<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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Filed pursuant to Rule 424(a)
Registration No. 333-13289
SUBJECT TO COMPLETION, DATED SEPTEMBER 5, 1997
800,000 UNITS CONSISTING OF 800,000 SHARES OF COMMON STOCK AND 800,000
REDEEMABLE CLASS A COMMON STOCK PURCHASE WARRANTS
[LOGO OF ISONICS CORPORATION]
Isonics Corporation, a California corporation ("Isonics" or the "Company"),
hereby offers 800,000 units ("Units"), each Unit consisting of one share
(collectively, the "Shares") of Common Stock, no par value per share ("Common
Stock"), and one redeemable Class A Common Stock Purchase Warrant
(collectively, the "Warrants"). The Units, the Shares and the Warrants are
sometimes referred to collectively as the "Securities." Each Warrant entitles
the registered holder thereof to purchase one share of Common Stock at a price
currently expected to be $5.80 per share, subject to adjustment, for three
years commencing one year from the date of this Prospectus. The Common Stock
and Warrants comprising the Units will be immediately separately transferable
at the sole discretion of Monroe Parker Securities, Inc. (the "Underwriter").
The Company may redeem the Warrants commencing , 1999 (18 months from the
date of the Prospectus) or earlier with the consent of the Underwriter, at a
price currently expected to be $.10 per Warrant, on not less than 30 days'
prior written notice, if the last sale price of the Common Stock has been at
least 250% (currently expected to be $14.50 per share) of the current Warrant
exercise price, subject to adjustment, for at least 20 consecutive trading days
ending within three days prior to the date on which notice of redemption is
given. See "Description of Capital Stock."
Prior to this offering, there has been no public market for the Units, Common
Stock or Warrants. The offering price of the Units and the exercise price and
the terms of the Warrants have been determined by negotiations between the
Company and the Underwriter, and are not necessarily related to net asset
value, projected earnings or other established criteria of value. The Company
anticipates that the Units, Common Stock and Warrants will be quoted on the OTC
Electronic Bulletin Board under the symbols "ISNU," "ISNX" and "ISNXW,"
respectively. There can be no assurance that an active trading market in the
Company's securities will develop after the completion of this offering, or be
sustained. See "Underwriting."
The Units are being offered on a "firm commitment" basis by the Underwriter,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriter, and subject to the Underwriter's right to reject orders in whole
or in part, and to the approval of certain legal matters by counsel and certain
other conditions. It is expected that delivery of the Units will be made
against payment therefor on or about , 1997.
----------
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 18.
----------
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................................... $5.90 $.59 $
- ---------------------------------------------------------------------------------------------------
Per Share................................. $5.80 $.58 $
- ---------------------------------------------------------------------------------------------------
Per Warrant............................... $.10 $.01 $
- ---------------------------------------------------------------------------------------------------
Total (3).................................. $ $ $
===================================================================================================
</TABLE>
(1) Excludes additional compensation to be received by the Underwriter in the
form of (i) options to purchase 80,000 Units, exercisable over a period of
four years commencing one year from the date of this Prospectus, at an
exercise price equal to 165% of the public offering price of the Units
being offered hereby; and (ii) a 3% non-accountable expense allowance of
$141,600 (or $162,840 if the over-allotment option is exercised in full).
The Company has agreed under certain circumstances to pay the Underwriter a
warrant solicitation fee of 4% of the exercise price received for each
Warrant exercised. In addition, the Company and the Underwriter have agreed
to indemnify each other against certain liabilities under the Securities
Act of 1993 (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses, including the Underwriter's non-accountable
expense allowance payable by the Company, estimated at $ (or $ if the
over-allotment option is exercised in full).
(3) The Company has granted to the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to an additional
120,000 Units on the same terms solely to cover over-allotments, if any. If
the over-allotment option is exercised in full, the Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company would be
$ , $ and $ respectively.
