ended January 31, 1997,
two customers accounted for 67% and 14% of net revenues. Export sales were
14%, 13%, 12% and 14% of net revenues in 1995 and 1996 and for the nine months
ended January 31, 1996 and 1997, 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 $198,000 and $55,000
for the year ended April 30, 1996 and the nine month period ended January 31,
1997, respectively.
F-14
<PAGE>
Gas centrifuge
enrichment facility
owned by a third
party where several
of 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
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 , 1997 (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
---------------
NATIONAL SECURITIES
CORPORATION
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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................ $ 5,052
NASD filing fee.................................................... 2,643
Nasdaq SmallCap Market filing fee.................................. 10,000
Chicago Stock Exchange............................................. 20,000
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...................................................... 117,305
--------
Total.............................................................. $550,000
========
</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 1,094,293 $ 12,000 Property
1 Investor 11/20/93 Common Stock 57,595 $ 6,000 Cash
2 Investors 12/1/94 and 12/7/95 Preferred Stock 6,250 $ 125,000 Cash
1 Acquired Entity 3/31/95 Common Stock 38,127 $ 60,000 Property
1 Advisor 9/96 Warrants 101,366 $ 141,000 Services
1 Investor 8/96 Common Stock 38,400 100,000 Cash
1 Investor 9/96 Common Stock 39,116 $ 101,885 Cash
2 Investors 9/96 Common Stock 172,784 $ 330,000 Notes
11 Investors 9/96 Notes and Warrants 227,313 $1,397,000 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 granted options under the Company's Existing Plan to purchase a total
of 490,089 shares of Common Stock at exercise prices ranging from $1.74 to
$5.10 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 250,300 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.
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.***
10.16 February 1997 Agreement between the Registrant, Electrochemical Plant
and AO Techsnabexport, Co., Ltd.**
10.17 Letter from Yale University to Registrant dated January 28, 1997.
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).
27.01 Financial Statement Schedule.
</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 APRIL 1, 1997.
Isonics Corporation
By: /s/ Paul J. Catuna
---------------------------------
PAUL J. CATUNA,
CHIEF FINANCIAL 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:
President, Chief
James E. Alexander* Executive Officer April 1, 1997
- ------------------------------- and Director
JAMES E. ALEXANDER
PRINCIPAL FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER:
/s/ Paul J. Catuna Chief Financial
- ------------------------------- Officer and April 1, 1997
PAUL J. CATUNA Director of
Administration
ADDITIONAL DIRECTORS
Boris Rubizhevsky* Senior Vice
- ------------------------------- President and April 1, 1997
BORIS RUBIZHEVSKY Director
Lindsay A. Gardner* Director
- ------------------------------- April 1, 1997
LINDSAY A. GARDNER
Larry J. Wells* Director
- ------------------------------- April 1, 1997
LARRY J. WELLS
*By: /s/ Paul J. Catuna
---------------------------------
PAUL J. CATUNA, ATTORNEY-IN-FACT
</TABLE>
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.
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.***
10.16 February 1997 Agreement between the Registrant, Electrochemical
Plant and AO Techsnabexport, Co., Ltd.**
10.17 Letter from Yale University to Registrant dated January 28,
1997.
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).
27.01 Financial Statement Schedule.
</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
________ ___, 1997
National Securities Corporation
1001 Fourth Avenue, Suite 2200
Seattle, WA 98154
Ladies and Gentlemen:
Isonics Corporation, a California corporation (the "Company"), hereby
agrees with National Securities Corporation ("National"), 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 National is acting as representative (in such
capacity, National shall hereinafter be referred to as "you" or the
"Representative") 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 _________, 1997 and until 5:30 p.m., New York City
time on _________________, 2002, 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/or ____________________ Warrants for the purpose of covering over-
allotments, if any. Such _________________ shares of Common Stock and/or
___________________ Warrants are hereinafter collectively to as the "Option
Securities." The Company also proposes to issue and sell to you warrants (the
"Representative's Warrants") pursuant to the Representative's Warrant Agreement
(the "Representative's 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
Representative's Warrants are hereinafter referred to as the "Representative's
Securities." The Firm Securities, the Option Securities, the Representative's
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
-3-
<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
-4-
<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 Representative's 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
Representative of the Representative's 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
-5-
<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 Representative's Warrant Agreement, or of
any action taken or to be taken by the Company pursuant to or in connection with
this Agreement or the Representative's 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 Representative's Warrant Agreement,
and to consummate the transactions provided for in such agreements; and this
Agreement, the Warrant Agreement and the Representative's Warrant Agreement have
each been duly and properly authorized, executed, and delivered by the Company.
Each of this Agreement, the Warrant Agreement and the Representative's 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 Representative's
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 Representative's
-6-
<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 Representative's 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 Representative's 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
-7-
<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
-8-
<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 National (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 Representative, 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
-9-
<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
-10-
<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 Underwriters' 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/or an additional ___________________ Warrants at a
price of $__________ per Warrant. The option granted hereby will expire 45 days
after (i) the date the Registration Statement becomes effective, if the Company
has elected not to rely on Rule 430A under the Regulations, or (ii) the date of
this Agreement if the Company has elected to rely upon Rule 430A under the
Regulations, and may be exercised in whole or in part from time to time (but not
on more than two (2) occasions) only for the purpose of covering over-allotments
which may be made in connection with the offering and distribution of the Firm
Securities upon notice by the Representative to the Company setting forth the
number of Option Securities as to which the
-11-
<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 Representative 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 National
Securities Corporation, 1001 Fourth Avenue, Suite 2200, Seattle Washington
98154, or at such other place as shall be agreed upon by the Representative and
the Company. Such delivery and payment shall be made at 9:00 a.m. (New York
time) on ______________, 1997, or at such other time and date as shall be agreed
upon by the Representative 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 National or at such other place as shall
be agreed upon by the Representative and the Company on each Option Closing
Date as specified in the notice from the Representative 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 Representative 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 Representative at such office or such other place as the
Representative 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
Representative's Warrants to the Representative at a purchase price of $0.001
per warrant, which warrants shall entitle the holders thereof to purchase an
aggregate of _________________ shares of Common Stock and _________________
Warrants. Each of the Representative's Warrant shall expire five (5) years after
the effective date of the Registration Statement, shall be exercisable for a
period of four (4) years commencing on the first anniversary of the effective
date of the Registration Statement, and will entitle the holder to purchase one
share of Common Stock at a price equaling one hundred fifty percent (150%) of
the initial public offering price of the Shares (the "IPO Price Per Share") and,
upon payment of one hundred twenty percent (120%) of the initial public offering
price of the Warrants, to acquire one warrant at an exercise price equaling two
hundred forty percent (240%) of the IPO Price Per Share.
-12-
<PAGE>
The Representative's Warrant Agreement and form of Warrant Certificate shall be
substantially in the form filed as Exhibit 4.02 to the Registration Statement.
Payment for the Representative's 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 Representative deems 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 Representative may
from time to time increase or decrease the public offering price to such extent
as the Representative, in its 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 Representative shall not
previously have been advised and furnished with a copy, or to which the
Representative 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 Representative 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.
-13-
<PAGE>
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Representative) in accordance with the requirements of the
Act.
(d) The Company will give the Representative 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 Representative 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
Representative or Camhy Karlinsky & Stein LLP ("Underwriters' Counsel") shall
reasonably object.
(e) The Company shall endeavor in good faith, in cooperation
with the Representative, 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 Representative 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 Representative agrees 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 Representative 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.
-14-
<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 Representative, 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 Representative:
(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 Representative may
reasonably request.
-15-
<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 Representative's Warrants.
(j) The Company will furnish to the Representative, without
charge, at such place as the Representative 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 Representative may reasonably
request.
(k) On or before the effective date of the Registration
Statement, the Company shall provide the Representative 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, or such regional stock
exchange as the Company and National mutually agree, 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 Representative, at the Company's sole expense,
monthly transfer sheets relating to the Common Stock and Warrants.
-16-
<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 National, 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 National 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 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.
-17-
<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 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 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 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 Representative's
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,
-18-
<PAGE>
including but not limited to the costs and expenses incurred by the Company and
the Representative 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 Representative 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 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
Representative on the Closing Date by certified or bank cashier's check or, at
the election of the Representative, 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, at least $50,000 of which has been paid to date. In the event
the Representative elects to exercise the over-allotment option described in
Section 2(b) hereof, the Company further agrees to pay to the Representative 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
Representative, 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
-19-
<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 Representative 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 Representative 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 Representative 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.
-20-
<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 Representative's 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 Representative's
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
Representative, respectively, good and marketable title to the
Securities
-21-
<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
-22-
<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 Representative's 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 Representative's Warrant Agreement, or
which in any manner questions the validity or enforceability of
this Agreement, the Warrant Agreement or the Representative's
Warrant Agreement;
(vii) the Company has the corporate power and authority to
enter into each of this Agreement, the Warrant Agreement, and the
Representative's Warrant Agreement and to consummate the
transactions provided for therein; and each of this Agreement, the
Warrant Agreement, and the Representative's Warrant Agreement has
been duly authorized, executed and delivered by the Company. Each
of this Agreement, the Warrant Agreement, and the Representative's
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
Representative's Warrant Agreement, the
-23-
<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 Representative's 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
-24-
<PAGE>
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,
-25-
<PAGE>
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;
-26-
<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;
-27-
<PAGE>
(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 Representative 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
-28-
<PAGE>
(v) statements as to such other material matters incident to the
transaction contemplated hereby as the Representative 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 Representative 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 Representative 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 Representative, (i) the Representative's Warrant Agreement,
substantially in the form filed as Exhibit 4(b), to the Registration Statement,
in final form and substance satisfactory to the Representative, and (ii) the
Representative's 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 Representative may terminate this
Agreement or, if the Representative so elects, they may waive any such
conditions which have not been fulfilled or extend the time for their
fulfillment.
-29-
<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 Representative 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
-30-
<PAGE>
for use therein and constitute the only information furnished in writing by or
on behalf of the Underwriters or the Representative 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
-31-
<PAGE>
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,
-32-
<PAGE>
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 Representative, 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 Representative of telegrams to securities dealers releasing
such shares for offering or the release by the Representative 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.
-33-
<PAGE>
11. Substitution of Underwriters. If one or more of the Underwriters
----------------------------
shall fail (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 6, Section 10 or Section 12
hereof) to purchase the Securities which it or they are obligated to purchase on
such date under this Agreement (the "Defaulted Securities"), the Representative
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 Representative 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 Representative 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
Representative, National Securities Corporation, 1001 Fourth Avenue, Suite 2200,
Seattle, WA 98154, 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
-34-
<PAGE>
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 Representative's 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
Representative 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:
NATIONAL SECURITIES CORPORATION
By:___________________________________
Name: Steven A. Rothstein
Title: Chairman
For itself and as the Representative 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
- -------------------- --------- ------------
National Securities
Corporation
TOTAL
SCH. A-1
<PAGE>
EXHIBIT 3.01
RESTATED ARTICLES OF INCORPORATION
OF
ISONICS CORPORATION
James E. Alexander and Paul J. Catuna certify that:
1. They are the President and the Secretary, respectively of Isonics
Corporation, a California Corporation.
2. The Articles of Incorporation of this corporation are amended and
restated to read as set forth in Annex "A" hereto.
---------
3. The foregoing amendment and restatement of the Articles of
Incorporation has been duly approved by the board of directors.
4. The foregoing amendment and restatement of the Articles of
Incorporation has been duly approved by the required vote of shareholders in
accordance with Sections 902 and 903 of the California Corporations Code. The
total number of outstanding shares of the corporation entitled to vote is
11,698,075 shares of Common Stock, 3,750 shares of Class A, Series 1 Nonvoting
Preferred Stock and 2,500 shares of Class A, Series 2 Nonvoting Preferred Stock.
There are no shares of the corporation's Class B Preferred Stock issued or
outstanding. The number of shares voting in favor of the amendment and
restatement equaled or exceeded the vote required. The percentage vote required
was more than fifty percent (50%) of the outstanding shares of Common Stock, one
hundred percent (100%) of the outstanding shares of Class A, Series 1 Nonvoting
Preferred Stock and one hundred percent (100%) of the Class A, Series 2
Nonvoting Preferred Stock.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our knowledge.
Dated: December 2, 1996
/s/ J. E. ALEXANDER
- -----------------------------
James E. Alexander, President
/s/ PAUL J. CATUNA
- -----------------------------
Paul J. Catuna, Secretary
<PAGE>
Annex "A"
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
Class A Preferred Stock.
Upon the filing of these articles, each issued and outstanding share of
Common Stock shall be reverse split into .145138 shares of Common Stock (the
"Split").
2
<PAGE>
ARTICLE IV
The shares of this corporation's Preferred Stock may be issued from
time to time in one or more series as the Board of Directors may from time to
time determine. The Board of Directors is authorized to determine and alter the
rights, preferences, privileges, and restrictions granted to or imposed upon,
any wholly unissued series of Preferred Stock, and to fix the number of shares
of any series of Preferred Stock and the designation of any such series of
Preferred Stock. The Board of Directors, within the limits and restrictions
stated in any resolution or resolution of the Board of Directors originally
fixing the number of shares constituting any series, may increase or decrease
(but not below the number of shares of such series then outstanding) the number
of shares of any series prior to or subsequent to the issuance of shares of that
series.
ARTICLE V
5.1 Conversion Upon Filing. Effective upon the filing of these
----------------------
articles (the "Conversion Date"), all then outstanding shares of Class A, Series
1 Nonvoting Preferred Stock ("Series 1 Preferred") and Class A Series 2
Nonvoting Preferred Stock ("Series 2 Preferred") (the Series 1 Preferred and
Series 2 Preferred referred to collectively as the "Class A Preferred") shall
convert into fully paid and nonassessable shares of Common Stock at the
conversion rate (after giving effect to the Split) of 15.4104 shares of Common
Stock for each outstanding share of Class A Preferred Stock (the "Conversion
Rate").
5.2 Procedures. As promptly as practicable after the surrender of
----------
all then-outstanding certificates representing shares of Class A Preferred
Stock, this corporation shall deliver or cause to be delivered at its principal
office to the holder of such shares of Class A Preferred Stock, a certificate or
certificates representing the shares of Common Stock issuable upon such
conversion, issued in the name of such holder. Shares of Class A Preferred Stock
shall be deemed to have been converted as of the Conversion Date. Thereafter,
the holder of any certificate representing Class A Preferred Stock shall no
longer have any rights to such Class A Preferred Stock and such person shall be
treated for all purposes as having become the record holder of Common Stock at
such time.
<PAGE>
ARTICLE VI
(a) Liability of Directors. The liability of directors of the
----------------------
corporation for monetary damages shall be eliminated to the fullest extent
permissible under California Law.
(b) Indemnification. 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) Amendment, Modification. Any amendment, repeal or modification
-----------------------
of any provision of this Article VI shall not adversely affect any right or
protection of an agent of this corporation existing at the time of such
amendment, repeal or modification.
4
<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.
ARTICLE IV
The shares of this corporation's Preferred Stock may be issued from
time to time in one or more series as the Board of Directors may from time to
time determine. The Board of Directors is authorized to determine and alter the
rights, preferences, privileges, and restrictions granted to or imposed upon,
any wholly unissued series of Preferred Stock, and to fix the number of shares
of any series of Preferred Stock and the designation of any such series of
Preferred Stock. The Board of Directors, within the limits and restrictions
stated in any resolution or resolution of the Board of Directors originally
fixing the number of shares constituting any series, may increase or decrease
(but not below the number of shares of such series then outstanding) the number
of shares of any series prior to or subsequent to the issuance of shares of that
series.
<PAGE>
ARTICLE V
(a) Liability of Directors. The liability of directors of the
----------------------
corporation for monetary damages shall be eliminated to the fullest extent
permissible under California Law.
(b) Indemnification. 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) Amendment, Modification. 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 4.02
___________________________
ISONICS CORPORATION, AND
NATIONAL SECURITIES CORPORATION
REPRESENTATIVE'S
WARRANT AGREEMENT
DATED AS OF ______ ___, 1997
___________________________
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT dated as of _________, ____ 1997,
between ISONICS CORPORATION, a California corporation (the "Company"), and
NATIONAL SECURITIES CORPORATION ("National") and its assignees or designees
(each hereinafter collectively referred to variously as "Holders" or
"Representatives").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Representatives have agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof and entered
into between the Company and the Representatives, to act as the representatives
of the several underwriters listed therein (the "Underwriters") in connection
with the Company's proposed public offering of _______ shares of Common Stock
(as hereinafter defined) at a public offering price of $________ per share and
________ redeemable warrants (the "Redeemable Warrants") to purchase one (1)
share of Common Stock at an exercise price of $____, per share 150% of the
initial public offering price per share of Common Stock (the "Public Offering").
WHEREAS, pursuant to the Underwriting Agreement, the Company proposes
to issue warrants (the "Representatives' Warrants") to the Representatives to
purchase up to an aggregate of __________ shares of Common Stock of the Company
and/or ________ Redeemable Warrants.
-1-
<PAGE>
WHEREAS, the Representative's Warrants to be issued pursuant to this
Agreement will be issued on the Closing Date (as such term is defined in the
Underwriting Agreement) by the Company to the Representatives in consideration
for, and as part of the Underwriters' compensation in connection with, the
Representatives acting as the representatives pursuant to the Underwriting
Agreement.
NOW, THEREFORE, in consideration of the premises, the payment by the
Representatives to the Company of an aggregate of ___ dollars ($____), the
agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Grant. The Representatives are hereby collectively granted the
-----
right to purchase, at any time after the Effective Date of the Registration
Statement until 5:30 p.m., New York time, on ___________ __, 2002 (5 years from
the Effective Date of the Registration Statement), at which time the
Representative's Warrants expire, up to an aggregate of _____ shares of Common
Stock, no par value (the "Common Stock"), and/or _______ Redeemable Warrants at
an initial exercise price (subject to adjustment as provided in Section 11
-------
hereof) of $____ per share of Common Stock 150% of the initial public offering
price per share and $____ per Redeemable Warrant 120% of the initial public
offering price per Redeemable Warrant, (collectively, the "Exercise Price").
One Redeemable Warrant is exercisable to purchase one additional share of Common
Stock at an initial exercise of $____ 240% of the initial public offering price
per share from the Effective Date of the Registration Statement until 5:30 p.m.
New York time on ___________
-2-
<PAGE>
__, 2001 [5 years from the Effective Date of the Registration Statement], at
which time the Redeemable Warrants shall expire. Except as set forth herein, the
shares of Common Stock and the Redeemable Warrants issuable upon exercise of the
Representatives' Warrants are in all respects identical to the shares of Common
Stock and the Redeemable Warrants being purchased by the Underwriters for resale
to the public pursuant to the terms and provisions of the Underwriting
Agreement. The shares of Common Stock and the Redeemable Warrants issuable upon
exercise of the Representatives' Warrants are sometimes hereinafter referred to
collectively as the "Securities."
2. Representatives' Warrant Certificates. The Representatives'
-------------------------------------
Warrant Certificates (the "Warrant Certificates") delivered and to be delivered
pursuant to this Agreement shall be in the form set forth in Exhibit A, attached
hereto and made a part hereof, with such appropriate insertions, omissions,
substitutions, and other variations as required or permitted by this Agreement.
3. Registration of Warrant. The Representatives' Warrants shall be
-----------------------
numbered and shall be registered on the books of the Company when issued.
4. Exercise of Representatives' Warrants.
-------------------------------------
The Representatives' Warrants initially are exercisable at an
aggregate Exercise Price (subject to adjustment as provided in Section 11
-------
hereof) per share of Common Stock and Redeemable Warrant as set forth in Section
-------
8 hereof payable by certified or official bank check in New York Clearing House
funds. Upon surrender of a Representatives' Warrant
-3-
<PAGE>
Certificate with the annexed Form of Election to Purchase duly executed,
together with payment of the Exercise Price for the Units purchased at the
Company's principal offices in California presently located at 4010 Moorpark
Avenue, Suite 119, San Jose, California 95117 the registered holder of a
Representatives' Warrant Certificate ("Holder" or "Holders") shall be entitled
to receive a certificate or certificates for the shares of Common Stock and/or
Redeemable Warrants so purchased. The purchase rights represented by each
Representatives' Warrant Certificate are exercisable at the option of the Holder
thereof, in whole or in part (but not as to fractional shares of Common Stock
and/or Redeemable Warrants underlying the Representatives' Warrants).
Representatives' Warrants may be exercised to purchase all or part of the shares
of Common Stock together with an equal or unequal number of the Redeemable
Warrants represented thereby. In the case of the purchase of less than all of
the shares of Common Stock and/or Redeemable Warrants purchasable under any
Representatives' Warrant Certificate, the Company shall cancel said
Representatives' Warrant Certificate upon the surrender thereof and shall
execute and deliver a new Representatives' Warrant Certificate of like tenor for
the balance of the shares of Common Stock and/or Redeemable Warrants purchasable
thereunder.
5. Issuance of Certificates. Upon the exercise of the
------------------------
Representatives' Warrant, the issuance of certificates for shares of Common
Stock and/or Redeemable Warrants or other securities, properties or rights
underlying such Representatives' Warrant shall be made forthwith (and in any
event within five (5) business days thereafter) without charge to the Holder
thereof including, without limitation, any tax which may be payable in respect
of the issuance thereof, and such certificates shall (subject to the provisions
of Sections 7 and 9 hereof) be issued in the
--------
-4-
<PAGE>
name of, or in such names as may be directed by, the Holder thereof; provided,
however, that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
such certificates in a name other than that of the Holder and the Company shall
not be required to issue or deliver such certificates unless or until the person
or persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.
The Representative's Warrant Certificates and the certificates
representing the shares of Common Stock and/or Redeemable Warrants or other
securities, property or rights issued upon exercise of the Representative's
Warrant shall be executed on behalf of the Company by the manual or facsimile
signature of the then present President or any Vice President of the Company
under its corporate seal reproduced thereon, attested to by the manual or
facsimile signature of the then present Secretary or any Assistant Secretary of
the Company. Representative's Warrant Certificates shall be dated the date of
execution by the Company upon initial issuance, division, exchange, substitution
or transfer.
6. Transfer of Representative's Warrant. The Representative's
------------------------------------
Warrant shall be transferable only on the books of the Company maintained at its
principal office, where its principal office may then be located, upon delivery
thereof duly endorsed by the Holder or by its duly authorized attorney or
representative accompanied by proper evidence of succession,
-5-
<PAGE>
assignment or authority to transfer. Upon any registration transfer, the Company
shall execute and deliver the new Representative's Warrant to the person
entitled thereto.
7. Restriction On Transfer of Representative's Warrant. The Holder
---------------------------------------------------
of a Representative's Warrant Certificate, by its acceptance thereof, covenants
and agrees that the Representative's Warrant is being acquired as an investment
and not with a view to the distribution thereof, and that the Representative's
Warrant may not be sold, transferred, assigned, hypothecated or otherwise
disposed of, in whole or in part, for the term of the Representative's Warrant,
except to officers or partners of the Underwriters, or by operation of law.
8. Exercise Price.
---------------
1.8.1 Initial and Adjusted Exercise Price. Except as otherwise
-----------------------------------
provided in Section 11 hereof, the initial exercise price of each
-------
Representative's Warrant shall be $____ per share of Common Stock [150% of the
initial public offering price per share of Common Stock] and $____ per
Redeemable Warrant [120% of the initial public offering price per Redeemable
Warrant]. The adjusted exercise price shall be the price which shall result
from time to time from any and all adjustments of the initial exercise price in
accordance with the provisions of Section 11 hereof. Any transfer of a
-------
Representative's Warrant shall constitute an automatic transfer and assignment
of the registration rights set forth in Section 9 hereof with respect to the
-------
Securities or other securities, properties or rights underlying the
Representative's Warrants.