----------
MONROE PARKER SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
FOR OHIO RESIDENTS ONLY: This offering is being limited to residents of the
State of Ohio meeting investor suitably standards of $65,000 of annual income
plus a minimum of $250,000 of net worth; or in the alternative, joint net
worth with spouse of $500,000 (net worth excludes principal residence, home
furnishings and automobiles). Ohio residents wishing to invest must show their
eligibility by signing an investor suitability letter.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS, 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 OTC
ELECTRONIC BULLETIN BOARD OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<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, a 1-for-1.26 reverse
split of the Company's Common Stock effected in May 1997 and a 3-for-1 forward
stock 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 year ended April
30, 1997 and for the three months ended July 31, 1997, approximately 30% and
64% of net revenues were from sales made directly to end users, respectively.
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 has obtained an option 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 and others 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>
<S> <C>
Securities offered....... 800,000 Units, each Unit consisting of one share and one
Warrant. The Common Stock and Warrants comprising the Units
will be immediately separately transferable at the sole
discretion of the Underwriter. See "Description of Capital
Stock."
Description of Warrants:
Exercise of Warrants... Subject to redemption by the Company, the Warrants may be
exercised at any time during the three-year period commencing
one year from the date of this Prospectus at an exercise price
of $ per share, subject to adjustment.
Redemption of Warrants. The Warrants are redeemable by the Company commencing 18
months from the date of the Prospectus, or earlier with the
consent of the Underwriter, at $ per Warrant, on not less
than 30 days' prior written notice, if the last sale price (or
the average of the last bid and asked prices on the OTC
Electronic Bulletin Board) of the Common Stock has been at
least 250% ($ per share) of the current Warrant exercise
price for at least 20 consecutive trading days ending within
three days prior to the date on which notice of redemption is
given.
Common Stock to be
outstanding
after this offering..... 5,350,268 Shares(1)
Use of proceeds.......... For repayment of debt, research and development, capital
expenditures and other general corporate purposes.
OTC Electronic Bulletin
Board Symbols........... Units--ISNU; Common Stock--ISNX; Warrants--ISNXW
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
APRIL 30, ENDED JULY 31,
-------------- ---------------
1996 1997 1996 1997
------ ------- ------- -------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................. $5,567 $ 4,539 $ 1,564 $11,535
Operating income (loss)...................... 522 (915) 85 (60)
Net income (loss)............................ 281 (1,363) 43 (190)
Net income (loss) per share(2)............... .04 (.22) .01 (.03)
Shares used in computing per share
information(2).............................. 6,304 6,213 6,305 6,361
Pro forma (loss) per share(2)................ (.16) (.01)
Shares used in computing pro forma
information(2).............................. 6,595 6,601
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1997
----------------------
ACTUAL AS ADJUSTED(3)
------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 87 $2,246
Working capital (deficiency)............................ (955) 1,507
Total assets............................................ 2,521 4,598
Long-term debt, less current portion.................... 961 56
Total shareholders' equity (deficit).................... (806) 2,479
</TABLE>
- --------
(1) Based on shares outstanding as of July 31, 1997. Does not include 689,809
shares of Common Stock issuable at a weighted average exercise price of
$.77 per share upon exercise of options granted under the Company's
employee benefit plan as of July 31, 1997, 720,000 additional shares of
Common Stock reserved for future grants under the Company's employee
benefit plans, 1,572,034 shares of Common Stock issuable upon the exercise
of outstanding warrants at a weighted average exercise price of $2.47 per
share, and options to purchase 120,000 shares of Common Stock at an
exercise price equal to 110% of the deemed initial public offering price
per Share. 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 800,000
Shares and 800,000 Warrants to purchase Common Stock at $5.80 per Share,
and the issuance of Underwriter's Warrants to purchase 240,000 shares of
Common Stock at a weighted average exercise price of $7.77 per share, and
after deducting the estimated underwriting discounts and commissions and
offering expenses and the application of the net proceeds therefrom. See
"Capitalization" and "Use of Proceeds."