-6-
<PAGE>
1.8.2 Exercise Price. The term "Exercise Price" herein shall mean
--------------
the initial exercise price or the adjusted exercise price, depending upon the
context or unless otherwise specified.
9. Registration Rights.
-------------------
1.9.1 Registration Under the Securities Act of 1933. Each
---------------------------------------------
Representative's Warrant Certificate and each certificate representing shares of
Common Stock and/or Redeemable Warrants and any of the other securities issuable
upon exercise of the Representative's Warrant (collectively, the "Warrant
Shares") shall bear the following legend unless (i) such Representative's
Warrant or Warrant Shares are distributed to the public or sold to the
underwriters for distribution to the public pursuant to Section 9 hereof or
-------
otherwise pursuant to a registration statement filed under the Securities Act of
1933, as amended (the "Act"), or (ii) the Company has received an opinion of
counsel, in form and substance reasonably satisfactory to counsel for the
Company, that such legend is unnecessary for any such certificate:
THE REPRESENTATIVE'S WARRANT REPRESENTED BY THIS
CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON
EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO (I) AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, (II) TO THE EXTENT
APPLI CABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF
SECURITIES), OR (III) AN OPINION OF COUNSEL, IF SUCH
OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR
THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER
SUCH ACT IS AVAILABLE.
-7-
<PAGE>
THE TRANSFER OR EXCHANGE OF THE REPRESENTATIVE'S
WARRANT REPRESENTED BY THE CERTIFICATE IS RESTRICTED IN
ACCORDANCE WITH THE REPRESENTATIVE'S WARRANT AGREEMENT
REFERRED TO HEREIN.
1.1.1 Piggyback Registration. If, at any time commencing after
----------------------
the effective date of the Registration Statement and expiring five (5) years
thereafter, the Company proposes to register any of its securities under the Act
(other than in connection with a merger or pursuant to Form S-4 or Form S-8) it
will give written notice by registered mail, at least twenty (20) days prior to
the filing of each such registration statement, to the Holders of the
Representative's Warrants and/or the Warrant Shares of its intention to do so.
If any of the Holders of the Representative's Warrants and/or Warrant Shares
notify the Company within ten (10) days after mailing of any such notice of its
or their desire to include any such securities in such proposed registration
statement, the Company shall afford such Holders of the Representative's
Warrants and/or Warrant Shares the opportunity to have any such Representative's
Warrants and/or Warrant Shares registered under such registration statement. In
the event that the managing underwriter for said offering advises the Company in
writing that in its opinion the number of securities requested to be included in
such registration exceeds the number which can be sold in such offering without
causing a diminution in the offering price or otherwise adversely affecting the
offering, the Company will include in such registration (a) first, the
-----
securities the Company proposes to sell, (b) second, the securities held by the
------
entities, if any, that made the demand for registration, (c) third, the
-----
Representative's Warrants and/or Warrant Shares requested to be
-8-
<PAGE>
included in such registration which in the opinion of such underwriter can be
sold, pro rata among all proposed selling shareholders.
--- ----
Notwithstanding the provisions of this Section 9.2, the Company shall
-------
have the right at any time after it shall have given written notice pursuant to
this Section 9.2 (irrespective of whether a written request for inclusion of any
-------
such securities shall have been made) to elect not to file any such proposed
registration statement or to withdraw the same after the filing but prior to the
effective date thereof.
-9-
<PAGE>
1.1.2 Demand Registration.
-------------------
(a) At any time commencing one (1) year after the effective
date of the Registration Statement and expiring five (5) years from the
effective date of the Registration Statement, the Holders of the
Representative's Warrants and/or Warrant Shares representing a "Majority" (as
hereinafter defined) of the Representative's Warrants and/or Warrant Shares
shall have the right (which right is in addition to the registration rights
under Section 9.2 hereof), exercisable by written notice to the Company, to have
-------
the Company prepare and file with the Securities and Exchange Commission (the
"Commission"), on one occasion, a registration statement and such other
documents, including a prospectus, as may be necessary in the opinion of both
counsel for the Company and counsel for the Holders, in order to comply with the
provisions of the Act, so as to permit a public offering and sale by such
Holders and any other Holders of the Representative's Warrant and/or Warrant
Shares who notify the Company within fifteen (15) days after the Company mails
notice of such request pursuant to Section 9.3(b) hereof (collectively, the
-------
"Requesting Holders") of their respective Warrant Shares for the earlier of (i)
nine (9) consecutive months or (ii) until the sale of all of the Warrant Shares
requested to be registered by the Requesting Holders.
(b) The Company covenants and agrees to give written notice
of any registration request under this Section 9.3 by any Holder or Holders
-------
representing a Majority of the Representative's Warrants and/or Warrant Shares
to all other registered Holders of the
-10-
<PAGE>
Representative's Warrants and the Warrant Shares within ten (10) days from the
date of the receipt of any such registration request.
(c) Intentionally omitted.
(d) Notwithstanding anything to the contrary contained
herein, if the Company shall not have filed a registration statement for the
Warrant Shares within the time period specified in Section 9.4(a) hereof
-------
pursuant to the written notice specified in Section 9.3(a) of the Holders of a
-------
Majority of the Representative's Warrants and/or Warrant Shares, the Company, at
its option, may repurchase (i) any and all Warrant Shares at the higher of the
Market Price (as defined in Section 9.3(e)) per share of Common Stock on (x) the
-------
date of the notice sent pursuant to Section 9.3(a) or (y) the expiration of the
-------
period specified in Section 9.4(a) and (ii) any and all Representative's Warrant
-------
at such Market Price less the exercise price of such Representative's Warrant.
Such repurchase shall be in immediately available funds and shall close within
two (2) days after the later of (i) the expiration of the period specified in
Section 9.4(a) or (ii) the delivery of the written notice of election specified
- -------
in this Section 9.3(d).
-------
(e) Definition of Market Price. As used herein, the phrase
--------------------------
"Market Price" at any date shall be deemed to be the last reported sale price,
or, in case no such reported sale takes place on such day, the average of the
last reported sale prices for the last three (3) trading days, in either case as
officially reported by the principal securities exchange on which
-11-
<PAGE>
the shares of Common Stock and/or Redeemable Warrants or Common Stock is listed
or admitted to trading, or, if the shares of Common Stock and/or Redeemable
Warrants or Common Stock is not listed or admitted to trading on any national
securities exchange, the average closing sale price as furnished by the NASD
through The Nasdaq Stock Market, Inc. ("Nasdaq") or similar organization if
Nasdaq is no longer reporting such information, or if the shares of Common Stock
and/or Redeemable Warrants or Common Stock is not quoted on Nasdaq, as
determined in good faith by resolution of the Board of Directors of the Company,
based on the best information available to it.
1.1.2 Covenants of the Company With Respect to Registration. In
-----------------------------------------------------
connection with any registration under Sections 9.2 or 9.3 hereof, the Company
--------
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a
registration statement within ninety (90) days of receipt of any demand
therefor, and to have any registration statements declared effective at the
earliest possible time, and shall furnish each Holder desiring to sell Warrant
Shares such number of prospectuses as shall reasonably be requested.
-12-
<PAGE>
(b) The Company shall pay all costs (excluding fees and
expenses of a single counsel for all Holders up to a maximum of $25,000 of legal
fees and costs and any underwriting or selling commissions), fees and expenses
in connection with all registration statements filed pursuant to Sections 9.2
--------
and 9.3(a) hereof including, without limitation, the Company's legal and
accounting fees, printing expenses, blue sky fees and expenses. The Holder(s)
will pay all costs, fees and expenses (including those of the Company) in
connection with the registration statement filed pursuant to Section 9.3(c).
-------
(c) The Company will use its commercially reasonable
efforts to take all necessary action which may be required in qualifying or
registering the Warrant Shares included in a registration statement for offering
and sale under the securities or blue sky laws of such states as reasonably are
requested by the Holder(s), provided that the Company shall not be obligated to
execute or file any general consent to service of process or to qualify as a
foreign corporation to do business under the laws of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the
Warrant Shares to be sold pursuant to any registration statement and each
person, if any, who controls such Holders within the meaning of Section 15 of
the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended
("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 such registration
statement but only to the same extent and with the same
-13-
<PAGE>
effect as the provisions pursuant to which the Company has agreed to indemnify
each of the Underwriters contained in Section 7 of the Underwriting Agreement.
-------
(e) The Holder(s) of the Warrant Shares to be sold pursuant
to a registration statement, and their successors and assigns, shall severally,
and not jointly, indemnify the Company, its officers and directors and each
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, against all loss, claim, damage or
expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which
they may become subject under the Act, the Exchange Act or otherwise, arising
from information furnished by or on behalf of such Holders, or their successors
or assigns, for specific inclusion in such registration statement to the same
extent and with the same effect as the provisions contained in Section 7 of the
-------
Underwriting Agreement pursuant to which the Underwriters have agreed to
indemnify the Company.
(f) Nothing contained in this Agreement shall be construed
as requiring the Holder(s) to exercise their Representative's Warrant prior to
the initial filing of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any
securities other than the Warrant Shares to be included in any registration
statement filed pursuant to Section 9.3 hereof, or permit any other registration
-------
statement (other than a registration statement on Form S-4 or S-8) to be or
remain effective during a ninety (90) day period following the effectiveness of
-14-
<PAGE>
a registration statement filed pursuant to Section 9.3 hereof, without the prior
-------
written consent of National or as otherwise required by the terms of any
existing registration rights granted prior to the date of this Agreement by the
Company to the holders of any of the Company's securities.
(h) The Company shall furnish to each Holder participating
in the offering and to each underwriter, if any, a signed counterpart, addressed
to such Holder or underwriter, of (i) an opinion of counsel to the Company,
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, an opinion dated the date
of the closing under the underwriting agreement), and (ii) a "cold comfort"
letter dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, a letter dated the date
of the closing under the underwriting agreement) 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.
(i) The Company shall as soon as practicable after the
effective date of the registration statement, and in any event within 15 months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the Act) an earnings
-15-
<PAGE>
statement (which need not be audited) complying with Section 11(a) of the Act
-------
and covering a period of at least 12 consecutive months beginning after the
effective date of the registration statement.
(j) The Company shall enter into an underwriting agreement
with the managing underwriters selected for such underwriting by Holders holding
a Majority of the Warrant Shares requested to be included in such underwriting,
which may be the Representative. Such agreement shall be satisfactory in form
and substance to the Company, each Holder and such managing underwriters, and
shall contain such representations, warranties and covenants by the Company and
such other terms as are customarily contained in agreements of that type used by
the managing underwriter. The Holders shall be parties to any underwriting
agreement relating to an underwritten sale of their Warrant Shares and may, at
their option, require that any or all the representations, warranties and
covenants of the Company to or for the benefit of such underwriters shall also
be made to and for the benefit of such Holders. Such Holders shall not be
required to make any representations or warranties to or agreements with the
Company or the underwriters except as they may relate to such Holders and their
intended methods of distribution.
(k) For purposes of this Agreement, the term "Majority" in
reference to the Representative's Warrants or Warrant Shares, shall mean in
excess of fifty percent (50%) of the then outstanding Representative's Warrants
or Warrant Shares that (i) are not held by the Company, an affiliate, officer,
creditor, employee or agent thereof or any of their respective
-16-
<PAGE>
affiliates, members of their family, persons acting as nominees or in
conjunction therewith or (ii) have not been resold to the public pursuant to a
registration statement filed with the Commission under the Act.