4
<PAGE>
RISK FACTORS
An investment in the Securities offered hereby involves a high degree of
risk. In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
Securities offered hereby. This Prospectus contains forward-looking statements
that involve risks and uncertainties. The Company's actual results could
differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed below and elsewhere in the Prospectus.
Relationship With Certain Suppliers and Raw Materials. The Company depends
upon a single processor, located in Russia, for one process involved in the
manufacturing of its products, and upon a single supplier or a limited number
of suppliers and processors for certain other manufacturing processes.
Although the Company does have written agreements with certain of its
suppliers and processors, the Company does not have any written agreements
with other suppliers and processors. Although the Company seeks to reduce its
dependence on its sole and limited suppliers, disruption or termination of any
of the sources could occur, and such disruptions could have at least a
temporary material adverse effect on the Company's business, financial
condition and results of operations. Moreover, a prolonged inability to obtain
alternative sources for processing could materially adversely affect the
Company's relations with its customers. See "Risk Factors--Expansion of the
Company's Product Offerings" and "Business--Manufacturing and Supply."
Operations in Russia. The processing of the Company's products is dependent
upon an isotope enrichment plant, located in Russia, which is owned by the
Ministry of Atomic Energy of the Russian Federation, which is part of the
cabinet of the government of the Russian Federation. The Company 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 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
5
<PAGE>
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 88%, 49% and 17% of net
revenues for the years ended April 30, 1996 and 1997 and for the three months
ended July 31, 1997, respectively. A second customer accounted for 19% of net
revenues for the three months ended July 31, 1997 and 13% of net revenues for
the year ended April 30, 1997. A third customer accounted for 51% of net
revenues for the three months ended July 31, 1997 and 20% of net revenues for
the year ended April 30, 1997. A fourth customer accounted for 10% of net
revenues for the three months ended July 31, 1996 and 10% of net revenues for
the year ended April 30, 1997. A fifth customer accounted for 20% of net
revenues for the three months July 31, 1996. A sixth customer accounted for
11% of net revenues for the year ended April 30, 1996. Consistent with the
Company's historical experience, the Company's quarterly results 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 net losses of $1,363,000 and $190,000, respectively, for the year ended
April 30, 1997 and the three months ended July 31, 1997. At July 31, 1997, the
Company had negative working capital of $955,000 and an accumulated deficit of
$1,586,000. In addition, the Company expects that it will incur a net loss for
the fiscal year ended April 30, 1998, largely as a result of expenses
associated with anticipated growth in research and development efforts 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. 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>
Possible Adverse Effect of "Penny Stock" Rules on Liquidity for the
Company's Securities. Rule 3a51-1 under the Exchange Act categorizes any
equity security as a "penny stock" except in limited circumstances, including
where the equity security has a price of $5.00 per share or more (excluding
any broker or dealer commission, commission equivalent, mark-up or mark-down),
where the security is registered on a qualified national securities exchange
or is a reported security or where the issuer has net tangible assets (equal
to total assets less intangible assets and liabilities) exceeding $2,000,000
(as demonstrated by financial statements dated less than 15 months prior to
the date of the transaction in question) and the issuer has been in continuous
operation for at least three years. Further, a security which is a unit
composed of one or more securities is not a penny stock under Rule 3a51-1 if
the unit price divided by the number of component shares of the unit that are
not warrants is $5.00 per share or more (excluding any broker or dealer
commission, commission equivalent, mark-up or mark-down) and any warrant
component of the unit has an exercise price of $5.00 per share or more. Rule
15g-9 under the Exchange Act imposes sales practice requirements on broker-
dealers which sell penny stocks to person other than established customers (as
defined in Rule 15g-9) or in other limited circumstances, including requiring
the broker-dealer, prior to any transaction in a penny stock, to make a
special suitability determination for the purchaser, to receive the
purchaser's written agreement to the transaction and to deliver a disclosure
statement respecting the penny stock rules.
The initial public offering price of the Units and the exercise price of the
Warrants will be sufficiently high such that the Units will not initially be
penny stocks. Further, the Company expects that it will be able to demonstrate
following this offering that, as a result of this offering, it will have net
tangible assets exceeding $2,000,000.