2. Obligations of Holders. It shall be a condition precedent to the
----------------------
obligations of the Company to take any action pursuant to Section 9 hereof that
-------
each of the selling Holders shall:
(a) Furnish to the Company such information regarding
themselves, the Warrant Shares held by them, the intended method of sale or
other disposition of such securities, the identity of and compensation to be
paid to any underwriters proposed to be employed in connection with such sale or
other disposition, and such other information as may reasonably be required to
effect the registration of their Warrant Shares.
(b) Notify the Company, at any time when a prospectus
relating to the Warrant Shares covered by a registration statement is required
to be delivered under the Act, of the happening of any event with respect to
such selling Holder as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing.
-17-
<PAGE>
3. Adjustments to Exercise Price and Number of Securities. The
------------------------------------------------------
Exercise Price in effect at any time and the number and kind of securities
purchased upon the exercise of the Representative's Warrant shall be subject to
adjustment from time to time only upon the happening of the following events:
1.3.1 Stock Dividend, Subdivision and Combination. In case the
-------------------------------------------
Company shall (i) declare a dividend or make a distribution on its outstanding
shares of Common Stock in shares of Common Stock, (ii) subdivide or reclassify
its outstanding shares of Common Stock into a greater number of shares, or (iii)
combine or reclassify its outstanding shares of Common Stock into a smaller
number of shares, the Exercise Price in effect at the time of the record date
for such dividend or distribution or of the effective date of such subdivision,
combination or reclassification shall be adjusted so that it shall equal the
price determined by multiplying the Exercise Price by a fraction, the
denominator of which shall be the number of shares of Common Stock outstanding
after giving effect to such action, and the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such action.
Such adjustment shall be made successively whenever any event listed above shall
occur.
1.3.2 Adjustment in Number of Securities. Upon each adjustment of
----------------------------------
the Exercise Price pursuant to the provisions of this Section 11, the number of
-------
Warrant Shares issuable upon the exercise at the adjusted Exercise Price of each
Representative's Warrant shall be adjusted to the nearest number of whole shares
of Common Stock by multiplying a number
-18-
<PAGE>
equal to the Exercise Price in effect immediately prior to such adjustment by
the number of Warrant Shares issuable upon exercise of the Representative's
Warrant immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.
1.3.3 Definition of Common Stock. For the purpose of this
--------------------------
Agreement, the term "Common Stock" shall mean (i) the class of stock designated
as Common Stock in the Articles of Incorporation of the Company as amended as of
the date hereof, 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 to par
value.
1.3.4 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), the corporation formed by such consolidation
or merger shall execute and deliver to the Holder a supplemental warrant
agreement providing that the Holder of each Representative's Warrant then
outstanding or to be outstanding shall have the right thereafter (until the
expiration of such Representative's Warrant) to receive, upon exercise of such
Representative's Warrant, the kind and amount of shares of stock and other
securities and property receivable upon such consolidation or merger by a holder
of the number of shares of Common Stock for which such Representative's Warrant
might have been exercised immediately prior to such consolidation, merger, sale
or transfer. Such supplemental warrant agreement shall provide for adjustments
-19-
<PAGE>
which shall be identical to the adjustments provided in Section 11. The above
-------
provision of this subsection shall similarly apply to successive consolidations
or mergers.
1.3.5 No Adjustment of Exercise Price in Certain Cases. No
------------------------------------------------
adjustment of the Exercise Price shall be made:
(a) Upon the issuance or sale of the Representative's
Warrant or the Warrant Shares;
(b) Upon the issuance or sale of Common Stock (or any other
security convertible, exercisable, or exchangeable into shares of Common Stock)
upon the direct or indirect conversion, exercise, or exchange of any options,
rights, warrants, or other securities or indebtedness of the Company outstanding
as of the date of this Agreement or granted pursuant to any stock option plan of
the Company in existence as of the date of this Agreement, pursuant to the terms
thereof; or
(c) If the amount of said adjustment shall be less than two
cents ($.02) per share, provided, however, that in such case any adjustment that
would otherwise be required then to be made shall be carried forward and shall
be made at the time of and together with the next subsequent adjustment which,
together with any adjustment so carried forward, shall amount to at least two
cents ($.02) per Representative's Warrant.
4. Exchange and Replacement of Representative's Warrant Certificates.
-----------------------------------------------------------------
Each Representative's Warrant Certificate is exchangeable, without expense, upon
the surrender
-20-
<PAGE>
thereof by the registered Holder at the principal executive office of the
Company for a new Representative's Warrant Certificate of like tenor and date
representing in the aggregate the right to purchase the same number of Warrant
Shares in such denominations as shall be designated by the Holder thereof at the
time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any Representative's Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Representative's Warrant, if mutilated, the Company will make and deliver a
new Warrant Certificate of like tenor, in lieu thereof.
5. Elimination of Fractional Interests. The Company shall not be
-----------------------------------
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Representative's Warrant, nor shall it be required to
issue scrip or pay cash in lieu of fractional interests, it being the intent of
the parties that all fractional interests shall be eliminated by rounding any
fraction up to the nearest whole number of shares of Common Stock or other
securities, properties or rights.
6. Reservation and Listing of Securities. The Company shall at all
-------------------------------------
times reserve and keep available out of its authorized shares of Common Stock,
solely for the purpose of issuance upon the exercise of the Representative's
Warrant and the Redeemable Warrant, such number of shares of Common Stock or
other securities, properties or rights as shall be issuable
-21-
<PAGE>
upon the exercise thereof. Every transfer agent ("Transfer Agent") for the
Common Stock and other securities of the Company issuable upon the exercise of
the Representative's Warrant will be irrevocably authorized and directed at all
times to reserve such number of authorized shares of Common Stock and other
securities as shall be requisite for such purpose. The Company will keep a copy
of this Agreement on file with every Transfer Agent for the Common Stock and
other securities of the Company issuable upon the exercise of the
Representative's Warrant. The Company will supply every such Transfer Agent with
duly executed stock and other certificates, as appropriate, for such purpose.
The Company covenants and agrees that, upon exercise of the Representative's
Warrant and payment of the Exercise Price therefor, all shares of Common Stock
and other securities issuable upon such exercise shall be duly and validly
issued, fully paid, non-assessable and not subject to the preemptive rights of
any stockholder. As long as the Representative's Warrant shall be outstanding,
the Company shall use its best efforts to cause all shares of Common Stock
issuable upon the exercise of the Representative's Warrant to be listed (subject
to official notice of issuance) on all securities exchanges on which the Common
Stock issued to the public in connection herewith may then be listed and/or
quoted on Nasdaq SmallCap Market.
7. Notices to Representative's Warrant Holders. Nothing contained in
-------------------------------------------
this Agreement shall be construed as conferring upon the Holders the right to
vote or to consent or to receive notice as a stockholder in respect of any
meetings of stockholders for the election of directors or any other matter, or
as having any rights whatsoever as a stockholder of the
-22-
<PAGE>
Company. If, however, at any time prior to the expiration of the
Representatives' Warrants and their exercise, any of the following events shall
occur:
(a) the Company shall take a record of the holders of its shares
of Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) the Company shall offer to all the holders of its Common Stock
any additional shares of capital stock of the Company or securities convertible
into or exchangeable for shares of capital stock of the Company, or any option,
right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed; then in any one or more of said events, the Company shall give written
notice of such event at least fifteen (15) days prior to the date fixed as a
record date or the date of closing the transfer books for the determination of
the stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or
-23-
<PAGE>
subscription rights, or entitled to vote on such proposed dissolution,
liquidation, winding up or sale. Such notice shall specify such record date or
the date of closing the transfer books, as the case may be. Failure to give such
notice or any defect therein shall not affect the validity of any action taken
in connection with the declaration or payment of any such dividend, or the
issuance of any convertible or exchangeable securities, or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or
sale.
Redeemable Warrants.
-------------------
-24-
<PAGE>
The form of the certificate representing the Redeemable Warrants (and
the form of election to purchase shares of Common Stock upon the exercise of the
Redeemable Warrants and the form of assignment printed on the reverse thereof)
shall be substantially as set forth in Exhibit "A" to the Warrant Agreement
dated as of the date hereof by and among the Company, the Representative and
Continental Stock Transfer & Trust Company, as warrant agent (the "Redeemable
Warrant Agreement"). Each Redeemable Warrant issuable upon exercise of the
Representative's Warrants shall evidence the right to initially purchase a fully
paid and non-assessable share of Common Stock at an initial purchase price of
$____ [150% of the initial public offering price per share of Common Stock] from
the Effective Date of the Registration Statement until 5:30 p.m. New York time
on ______ 2002 [5 years from the Effective Date of the Registration Statement]
at which time the Redeemable Warrants, unless the exercise period has been
extended, shall expire. The exercise price of the Redeemable Warrants and the
number of shares of Common Stock issuable upon the exercise of the Redeemable
Warrants are subject to adjustment, whether or not the Representative's Warrants
have been exercised and the Redeemable Warrants have been issued, in the manner
and upon the occurrence of the events set forth in Section 8 of the Redeemable
Warrant Agreement, which is hereby incorporated by reference and made a part
hereof as if set forth in its entirety herein. Subject to the provisions of
this Agreement and upon issuance of the Redeemable Warrants underlying the
Representative's Warrants, each registered holder of such Redeemable Warrant
shall have the right to purchase from the Company (and the Company shall issue
to such registered holders) up to the number of fully paid and non-assessable
shares of Common Stock (subject to adjustment as provided herein
-25-
<PAGE>
and in the Redeemable Warrant Agreement), free and clear of all preemptive
rights of stockholders, provided that such registered holder complies with the
terms governing exercise of the Redeemable Warrant set forth in the Redeemable
Warrant Agreement, and pays the applicable exercise price, determined in
accordance with the terms of the Redeemable Warrant Agreement. Upon exercise of
the Redeemable Warrants, the Company shall forthwith issue to the registered
holder of any such Redeemable Warrant in his name or in such name as may be
directed by him, certificates for the number of shares of Common Stock so
purchased. Except as otherwise provided in this Agreement, the Redeemable
Warrants underlying the Representative's Warrants shall be governed in all
respects by the terms of the Redeemable Warrant Agreement. The Redeemable
Warrants shall be transferable in the manner provided in the Redeemable Warrant
Agreement, and upon any such transfer, a new Redeemable Warrant Certificate
shall be issued promptly to the transferee. The Company covenants to, and agrees
with, the Holder(s) that without the prior written consent of the Holder(s),
which will not be unreasonably withheld, the Redeemable Warrant Agreement will
not be modified, amended, canceled, altered or superseded, and that the Company
will send to each Holder, irrespective of whether or not the Representative's
Warrants have been exercised, any and all notices required by the Redeemable
Warrant Agreement to be sent to holders of the Redeemable Warrants.
8. Notices. All notices, requests, consents and other communications
-------
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return receipt
requested:
-26-
<PAGE>
(a) if to the registered Holder of the Representative's Warrant,
to the address of such Holder as shown on the books of the Company; or
(b) if to the Company, to the address set forth in Section 4
-------
hereof or to such other address as the Company may designate by notice to the
Holders.
9. Supplements; Amendments; Entire Agreement. This Agreement
-----------------------------------------
(including the Underwriting Agreement to the extent portions thereof are
referred to herein) contains the entire understanding between the parties hereto
with respect to the subject matter hereof and may not be modified or amended
except by a writing duly signed by the party against whom enforcement of the
modification or amendment is sought. The Company and the Representative may
from time to time supplement or amend this Agreement without the approval of any
holders of Representative's Warrant Certificates (other than the Representative)
in order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company and the Representative may deem necessary or
-27-
<PAGE>
desirable and which the Company and the Representative deem shall not adversely
affect the interests of the Holders of Representative's Warrant Certificates.
10. Successors. All of the covenants and provisions of this Agreement
----------
shall be binding upon and inure to the benefit of the Company, the Holders and
their respective successors and assigns hereunder.
11. Survival of Representations and Warranties. All statements in any
------------------------------------------
schedule, exhibit or certificate or other instrument delivered by or on behalf
of the parties hereto, or in connection with the transactions contemplated by
this Agreement, shall be deemed to be representations and warranties hereunder.