However, there can be no assurance that, or when, the Company will be able
to demonstrate sufficiently that it has net tangible assets exceeding
$2,000,000 or that the price of the Units will remain above $5.00 per Unit
prior to the Company doing so, if at all. Therefore, since the Units, Common
Stock and Warrants will not initially be registered on a qualified national
securities exchange or be reported securities, there can be no assurance that
the Units, Common Stock or Warrants will qualify for exemption from the penny
stock rules. If the Company's securities become subject to the penny stock
rules, the ability or willingness of broker-dealers to sell or make a market
in the Company's securities may be adversely affected, the ability of
purchasers in this offering to sell in the secondary market any of the
Securities acquired hereby may be adversely affected and the market liquidity
for the Company's securities could be adversely affected.
Limits on Secondary Trading; Possible Illiquidity of Trading Market. The
Company anticipates that the Units, Common Stock and Warrants will be quoted
on the OTC Electronic Bulletin Board, which is a significantly less liquid
market than the Nasdaq SmallCap Market or other stock exchanges. If, at a
future date, the Company becomes able to satisfy the quantitative and other
listing requirements for listing of the Units, Common Stock and Warrants on
the Nasdaq SmallCap Market or another stock exchange, the Company may apply
for such listing, although there can be no assurance that the Company will
apply for any such listing or that its application would be accepted. As a
result of the Units, Common Stock and Warrants being quoted on the OTC
Electronic Bulletin Board, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, the Units, Common
Stock and Warrants than if those securities were listed on the Nasdaq SmallCap
Market or another stock exchange.
Under the blue sky laws of most states, public sales of Units, 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 Units, 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.
7
<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 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 Units, 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."
8
<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.
Dependence on Key Personnel. The Company's future success will depend in
significant part upon the continued service of its key technical, sales and
senior management personnel, including James E. Alexander, the Company's
President and Chief Executive Officer, and Boris Rubizhevsky, the Company's
Senior Vice President, Isotope Production and Supply. The Company maintains $1
million of key man life insurance on the lives of Messrs. Alexander and
Rubizhevsky. The loss of the services of one or more of the Company's
executive officers or other key technical personnel could have a material
adverse effect on the Company's business, financial condition or results of
operations. In addition, the Company's future operating results depend, in
part, upon its ability to attract and retain qualified personnel for its
operations. The failure to attract or retain such persons could materially
adversely affect the Company's business, financial condition and results of
operations.
Reliance on Strategic Collaborations and Relationships. The Company's
strategy for the development, processing and marketing of certain of its
products includes entering into various collaborations with corporate
partners, processors, suppliers and others. The Company has developed
strategic relationships, including cooperative research and development
projects, with certain third parties. There can be no assurance that existing
collaborative arrangements will continue, or that the Company will be able to
negotiate other successful collaborative arrangements in the future. The loss
of any of these relationships could adversely affect the Company's business,
financial condition and results of operations. If the Company is not able to
maintain or
9
<PAGE>
establish such arrangements, it would likely face increased capital
requirements to undertake such activities at its own expense, and could also
encounter significant delays in development, processing, marketing or sale of
products into certain markets. See "Business--Manufacturing and Supply."
Third Party Reimbursement of Healthcare Costs. Some of the Company's
potential products, such as DBT products, are expected to compete in the
medical diagnostics and healthcare markets. Demand for such products, and the
prices at which such products can be sold, may depend in large part upon the
extent to which purchasers will be reimbursed by governmental agencies and
insurance companies for use of such products. Future federal or state
legislation could result in a substantial restructuring of the healthcare
delivery system. While the Company cannot predict whether any legislative or
regulatory proposals will be adopted or the effect such proposals may have on
its business, uncertainty regarding such proposals, as well as the adoption of
such proposals, could have a material adverse effect on the Company's ability
to develop and sell products that compete in these markets. Such reforms, if
adopted, and ongoing changes in the healthcare industry, could adversely
affect the pricing of therapeutic or diagnostic products in the United States
or the amount of reimbursement available from governmental agencies or third
party insurers, and consequently could have a material adverse effect on the
Company. In both domestic and foreign markets, sales of such products, if any,
will depend in part on the availability of reimbursement from third party
payers, such as government and private insurance plans and other
organizations.