Notwithstanding any investigations made by or on behalf of the parties to this
Agreement, all representations, warranties and agreements made by the parties to
this Agreement or pursuant hereto shall survive.
12. Governing Law. This Agreement and each Representative's Warrant
-------------
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of California and for all purposes shall be construed in
accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
13. Severability. If any provision of this Agreement shall be held to
------------
be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
-28-
<PAGE>
14. Captions. The caption headings of the Sections of this Agreement
--------
are for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
15. Benefits of this Agreement. Nothing in this Agreement shall be
--------------------------
construed to give to any person or corporation other than the Company and the
Representative and any other registered Holder(s) of the Representative's
Warrant Certificates or Warrant Shares any legal or equitable right, remedy or
claim under this Agreement; and this Agreement shall be for the sole and
exclusive benefit of the Company and the Underwriters and any other Holder(s) of
the Representative's Warrant Certificates or Warrant Shares.
16. Counterparts. This Agreement may be executed in any number of
------------
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
-29-
<PAGE>
IN WITNESS OF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
ATTEST: ISONICS CORPORATION
_________________
Secretary Name: __________________
Title: __________________
NATIONAL SECURITIES CORPORATION
By:_______________________________________
Name: Steven A. Rothstein
Title: Chairman
-30-
<PAGE>
EXHIBIT A
[FORM OF REPRESENTATIVE'S WARRANT CERTIFICATE]
THE REPRESENTATIVE'S WARRANT REPRESENTED BY THIS CERTIFICATE AND THE OTHER
SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL
FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE REPRESENTATIVE'S WARRANT REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO
HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, _____________ ___, 2002
Representative's Warrant No. _____
____ Shares of Common Stock and/or ____ Redeemable Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that ________, or registered
assigns, is the registered holder of Warrants to purchase initially, at any time
from _________ ___, 1997 until 5:30 p.m., New York time on ___________ ___, 2002
("Expiration Date"), up to ____ shares of Common Stock and/or ____ Redeemable
Warrants (each to acquire one share of the Company's Common Stock at the initial
exercise price, subject to adjustment of $_____ [240% of the initial public
offering price per share]) of Isonics Corporation, a California corporation (the
"Company") at the initial exercise price, subject to adjustment in certain
events, of $____ per share of Common Stock [150% of initial offering price per
Shares] and $1______ per Redeemable Warrant [120% of the initial price to public
of the Warrants] (the "Exercise Price") upon surrender of this Representative's
Warrant Certificate and payment of the Exercise Price at an office or agency of
the Company, but subject to the conditions set forth herein and in the
Representative's Warrant Agreement dated as of _________ ___, 1997 among the
Company, and National Securities Corporation (the "Warrant Agreement"). Payment
of the Exercise Price shall be made by certified or official bank check in New
York Clearing House funds payable to the order of the Company.
<PAGE>
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Representative's Warrant evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
The Representative's Warrant evidenced by this Warrant Certificate are
part of a duly authorized issue of Representative's Warrant issued pursuant to
the Warrant Agreement, which Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the
Representative's Warrant.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Representative's
Warrant; provided, however, that the failure of the Company to issue such new
Warrant Certificates shall not in any way change, alter, or otherwise impair,
the rights of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Representative's Warrant shall be issued to the transferee(s) in exchange for
this Warrant Certificate, subject to the limitations provided herein and in the
Warrant Agreement, without any charge except for any tax or other governmental
charge imposed in connection with such transfer.
Upon the exercise of less than all of the Representative's Warrant
evidenced by this Certificate, the Company shall forthwith issue to the holder
hereof a new Warrant Certificate representing such numbered unexercised
Representative's Warrant.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
EXH. A-2
<PAGE>
This Warrant Certificate does not entitle any holder thereof to any of
the rights of a shareholder of the Company.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated as of April __, 1997.
ATTEST: ISONICS CORPORATION
_________________
Secretary Name: _____________
Title: _____________
EXH. A-3
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.11]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ____ shares of Common Stock
and/or ____ Redeemable Warrants and herewith tenders in payment for such
securities a certified or official bank check payable in New York Clearing House
Funds to the order of Isonics Corporation (the "Company") in the amount of
$_____, all in accordance with the terms of Section 3.1 of the Representative's
Warrant Agreement dated as of ________ __, 1997 among the Company and National
Securities Corporation. The undersigned requests that a certificate for such
securities be registered in the name of ___________________________________,
whose address is ________________________________ and that such certificate be
delivered to _________________, whose address is __________________________
______________________, and if said number of shares shall not be all the shares
purchasable hereunder, that a new Warrant Certificate for the balance of the
shares purchasable under the within Warrant Certificate be registered in the
name of the undesigned warrant holder or his assignee as below indicated and
delivered to the address stated below.
Dated: ________________
(Signature must conform in all
respects to name of holder as specified on the
face of the Warrant Certificate.)
Address:______________________________________
______________________________________
__________________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
Signature Guaranteed:___________________________________________________________
(Signature must be guaranteed by a bank savings and loan association,
stockbroker, or credit union with membership in an approved signature guaranty
Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15.)
EXH. A-4
<PAGE>
[FORM OF ASSIGNMENT]
(TO BE EXECUTED BY THE REGISTERED HOLDER IF SUCH HOLDER
DESIRES TO TRANSFER THE WARRANT CERTIFICATE.)
FOR VALUE RECEIVED __________________ here sells, assigns and transfers unto
[NAME OF TRANSFEREE] this Warrant Certificate, together with all right, title
and interest therein, and does hereby irrevocably constitute and appoint
__________________________ Attorney, to transfer the within Warrant Certificate
on the books of the within-named Company, with full power of substitution.
Dated: _________________
Signature:________________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant
Certificate.)
Address:__________________________________________
__________________________________________
__________________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
Signature Guaranteed:___________________________________________________________
(Signature must be guaranteed by a bank savings and loan association,
stockbroker, or credit union with membership in an approved signature guaranty
Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15.)
EXH. A-5
<PAGE>
EXHIBIT 4.03
ISONICS CORPORATION
AND
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
AND
NATIONAL SECURITIES CORPORATION
_______________________
WARRANT AGREEMENT
Dated as of __________ __, 1997
<PAGE>
THIS WARRANT AGREEMENT (the "Agreement"), dated this ___ day of
____________ 1997, by and among ISONICS CORPORATION, a California corporation
(the "Company"), CONTINENTAL STOCK TRANSFER & TRUST COMPANY, as Warrant Agent
(the "Warrant Agent") and NATIONAL SECURITIES CORPORATION ("National" or the
"Representative"), and their successors and assigns.
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 "Representative's
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 Representative's 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
Representative, 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>
(b) "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.
(c) "Commission" shall mean the Securities and Exchange
Commission.
(d) "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, ______________.
(e) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(f) "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.
(g) "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.
(h) "Initial Warrant Exercise Date" shall mean the Effective
Date of the Prospectus.
(i) "Initial Warrant Redemption Date" shall mean the Effective
Date of the Prospectus.
2
<PAGE>
(j) "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.
(k) "NASD" shall mean the National Association of Securities
Dealers, Inc.
(l) "Nasdaq" shall mean the Nasdaq SmallCap Market.
(m) "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.
(n) "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.
(o) "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.
(p) "Representative's Warrant Agreement" shall mean the
agreement dated as of ___________ __, 1997 between the Company and the
Representatives relating to and governing the terms and provisions of the
Representatives' Warrants.
(q) "Transfer Agent" shall mean Continental Stock Transfer &
Trust Company, or its authorized successor.
3
<PAGE>
(r) "Underwriting Agreement" shall mean the underwriting
agreement dated as of ____________ __, 1997 between the Company and the several
underwriters listed therein relating to the Offering.
(s) "Warrant Certificate" shall mean a certificate representing
one or more of the Warrants substantially in the form annexed hereto as Exhibit
A.
(t) "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.
2. 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.
(b) 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.
(c) Upon exercise of the Representative's 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>
(d) 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>
3. 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.
(b) 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.
4. 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.
(b) The Company shall engage the Representative 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
Representative 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 Representative an amount equal
to five percent (5%) of the Exercise Price of such Warrants then being exercised
unless the Representative 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 Representative's 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 Representative shall be entitled to receive
the commission contemplated by this Section 4(b) as Warrant solicitation agent
only if: (i) the Representative has 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
Representative.
(c) 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
(2) 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
(3) 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.
5. 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.
(b) 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.
(c) 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.
(d) 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.
6. 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.
(b) 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.
(c) 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.
(d) 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.
(e) 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.
(f) 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.
7. 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>
8. 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.
(b) 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.
(c) 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.
(d) 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.
(e) 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.
(b) 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.
(c) "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.
11. 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
(250% 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>
(i) If the Representative acts as the Warrant solicitation
agents for the Company, the Company shall indemnify the Representative and each
person, if any, who controls the Representative 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 Representative contained in Section 7 of the Underwriting
Agreement.
(j) Five business days prior to the Redemption Date, the Company
shall furnish to the Representative, as the Warrant solicitation agent, (i) an
opinion of counsel to the Company, dated such date and addressed to the
Representative, and (ii) a "cold comfort" letter dated such date addressed to
each of the Representative, 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.
(k) 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.
9. Concerning the Warrant Agent.
----------------------------
(a) The Warrant Agent acts hereunder as agent and in a
ministerial capacity for the Company and the Representative, 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.
(b) 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.
(c) The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company or for the
Representative) 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.
(d) 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>
(e) 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.
(f) 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.
(g) 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.
(h) 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.
(i) 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.
10. 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
20
<PAGE>
of the Representative, 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 Representative and except as may be
required by law.
12. 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 2 Broadway, 19th Fl.,
New York, New York 10005. Copies of any notice delivered pursuant to this
Agreement shall also be delivered 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.
13. 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.
14. Binding Effect.
--------------
This Agreement shall be binding upon and inure to the benefit of the
Company, the Representative, 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.
15. 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.
16. Counterparts.
------------
This Agreement may be executed in several counterparts, which taken
together shall constitute a single document.
21
<PAGE>
17. 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.
18. 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 Representative, 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 Representative, 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 ___________ ___, 2002
___________ 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 Continental 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 ____________
__, 1997, by and between the Company, and National Securities Corporation
("National" or the "Representative") 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 after 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 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 Representative 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 California 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 4.04
No. W _______ VOID AFTER ___________ ___, 2002
_________________ WARRANTS
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
ISONICS CORPORATION
CUSIP # 464895 11 9
-----------
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 Continental 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 ____________
__, 1997, 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.
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.
<PAGE>
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 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
<PAGE>
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 after 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 [250% of the intial public offering price] for any
twenty (20) consecutive trading days ending on the 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 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.
<PAGE>
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 California without giving effect to
conflicts of laws.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
<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
<PAGE>
EXHIBIT 10.16
Contract 08843672/70034-02D
page 1 of 16
CONTRACT
REG. NO. 08843672 / 70034-02D
FOR THE SUPPLY OF SERVICES OF PROCESSING RAW
MATERIALS INTO PRODUCTS OF DEPLETED ZINC
BETWEEN:
AO "TECHSNABEXPORT"
(THE EXPORTER)
ELECTROCHEMICAL PLANT
(THE PRODUCER)
AND
ISONICS CORPORATION
(THE BUYER)
*Portions of this exhibit have Confidential Treatment Requested
<PAGE>
Contract 08843672/70034-021D
page 2 of 16
1. PARTIES.
1.1. AO TECESNABEXPORT, a foreign trade joint stock company organized and
existing under the laws of the Russian Federation (hereinafter referred to
as "TSE").
1.2. ELECTROCHEMICAL PLANT, an enterprise organized and existing under the
laws of the Russian Federation (hereinafter referred to as "ECP").
1.3. TSE and ECP shall be jointly and severally referred to, for the text
convenience, as the "the Seller".
1.4. ISONICS CORPORATION, a corporation organized and existing under the laws
of the State of California, the United States of America (hereinafter
referred to as the Buyer).
1.5. The Buyer and the Seller shall be referred to as the "Party" and
collectively as the "Parties".
2. RECITALS
2.1. The Seller, among its other industrial activities, is in the business of
producing and selling depleted zinc in various chemical forms, such as
oxide or metal, either as powder or pellets by means of separation and
conversion of diethyl zinc gas into various zinc isotopes and depleted
zinc.
2.2. The Buyer and the Seller are the parties to a certain memorandum of August
1, 1996, pursuant to which the Seller grants the Buyer, among other rights
and obligations, full right and authority in accordance with the section 5
of the Contract to buy such depleted zinc, to acquire zinc depletion and
conversion services and a right to market, trade and resell such depleted
zinc for ultimate consumption by its customers.
2.3. Based on the above, the Seller wishes to provide to the Buyer and the
Buyer wishes to acquire from the Seller various depleted zinc products,
obtained from the raw material to be supplied by the Buyer to the Seller
as set forth in this Contract.
3. DEFINITIONS AND INTERPRETATIONS
3.1. In this Contract, unless inconsistent with the context, the following
expressions or terms shall have the meanings ascribed to them
respectively:
3.1.1. "THE BASIC PRODUCT" MEANS DZ OXIDE POWDER CONFORMING TO THE
SPECIFICATION IN EXISTENCE AND IN EFFECT AT THE TIME OF SIGNING OF THE
CONTRACT.
3.1.2. "CONTRACT" MEANS THE CONTRACT SET OUT IN THIS DOCUMENT AND ALL
ADDENDA, AMENDMENTS AND SPECIFICATIONS HERETO.
<PAGE>
Contract 08843672/70034-02D
page 3 OF 16
3.1.3. "DEPLETED ZINC" ("DZ", "DZ PRODUCT") MEANS ZINC, DEPLETED TO NOT
MORE THAN ONE PERCENT (1.0%) IN ZINC-64, IN VARIOUS CHEMICAL FORMS AND
PROVIDED AS POWDER OR PELLETS (THE CHEMICAL COMPOSITIONS AND SHAPES
ARE TO BE DEFINED IN SPECIFICATIONS HERETO).
3.1.4. "DEPLETION AND CONVERSION SERVICES" MEANS THE SERVICES TO BE
PROVIDED BY THE SELLER IN CONVERTING RAW MATERIAL INTO DZ MEETING THE
SPECIFICATIONS.
3.1.5. "DZ BATCH" MEANS ONE OR MORE DZ LOTS WHICH ARE DELIVERED TOGETHER.
3.1.6. "DZ DELIVERY MONTH" MEANS THE CALENDAR MONTH IN WHICH THE DELIVERY
OF A CERTAIN DZ BATCH SHOULD BE EFFECTED ACCORDING TO THE DELIVERY
SCHEDULE MUTUALLY AGREED UPON BY THE PARTIES.
3.1.7. "DZ LOT" MEANS A CERTAIN GROUP OF PACKAGES CONTAINING DZ OF
HOMOGENEOUS CHEMICAL COMPOSITION (BUT, POSSIBLY, OF A DIFFERENT
ISOTOPIC CONTENT).
3.1.8. "PURCHASE PRICE" MEANS PRICE, WHICH MUST BE PAID BY THE BUYER TO
THE SELLER FOR EACH GRAM OF, PRODUCED BY PROCESSING RAW MATERIAL, DZ
PRODUCT AND DELIVERED BY THE SELLER TO THE BUYER. THE PURCHASE PRICE
IS ALSO UNDERSTOOD BY THE PARTIES AS PAYMENT FOR THE DEPLETION AND
CONVERSION SERVICES.
3.1.9. "RAW MATERIAL" MEANS DIETHYL ZINC GAS (ZN(C2H5)2) WITH THE NATURAL
ISOTOPIC CONTENT TO BE DELIVERED BY THE BUYER TO THE SELLER FOR
DEPLETION AND CONVERSION.
3.1.10. "SECONDARY MATERIAL" MEANS DIETHYL ZINC GAS, REMAINING AFTER
processing of the Raw Material into DZ and differentiated from it by
the isotopic content.
3.1.11. "SPECIFICATION(S)" MEANS A MUTUALLY AGREED UPON SET OF TECHNICAL
requirements for the chemical composition or shape of DZ, DZ
packaging, and specific quantity of Raw Material required for
production of I kg of DZ.
4. AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual obligations
hereinafter described, and intending to be legally bound, the Parties agree as
follows:
<PAGE>
Contract 08843672/70034-02D
page 4 of 16
5. SCOPE AND TERM
5.1. SCOPE: PURSUANT TO THE TERMS AND CONDITIONS SET FORTH HEREIN, THE SELLER
WILL SUPPLY THE BUYER WITH VARIOUS DZ PRODUCTS MEETING THE SPECIFICATIONS
BY MEANS OF PROCESSING THE RAW MATERIAL TO BE PROVIDED TO THE SELLER BY THE
BUYER AS SET FORTH HEREIN. THE FOLLOWING PRECONDITIONS SHALL APPLY AND WILL
BE BINDING UPON THE PARTIES:
5.1.1. The Buyer shall acquire from the Seller Depletion and Conversion
Services and may resell so obtained DZ for the ultimate consumption by its
customers. The Seller will not sell zinc depletion and conversion services
or depleted zinc directly or indirectly to parties located in North
America, nor to other parties for resale in North America.
5.1.2. During the term of this Contract, the Buyer will not buy depletion
and conversion services or depleted zinc from third parties located in the
Russian Federation for resale of these services or DZ in North America.
5.1.3. Unless the Buyer specifically agrees otherwise, the Seller cannot
use Raw Material for any other use than for providing the Seller with
Depletion and Conversion Services.
5.2. TERM: THIS CONTRACT SHALL BE EFFECTIVE AS OF THE DATE OF ITS SIGNING AND
SHALL CONTINUE FOR THREE YEARS, COVERING 1997, 1998, 1999 DELIVERIES.
6. QUANTITIES AND SCHEDULE
6.1. For purposes of the present Contract, all quantities of DZ, independent of
its chemical form, shall be expressed in kilograms or grams of zinc (metal)
weight in DZ. All quantities of the Raw Material shall be expressed in
kilograms of compound weight of diethyl Zinc (ZN(C2H5)2).
6.2. Within the term of the present Contract, the Seller shall deliver to the
Buyer and the Buyer shall accept the deliveries of the total nominal
quantity of [*] of DZ according to the following annual schedule.
CALENDAR YEAR OF DELIVERIES: DZ QUANTITIES:
[*] [*]
[*] [*]
[*] [*]
The Buyer has the right to acquire additional quantities [*], defined as
the "Optional Quantity".
[*] Confidential Treatment Requested
<PAGE>
Contract 08843672/70034-02D
page 5 of 16
6.3. Parties have agreed to the following monthly delivery schedule for the
calendar year 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
DZ BATCH # QUANTITY MONTH OF QUANTITY MONTH OF
OF SUPPLY OF DELIVERY
RAW OF RAW DZ IN KG OF DZ
MATERIAL MATERIAL
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
[ * ]
- ---------------------------------------------------------------------------------
[ * ]
- ---------------------------------------------------------------------------------
[ * ]
- ---------------------------------------------------------------------------------
[ * ]
- ---------------------------------------------------------------------------------
</TABLE>
Above described schedule is only for the base product, excluding Optional
Quantity.
6.4. In regards to calendar years 1998 and 1999 on or prior to November 30 of
the year preceding each calendar year of DZ deliveries within the term of
the Contract, the Parties shall agree on the Depletion and Conversion
Services prices for the following year and coordinate the month-by-month
Delivery Schedule of DZ and Raw Material for such calendar year. The
following basic principles shall apply:
. Delivery Schedule must be within the ECP's production ability,
. Raw Material in amounts sufficient for production of each DZ Batch shall be
delivered by the Buyer to the Seller not less than [*] prior
to DZ Delivery Month of each corresponding DZ Batch. The amount of Raw
material required for production of each DZ lot shall be calculated as the
product of [*].
. Any and each particular chemical composition and shape ordered by the Buyer
must be covered by a Specification agreed upon by the Parties and effective
as of the date on which the Delivery Schedule is signed.
6.5. Notwithstanding the above stipulations, the Parties, depending on newly
arisen circumstances, if any, such as signing of new Specifications to the
Contract, may mutually agree to amend a previously coordinated Delivery
Schedule for each particular year of deliveries with respect to chemical
compositions and shapes of DZ and deliveries dates.
6.6. Optional Quantity can be ordered by the Buyer in full or partially during
each calendar year covered by this contract by providing the Seller [*]
advance notice and making Raw Material available not later than [*] before
the requested delivery date. Should the Buyer order such Optional Quantity
in a DZ Batch [*], then such DZ Batch will be shipped together with the
next scheduled regular DZ Batch. All other terms of this contract will
apply to Optional Quantity.
[*] Confidential Treatment Requested
<PAGE>
Contract 08843672/70034-02D
PAGE 6 OF 16
7. DELIVERY OF RAW MATERIAL
7.1. Raw Material shall be delivered by the Buyer to the Seller on DDU St.
Petersburg seaport ("Delivered Duty Unpaid" INCOTERMS 1990) basis to the
following Consignee address:
Electrochemical Plant,
Zelenogorsk, Krasnoyarsky Krai, Russia.
c/o SPP "ISOTOP"
192006, Zagoorodnyi pr., 13,
St. Petersburg, Russia.
tel/fax #: 007-812-311-37-73
7.2. The Parties agree that the price of Raw Material and the transportation
cylinders stipulated in the Contract serves for customs purposes only and
no payment for Raw Material and the transportation cylinders delivered by
the Buyer to the Seller is required. The transportation cylinders
afterwards will [*]. Price for each Raw Material batch will be set by a
separate addendum to this Contract, which may be entered into using
facsimile signatures.
7.3. The Seller shall clear the Raw Material through the Russian customs
authorities as "import of goods for processing". Any taxes, fees and other
duties levied by the Russian customs authorities in respect to the Raw
Material shall be paid by the Seller and, with the exception of the Value
Added Tax (V.A.T.), shall be reimbursed by the Buyer to the Seller upon
presentation to the Buyer of the Seller's invoice as set forth in Section
8.4 below
7.4. On each delivery of Raw Material the Buyer shall produce to the Seller the
following set of documents.
. Original clean on board Bill of Lading in duplicate;
. Proforma invoice stipulating the quantity of delivered Raw Material, its
price and the total amount (for customs purposes only), and separately,
proforma invoice, stipulating the quantity of transportation cylinders
their price and a total amount (for customs purposes only) in duplicate;
. Packing List in duplicate;
. Quality and Quantity Certificates in duplicate
7.5. Not later than thirty (30) days prior to estimated date of delivery of
each lot of the Raw Material, the Buyer shall notify the Seller of the
estimated delivery date and provide the name of the vessel as soon as it is
booked.
8. DELIVERY OF DZ
8 1. Any and each DZ Batch shall be delivered by the Seller to the Buyer FCA
Moscow airport (INCOTERMS 1990) with shipping arranged to the Following
address:
[*] Confidential Treatment Requested
<PAGE>
Contract 08843672/70034-02D
page 7 of 16
ISONICS Corporation
4010 Moorpark Ave., San Jose CA 95117
c/o AIRSCHOTT Customs Brokerage FTZ 137
Washington DC 20041, phone 713-471-7444
8.2. Unless otherwise agreed upon by the Parties, the Seller shall clear DZ
through the Russian customs authorities as "export". Any levies by the
Russian customs authorities in respect to the export of DZ, such as taxes,
fees and other duties shall be paid by the Seller. The Seller will enter
under standard terms into transportation agreements with a transport company
acceptable to the Buyer, for shipment from Moscow at the expense and risk of
the Buyer. The Buyer shall reimburse the Seller for air freight cost
associated with each DZ Batch from Moscow to Washington, or other
destination designated by the Buyer, upon presentation of the Seller's
invoice as set forth in Section 8.4 of the Contract.