Product and Other Liability; Minimal Insurance Coverage. The Company's
business exposes it to potentially substantial product, environmental,
occupational and other liability risks which are inherent in research and
development, preclinical study, clinical trials, manufacturing, marketing,
distribution and use, of the Company's current and potential products,
including, but not limited to, products for pharmaceutical, medical device and
nuclear energy markets. The Company currently does not have product liability
insurance, but may seek such coverage as it deems prudent in light of future
operations. There can be no assurance that insurance coverage will be
available at an acceptable cost, if at all, or that a product liability or
other claim would not materially and adversely affect the business, financial
condition and results of operations of the Company even if such insurance 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 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.
Immediate and Substantial Dilution. Investors participating in this offering
will incur immediate, substantial dilution of $5.49 or 93% of the offering
price per share. To the extent options or warrants to purchase Common Stock
are exercised, there may be further dilution. See "Dilution."
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 Underwriter. There can be no assurance that an active public market for
the Units,
10
<PAGE>
Common Stock and Warrants will develop or be sustained after the offering or
that the market price of the Units, 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 Units, Common Stock and Warrants.
Arbitrary Offering Price. The initial public offering price of the Units and
the exercise price and terms of the Warrants have been determined by
negotiations between the Company and the Underwriter. See "Underwriting" for a
discussion of the factors considered in determining the initial public
offering price. Regulatory developments and economic and other external
factors, as well as period-to-period fluctuations in financial results, may
also have a significant impact on the market price of such securities.
Possible Restrictions on Market-Making Activities in Company's
Securities. The Underwriter has advised the Company that it intends to make a
market in the Company's securities. Regulation M, which was recently adopted
to replace Rule 10b-6 and certain other rules promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), may prohibit the
Underwriter from engaging in any market-making activities with regard to the
Company's securities for the period from five business days (or such other
applicable period as Regulation M may provide) prior to any solicitation by
the Underwriter of the exercise of Warrants until the later of the termination
of such solicitation activity or the termination (by waiver or otherwise) of
any right that the Underwriter may have to receive a fee for the exercise of
Warrants following such solicitation. As a result, the Underwriter may be
unable to provide a market for the Company's securities during certain periods
while the Warrants are exercisable.
Underwriter's Warrants. The Company has agreed to sell to the Underwriter,
at an aggregate price of $80, the right to purchase up to 80,000 Shares and
80,000 Warrants, each Warrant having the same terms as the Warrants to be sold
to the public in this offering (the "Underwriter's Warrants"). Each
Underwriter's Warrant will be exercisable, for a four-year period commencing
one year after the date of the Prospectus, to purchase one share at a price of
$9.57, which is 165% of the deemed initial public offering price per Share
(i.e., $5.80 per share), and upon payment of $.165, which is 165% of the
deemed initial public offering price per Warrant (i.e., $.10 per Warrant), to
acquire one Warrant which is exercisable to purchase one share of Common Stock
at a price of $5.80, which is the same exercise price as the Warrants. For the
life of such Underwriter's Warrants, the holders thereof are given the
opportunity to profit from a rise in the market price of the Common Stock or
Warrants, which may result in a dilution of the interests of other
shareholders. As a result, the Company may find it more difficult to raise
additional equity capital if it should be needed for its business while such
Underwriter's Warrants are outstanding. See "Underwriting."