8.3. Not later than fifteen (15) days prior to estimated date of delivery of
each DZ Batch, the Seller shall notify the Buyer of the estimated delivery
date and flight number. The Seller shall update the Buyer in respect of the
final delivery date of DZ Batch not later than 1 day prior to such final
delivery date.
8.4. For each and any DZ Batch the Seller shall provide the Buyer with the
following set of paperwork:
. Original Certificates of Quality and Quantity for each DZ package in
duplicate. One set should be delivered attached to the DZ shipment
marked as "Place #", the other by express mail along with other required
documents;
. The Seller's invoice in triplicate. One set with the shipment and the
others by express mail;
. Original Packing list in duplicate. One set should be delivered attached
to the DZ shipment marked as "Place #", the other by express mail;
original Air Waybill and 1 copy;
. Copy of the Air Waybill, invoice and packing list should be faxed to the
Seller as soon as shipment is scheduled and Air Waybill is prepared.
9. SPECIFICATIONS AND QUALITY ACCEPTANCE OF DZ
9.1. Specifications shall include the following data:
All controlled technical parameters, such as isotopic composition,
impurities content, and mechanical parameters;
Methods of measurement of the technical parameters and their acceptable
standard deviations as appropriate,
Raw Material required for production of DZ, losses, DZ yield and
quantity of remaining Secondary Material.
<PAGE>
Contract 08843672/70034-02D
page 8 of 16
9.2. Should any parameter measured by ECP deviate from its value as per the
Specification, before effecting of the delivery of the corresponding DZ Lot
to the Buyer, the Seller must notify the Buyer of such deviation. The Buyer
shall, within five (5) working days of receipt of such notification, approve
or disapprove delivery of such DZ Lot. ("Approved DZ" and "Disapproved DZ"
respectively)
In the event the Buyer fails to notify the Seller of its approval or
disapproval within the above specified time frames, the pending delivery of
questioned DZ Lot is considered by the Seller as Approved DZ. In case of
Disapproved DZ, the Parties shall amicably discuss the possible alternative
actions.
Specification to the Approved DZ shall be considered by the Parties as
temporarily amended and applicable only for the particular Approved DZ Lot,
and only with respect to the parameters which were claimed by the Seller as
deviating from the Specification.
9.3. In the event the Buyer claims any DZ Lot or a portion thereof to be not
conforming to the corresponding Specification (the "Non-conforming DZ"), the
Buyer is entitled to return such Non-conforming DZ to the Seller for
replacement. The Buyer shall deliver, if requested by the Seller,
additional Raw Material sufficient for replacement of Non-Conforming DZ and
the Seller shall pay or reimburse the Buyer in U.S. Dollars for the cost of
such additional Raw Material. Notwithstanding the provisions of Section
7.1., the additional Raw Material shall be delivered FCA U. S. Seaport or
FCA US Airport (INCOTERMS 1990).
The Seller shall effect the replacement delivery of the equivalent quantity
of DZ conforming to Specification according to a schedule reasonably
acceptable to the Buyer. If the Buyer has already effected payment for the
Non-conforming DZ, then the replacement DZ will be free of charge to the
Buyer.
In the event of disputes between the Parties as to conformance of the Non-
conforming DZ to the Specification, an independent testing laboratory shall
be appointed by the Buyer, provided such laboratory (i) is located outside
Russia and the U.S., and (ii) will use testing methods similar to those used
by the Seller, additionally, the Seller must provide these testing methods
to such independent testing laboratory. If results obtained by such
independent laboratory conform to the Specification, the Non-conforming DZ
must be accepted by the Buyer as fully conforming to the Specification and
all testing expenses incurred shall be paid by the Buyer. Otherwise, the
measures specified above shall apply with respect to such non-conforming DZ
and all testing expenses incurred shall be paid by the Seller.
9.4. On the Buyer's request the Seller shall endeavor improvement of technical
parameters of DZ products. The Buyer will attempt to help the Seller to
obtain necessary materials, samples and consulting services as requested by
the Seller.
<PAGE>
Contract 08843672/70034-02D
page 9 of 16
10. PACKAGING
10.1. The Basic Product shall be packaged as follows: (i) maximum of 1000 grams
of the Basic Product in each of heat-sealed, double walled (thick)
polyethylene bags (ii) maximum of 16 bags or 16000 grams of the Basic
Product shall be placed inside of a large polyethylene bag which is then
placed in a strong wooden box free of bark and free from apparent live
plant pests and suitable for export shipment.
10.2. Weight error of packed Basic Product on a dry basis shall be +/- 1%. The
packaging material in contact with the Basic Product shall be polyethylene
or equivalent material free of halides or sulfur. The seal shall prevent
dusting of the Product on the outside of the package. The Basic Product
shall be shipped in boxes not exceeding 22 kg gross weight and shall meet
air carrier's regulations.
10.3. The packing requirements for other DZ products shall be either
incorporated into the corresponding Specifications or issued as separate
addendum to the Contract.
11. DISPOSITION OF THE SECONDARY MATERIAL
11.1. [*].
11.2. [*].
11.3. [*].
[*] Confidential Treatment Requested
<PAGE>
Contract 08843672/70034-02D
page 10 of 16
12. PRICE AND PAYMENT
12.1. For the deliveries scheduled for 1997 calendar year, the Buyer shall pay
to the Seller a Purchase Price of [*] of depleted zinc metal contained in
the Basic Product, and a Purchase Price of [*] of depleted zinc metal
contained in zinc oxide [*], the supply of which is subject to written
agreement on the corresponding specification.
12.2. All payments to the Seller under this contract must be paid to TSE's bank
account at AO CONVERSBANK (109172, Kotelnicheskaya 33 - 1, Moscow Russia
telex 911591 CCB) through Bankers Trust Co. New York, NY, account of AO
CONVERSBANK # 04-0984-462, for further credit to Moscow, account of AO
Techsnabexport # 1253/2.
12.3. Should TSE change their bank, TSE must provide a 30 day advance notice to
the Buyer.
12.4. The Buyer shall pay to the Seller the amount owed by wire transfer in
immediately available funds, within [*] and against presentation by the
Seller of the following documents:
(I) Commercial invoice in triplicate
(II) Air Waybill evidencing delivery
(III) Quality and quantity certificate
(IV) Packing list.
12.5. All banking expenses, payments and commissions related to performance of
corresponding transactions under this contract on the territory of Russian
Federation must be paid by TSE. All other banking expenses, payments and
commissions must be made by the Buyer.
12.6. [*]
12.7. [*]
12.8. Should the Buyer refuse to accept delivery of any DZ Batch per agreed to
schedule and quantities and the total amount of DZ delivered during that
calendar
[*] Confidential Treatment Requested
<PAGE>
Contract 08843672/70034-02D
page 11 of 16
year will be less than nominally agreed to amounts, then the Seller has the
right to issue the bill for the revised invoice. This invoice amount is
calculated as [*] .
12.9. Price for each gram of Raw Material must be shown by the Buyer in the
shipping documents required by the Seller for the customs clearance of the
Raw Material.
12.10. The Purchase Price for DZ for 1998 and 1999 calendar years should be
agreed to by the Parties as a result of good faith negotiations prior to
November 30th of the preceding year. Among others, the following factors
must be taken into account:
. Purchase Price for the previous year
. Change in the US Consumer Price Index
. Quantity scheduled for that year
Competitive pricing, if known to Parties
Should during the term of this Contract, either Party receive information
on any negative developments in the market conditions, or on competitive
activities, which may significantly affect fulfillment of this Party's
obligations, then this Party should inform other Parties in order to
initiate in a short time amicable and fair negotiations to prevent any
possible negative consequences.
12.11. Should the Parties agree on the changes of the scope of work under this
Contract and/or specification and prices for different DZ products are
agreed to, then a separate agreement must be reached on the scope and the
terms of such work.
13. REPRESENTATION AND WARRANTIES.
13.1. The Seller hereby represents and warrants to the Buyer- that:
(i) All DZ will be conveyed with good and marketable title thereto,
free and clear of all liens, charges and encumbrances of any
description.
(ii) All DZ delivered to the Buyer will meet the applicable
Specification in effect as of the date of delivery and will be
in full conformity with corresponding Certificates of Quality
and Quantity.
13.2. The Buyer hereby represents and warrants to the Seller that:
(i) All Raw Material will be conveyed with good and marketable title
thereto, free and clear of all liens, charges and encumbrances of any
description,
(ii) All Raw Material delivered to the Seller is applicable for zinc
conversion and depletion.
13.3. The express warranties set forth herein are exclusive, and no other
warranties of any kind, whether statutory, written, oral or implied
(including warranties of fitness for a particular purpose or
merchantability), shall apply.
[*] Confidential Treatment Requested
<PAGE>
Contract 08843672/70034-02D
page 12 of 16
14. PERMITS, TITLE, AND RISK OF LOSS
14 1. Each Party shall, at its own expense, be responsible for obtaining all
approvals, authorizations, consents, licenses, and permits necessary to
carry out its obligations hereunder, and to the extent necessary, the other
Party shall cooperate as to the obtaining of such approvals,
authorizations, consents, licenses, and permits.
14.2. Title to DZ as well as all risk of loss or damage to persons or property
occasioned by DZ shall pass to the Buyer upon its delivery to the Buyer
pursuant to Section 8.1.
14.3. [*]
15. CONSEQUENTIAL DAMAGES
Except as otherwise specifically set forth herein, in no event, whether under
contract, tort (including negligence or strict liability), warranty, or
otherwise, shall either party to this Contract be liable to the other party for
any incidental or consequential damages of any nature arising out of or
connected with or resulting from the performance of or failure to perform this
Contract, including without limitation, loss of profits, loss of use of
facilities, or costs of capital.
16. IMPEDIMENT TO PERFORMANCE (FORCE-MAJEURE)
16.l. Either party shall be relieved of any liability for partial or complete
non-performance or delay in performance of its obligations under this
Contract, if such non-performance or delay in performance is caused by an
impediment of any extraordinary nature that has arisen after the effective
date of this Contract, and which impediment the party could neither
reasonably have foreseen nor could have prevented through reasonable
measures and could not reasonably have been expected to take into account
at the, time this Contract came into force. The party whose performance is
affected shall use all reasonable efforts to avoid or minimize the
consequences of such impediment and shall continue its obligations
hereunder after the cause for such impediment has ceased to exist.
16.2. A party will not be relieved of its liability for PARTIAL OR COMPLETE
NON-PERFORMANCE OR DELAY IN PERFORMANCE OF ITS OBLIGATIONS TO THE EXTENT
THAT SUCH NONPERFORMANCE OR DELAY IN PERFORMANCE IS CAUSED BY ITS OWN
ACTION, FAULTS OR NEGLIGENCE.
[*] Confidential Treatment Requested
<PAGE>
Contract 08843672/70034-02D
page 13 of 16
16.3. With the beginning (and cessation) of any such impediment, a party shall
without delay notify the other party in writing. Such notification must
inform the other party of the nature of the impediment and, where possible,
its influence on the capability of performance by the party of its
obligations hereunder, as well as the expected duration of such non-
performance or delay in performance of its obligations. If a party fails
to provide such notification within a reasonable period of time after it
learned or should have learned of the beginning (and cessation) of such
impediment, it shall be liable for any damages caused by untimely
notification or failure to notify.
16.4. A party shall, within a reasonable period of time, provide to the other
party, at its request, a certificate of a Chamber of Commerce (or Chamber
of Commerce and Industry), or other similar competent authority or
organization of the respective country, certifying the beginning (and
cessation) of any such impediment.
16.5. In the event of such an impediment, the time period for the performance
by the parties of their obligations under this Contract shall be extended
correspondingly for a period during which any such impediment and its
consequences last.
16.6. Where any such impediment and its consequences remain effective for more
than ninety (90) days or at the beginning of such impediment it becomes
clear that it and its consequences will be effective in excess of ninety
(90) days, the other party is entitled, at its option, to terminate, at no
cost, any obligations under this Contract, the performance of which is
prevented for such period of time by such impediment. Notification of such
termination must be provided to the impeded party prior to commencement of
performance or resumption of performance of such obligation(s) under this
Contract after removal of such impediment which caused non-performance or
delay in performance of such obligation(s).
16.7. In case of any such termination, neither party is entitled to claim
damages from the other party, except for any payments due to the Buyer for
Raw Material delivered to the Seller and except for any damages which are
related solely to untimely notification or failure to notify of the
beginning (and cessation) of such impediment. However, each party may
demand from the other party return (in whole or in part) of that which has
been delivered or paid by it under this Contract without receiving due
consideration as provided for pursuant to the terms of this Contract. In
case of any such termination, return of any Raw Material or payment shall
be effected by an equitable arrangement, as both partics shall at such time
agree. The return shall be effected at the expense of the party to whom
any such material is being returned. Where it is impossible to return Raw
Material in essentially the same condition as received, the respective
party must pay the other party the price of such Raw Material, with
exception of extraordinary conditions listed in the section 16.1.
<PAGE>
Contract 08843672/70034-02D
page 14 of 16
17. NOTICES
17.1. Any notice, invoice, or other written communication required or permitted
to be given hereunder shall be in writing and either be delivered
personally to the party to whom it is directed or sent by facsimile and
shall be effective on the day of receipt of the notice if received during
normal business hours of the addressee, and if not received during such
normal business hours, then on the first business day of the addressee
after such receipt.
17.2. The addresses of the parties to which all such notices shall be forwarded
are as follows:
to the Seller:
if to TSE A/O Techsnabexport
Staromonetnyj per. 26
Moscow, Russian Federation, 1091 80
Attention: Director, Uranservice
Facsimile: (7-095) 233-2412
if to ECP: Electrochemical Plant,
Zelenogorsk, Krasnoyarsky Krai
Attention, General Director
Facsimile: (7-39169) 212-62
to the Buyer: ISONICS Corporation
4010 Moorpark Ave., San Jose CA 95117
Attention: Director- Quality Programs
Facsimile: (408) 260-2110
18. ASSIGNMENT
18. 1. Neither party may assign any of its rights or obligations under this
Contract without the prior written consent of the other party, which
consent shall not unreasonably be withheld; provided, however, that either
party may assign any of its rights or delegate its obligations hereunder
without such consent to its parent company, its affiliates, the Producer,
or any party providing financing. No such assignment or delegation shall
relieve the assignor from any of its obligations hereunder.
18.2. This Contract shall inure to the benefit of and be binding upon the
parties and their respective successors and permitted assigns.
19. CONFIDENTIALITY
The parties shall treat this Contract as confidential, and neither party shall
disclose its contents without the prior written consent of the other party to
any person, except to its affiliates, legal advisors, auditors, or financing
sources.
<PAGE>
Contract 08843672/70034-02D
page 15 of 16
If disclosure is required to comply with the laws or regulations of a
government or government agency or by a court having jurisdiction over one
of the parties, such party may so disclose notwithstanding the foregoing
upon prior notice to the other party.
20. GOVERNING LAW AND ARBITRATION
20.1. The present Contract shall to the exclusion of United States (or any
specific State of the United States) or Russian law be governed by the
substantive law of Sweden.
20.2. The Parties shall endeavor to settle any dispute arising from the
execution of or in connection with this Contract amicably by friendly
negotiation.
20.3. In the event that either Party declares by written notice after a period
of 60 days from the date of the first written notice specifying such
dispute, that a resolution cannot be reached, any dispute, controversy or
claim arising out of or relating to this Contract or the breach,
termination or invalidity thereof, shall be exclusively settled by
arbitration in accordance with the Rules of the Arbitration Institute of
the Stockholm Chamber of Commerce as in force at that time.
20.4. The place of arbitration shall be Stockholm, Sweden and the hearings
shall be conducted, and all evidence presented, in the English language.
20.5. The arbitration award is final and binding upon the Parties. The
arbitration fee shall be borne by the losing Party, except as otherwise
provided in the arbitration award.
21. GENERAL TERMS
21.1. If any provision in this Contract shall be held to be invalid or
unenforceable, the remaining portions shall remain in effect. In the event
such invalid or unenforceable provision is considered an essential element
of this Contract, the Parties shall promptly negotiate a replacement
provision.
21.2. No waiver of the terms and conditions of this Contract, or the failure of
either Party strictly to enforce any such term or condition on one or more
occasions shall be construed as a waiver of the same or of any other term
or condition of this Contract on any other occasion.
21.3. The relationship between the Buyer and the Seller is that of independent
contractors. The Buyer and the Seller are not joint venturers, partners,
principal and agent, master and servant, employer or employee, and have no
other relationship to each other than independent contracting parties.
21.4. The Parties agree that time is of the essence in this Contract.
<PAGE>
Contract 08843672/70034-02D
page 16 OF 16
21.5. The terms and conditions contained in this Contract supersede all prior
oral or written understandings between the Parties with respect to the
subject matter thereof and constitute the entire agreement of the Parties
with respect to such subject matter. Such terms and conditions shall not be
modified or amended except by a writing signed by authorized
representatives of both parties.
IN WITNESS THEREOF the Parties executed the present Contract in three
counterparts in English and Russian, both text being authentic. In case of
any inconsistence between English and Russian versions the English should
control.
FOR AND BEHALF OF FOR AND BEHALF OF
ELECTROCHEMICAL PLANT ISONICS CORPORATION
By: _____________________ By: _______________________
Name: ___________________ Name: _____________________
Title: __________________ Title: ____________________
FOR AND ON BEHALF OF
TECHSNABEXPORT CO., LTD.
By: __________________________
Name: ________________________
Title: _______________________
By: __________________________
Name: ________________________
Title: _______________________
<PAGE>
SPECIFICATION NO. 01
TO CONTRACT NO. 08843672/70034-02D
FOR ZINC OXIDE IN THE FORM OF POWDER
1. GENERAL DESCRIPTION:
The material specified herein is zinc oxide (DZ oxide), with a reduced content
of isotope Zn-64 and consisting of particles which are generally equiaxed in
shape when viewed under 1000X magnification.
2. QUALITY CHARACTERISTICS:
<TABLE>
<CAPTION>
<S> <C> <C>
Characteristic Value Method of measurement
- ---------------------------------------------------------------------------------------------
[*] [*] [*]
</TABLE>
[*] Confidential Treatment Requested
<PAGE>
3. MATERIAL BALANCE:
[*]
FOR AND ON BEHALF OF FOR AND ON BEHALF OF
ELECTROCEHMICAL PLANT ISONICS CORPORATION
By: ________________________ By: ____________________
Name: ______________________ Name: __________________
Title: _____________________ Title: _________________
FOR AND BEHALF OF
TECHSNABEXPORT CO., LTD.
By: ________________________
Name: ______________________
Title: _____________________
By: ________________________
Name: ______________________
Title: _____________________
[*] Confidential Treatment Requested
<PAGE>
EXHIBIT 10.17
office of Cooperative Research
YALE UNIVERSITY 246 Church Street, Suite 401
New Haven, Connecticut o63lo
28 January 1997 Telephone: 203 432-7240
James E. Alexander Fax: 203 432-7245
President & CEO
Isonics Corporation
San Jose, CA 95117
Re: Isotopically Enriched Semiconductor Devices (OCR 315)
Invention of Professor T.P. Ma
Dear Jim:
Thank you for your letter of 7 January with the update on the purified
Si28 material. We agree to your request to extend the Option to Isonics
(formerly A&R) to 21 July 1997.
I passed your letter to Dr. Ma and have discussed Isonics' progress with
him. Once lsonics provides the material, he will be able to do the mobility
measurements. Because of the long delays, however, Professor Ma no longer has
access to the thermal conductivity measurement apparatus which had been on loan
from a company that has moved away. Thus, arrangements must be made either to
borrow more equipment or to subcontract these measurements. In any case, once
the material is available we can determine how best to proceed.
Without appearing to underestimate the difficulty of obtaining
isotopically pure Si, converting it to semiconductor-grade and developing
crystals (now an epitaxial layer), it is now nearly 2 years since Yale and A&R
signed the option to go forward. We are getting anxious about completing this
project and, if successful, locating chip makers that will use Ma's technology.
We hope and expect that Isonics will not need further extensions.
Paul Dawson of Eurenko, a company that provides stable isotopes with
facilities in the Netherlands, Germany and England, called me recently.
Eurenko is another source of Si28 and other materials that are covered in the
Ma patents that you may want to consider. His address is below:
PO Box 158
7600 AD
Almelo, Netherlands
phone: 31-546-545-454
Please be in touch with TP Ma as you finalize the material you are
providing, We look forward to beginning the next stage of this project.
Best regards.
Sincerely,
Henry S. Lowendorf
Associate Director
203-432-7244
<PAGE>
EXHIBIT 11.01
ISONICS CORPORATION
STATEMENTS REGARDING CALCULATION
OF NET INCOME (LOSS) PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
-----------------
YEAR ENDED NINE MONTHS
APRIL 30, ENDED JANUARY 31, NINE MONTHS
-------------- ----------------- ENDED JANUARY 31,
1995 1996 1996 1997 1997
------ ------ -------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Net Income (Loss)......... $ (143) $ 281 $ 412 $ (714) $(714)
Interest on nonconvertible
promissory notes......... -- -- -- -- 196
------ ------ -------- -------- -----
Net Income (Loss)......... $ (143) $ 281 $ 412 $ (714) $(518)
====== ====== ======== ======== =====
Weighted Average Common
Stock Outstanding........ 1,155 1,190 1,190 1,324 1,324
Dilutive Effect of
Preferred Stock.......... -- 78 78 -- 62
Pro forma shares issued
for repayment of debt.... -- -- -- -- 233
Dilutive effect of stock
options and warrants
granted since January 1,
1996 (approximately
twelve months preceding
the offering), calculated
using the treasury stock
method at $6.00 per
share.................... 513 513 513 437 437
------ ------ -------- -------- -----
Shares Used in Computing
Per Share Information.... 1,668 1,781 1,781 1,761 2,055
====== ====== ======== ======== =====
Net Income (Loss) Per
Share.................... $ (.09) $ .16 $ .23 $ (.41) $(.25)
====== ====== ======== ======== =====
</TABLE>
<PAGE>
EXHIBIT 23.02
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 March 26, 1997), 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
March 31, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> APR-30-1996 APR-30-1997
<PERIOD-START> MAY-01-1995 MAY-01-1996
<PERIOD-END> APR-30-1996 JAN-31-1997
<CASH> 116 66
<SECURITIES> 0 0
<RECEIVABLES> 35 485
<ALLOWANCES> 0 0
<INVENTORY> 1,006 2,109
<CURRENT-ASSETS> 1,281 2,695
<PP&E> 81 77
<DEPRECIATION> 10 24
<TOTAL-ASSETS> 1,788 3,840
<CURRENT-LIABILITIES> 1,342 3,176
<BONDS> 452 1,877
0 0
125 0
<COMMON> 78 1,129
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 1,788 3,840
<SALES> 5,567 3,355
<TOTAL-REVENUES> 5,567 3,355
<CGS> 3,835 2,579
<TOTAL-COSTS> 3,835 2,579
<OTHER-EXPENSES> 1,210 1,211
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 66 226
<INCOME-PRETAX> 456 (661)
<INCOME-TAX> 175 53
<INCOME-CONTINUING> 281 (714)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 281 (714)
<EPS-PRIMARY> .16 (.41)
<EPS-DILUTED> .16 (.41)
</TABLE>