Potential Adverse Effect of Redemption of the Warrants. The Warrants may be
redeemed by the Company commencing 18 months from the date of this Prospectus,
or earlier with the consent of the Underwriter, at a redemption price of $.10
per Warrant upon not less than 30 days' prior written notice, provided that
the average of the last reported bid and asked prices of the Common Stock on
the OTC Electronic Bulletin Board (or the last sale price of the Common Stock
on the Nasdaq National or Smallcap Markets or any national securities
exchange) for 20 consecutive trading days ending within three days of the
notice of redemption, equals or exceeds 250% (i.e., $14.50 per share assuming
a deemed initial public offering price of $5.80 per Share) of the current
Warrant exercise price, subject to adjustment. Redemption of the Warrants
could force the holders to exercise the Warrants and pay the exercise price at
a time when it may be disadvantageous for the holders to do so, sell the
Warrants at the then current market price when they might otherwise wish to
hold the Warrants, or to accept the redemption price, which is likely to be
substantially less than the market value of the Warrants at the time of
redemption. See "Description of Capital Stock--Class A Warrants."
Underwriter's Influence on the Market. A significant amount of the units
offered may be sold to customers of the Underwriter. Such customers
subsequently may engage in transactions for the sale or purchase of such
11
<PAGE>
Units and may otherwise effect transactions in such securities. If they
participate in the market, the Underwriter may exert substantial influence on
the market, if one develops, for the Units, Common Stock and Warrants. Such
market-making activity may be discontinued at any time. The price and
liquidity of the Units, Common Stock and Warrants may be significantly
affected by the degree, if any, of the Underwriter's participation in such
market. See "Underwriting."
Current Prospectus and State Registration Required to Exercise Warrants. The
Warrants are being registered pursuant to a Registration Statement filed with
the Securities and Exchange Commission ("Commission") under the Securities
Act, of which this Prospectus is a part, and after its effectiveness the
Warrants may be traded, and upon exercise after the Warrants become
exercisable, commencing one year after the date of this Prospectus, their
underlying shares of Common Stock may be sold in the public market that may
develop for the securities. However, unless such Registration Statement is
kept current by the Company and measures to qualify or keep qualified such
securities in certain states are taken, investors purchasing the Warrants in
this offering, although exercisable, will not be able to exercise the Warrants
or sell the underlying shares of Common Stock issuable upon exercise of the
Warrants in the public market. The Company has agreed to use its best efforts
to qualify and maintain a current registration statement covering such shares
of Common Stock. There can be no assurance, however, that the Company will be
able to maintain a current registration statement or to effect appropriate
qualifications under applicable state securities laws, the failure of which
may result in the exercise of the Warrants and the resale or other disposition
of Common Stock issued, upon such exercise, being unlawful. See "Description
of Capital Stock--Class A Warrants."
Protection of Intellectual Property. The Company does not currently hold any
patents, and has not filed any patent applications, regarding DZ or its other
actual or potential products. The Company relies primarily on a combination of
trade secrets, confidentiality procedures and contractual provisions to
protect its technology. Despite the Company's efforts, unauthorized parties
may attempt to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's technology and
products is difficult. In addition, the laws of many countries do not protect
the Company's information, technology and intellectual property that it
regards as proprietary to as great an extent as do the laws of the United
States. There can be no assurance that the Company's protective measures will
be adequate or that the Company's competitors will not independently develop
similar information, technology or intellectual property.
To date, the Company has not been notified of any claim that the Company's
products infringe the proprietary rights of third parties, but there can be no
assurance that third parties will not claim infringement by the Company with
respect to current or future products. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable to the Company or at all, which could have a material adverse
effect upon the Company's business, financial condition or results of
operations. See "Business--Patents and Proprietary Rights."
Risks Associated with International Sales. The Company may expand its sales
and marketing activities outside of the United States, which will require
management attention and financial resources. There can be no assurance that
such efforts will be successful. International operations are subject to a
number of risks, including longer receivable collection periods and greater
difficulty in accounts receivable collections, unexpected changes in
regulatory requirements, dependence on independent resellers, risks of foreign
currency fluctuations relative to the U.S. dollar, import and export
restrictions and tariffs, difficulties and costs of staffing and managing
foreign operations, potentially adverse tax consequences, political
instability, the burdens of complying with multiple, potential conflicting
laws and the impact of business cycles and economic instability outside the
United States.
Government Regulation. The Company's operations are subject to extensive
government regulations pertaining to product manufacture, marketing and
distribution, and environmental, worker safety, export control and other
matters. Certain of the Company's technology and products, especially those
having nuclear energy or military applications, are subject to substantial
controls, including requirements to obtain governmental approvals and licenses
on their use, distribution, dissemination and export. Furthermore, the
diagnostic and other medical
12
<PAGE>
products that the Company may develop in the future are subject to stringent
regulation by the FDA and its foreign counterparts, and within the United
States by certain state agencies. Regulations by the FDA and its counterparts
impose significant restrictions on the development, testing, manufacture,
marketing, distribution and export of such products, including in most cases
the need for prior approval from such government agencies to manufacture, test
and distribute such products. Regulatory approvals for commercial distribution
of medical and diagnostic products generally require substantial preclinical
and human clinical testing to demonstrate their safety and effectiveness.
There can be no assurance that clinical data from such studies will
demonstrate the safety or efficacy of any product that the Company may in the
future develop or of products utilizing components that the Company may desire
to supply, nor could there be any assurance that the FDA or its foreign
counterparts will approve the commercial distribution of any such products in
a timely manner, if at all. Likewise, to the extent that other foreign or
domestic government approvals or permits are required for the manufacture,
export, import, distribution and marketing of the Company's products and
operations, there can be no assurance that the Company will be able to obtain
or maintain such approvals or permits or meet applicable requirements or
standards, or that such approvals or permits will not contain restrictions or
limitations that materially affect the sale and distribution of the Company's
products. The Company's failure to obtain such approvals in a timely manner,
or its failure to comply with applicable foreign or domestic laws, regulations
or policies, including those applicable to its operations and products, or
changes in such laws, regulations or policies, may have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Government Regulation."
Control by Existing Shareholders. Upon completion of this offering, the
directors, executive officers and principal shareholders of the Company and
their affiliates will, in the aggregate, assuming the exercise in full of all
options and warrants then outstanding, beneficially own approximately 79.5% of
the Company's outstanding Common Stock assuming no exercise of the over-
allotment 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 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.
Underwriter's Limited Underwriting Experience. The Underwriter has been
actively engaged in the securities brokerage and investment banking business
since 1994. However, the Underwriter has engaged in only limited underwriting
activities, and this offering is only the seventh public offering in which the
Underwriter has acted as the sole or managing Underwriter. There can be no
assurance that the Underwriter's limited experience as an underwriter of
public offerings will not adversely affect the proposed public offering of the
Units, Common Stock and Warrants, the subsequent development of a trading
market, if any, or the market for and liquidity of
13
<PAGE>
the Company's securities. Therefore, purchasers of the securities offered
hereby may suffer a lack of liquidity in their investment or a material
diminution of the value of their investment.
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. 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 three years after the initial closing date of this
offering. As a result of these restrictions, based on shares outstanding as of
July 31, 1997, on the date of this Prospectus, no shares other than the
800,000 Shares and 800,000 Warrants offered hereby will be eligible for public
sale, and no currently outstanding shares of Common Stock will be eligible for
public sale 12 months after the initial closing date of this offering. Shares
of Common Stock will become eligible for public sale at various times
thereafter. See "Description of Capital Stock--Registration Rights." The
Company intends to register on a registration statement on Form S-8, shortly
after the effective date of this offering, a total of approximately 2,160,707
shares of Common Stock granted under the Company's employee benefit plans. See
"Shares Eligible for Future Sale."
Use of Proceeds. Approximately 39% of the estimated net proceeds of this
offering are expected to be used to repay existing outstanding notes of the
Company issued in the Placement transaction, and approximately 28% of the
estimated net proceeds of this offering are expected to be used for working
capital and general corporate purposes. See "Use of Proceeds" and
"Capitalization--Recent Financing Transactions."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 800,000 Units offered
hereby are estimated to be approximately $3,556,000 ($4,122,000 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 39%
Facilities and capital expenditures(2)......... $ 550,000 16%
Research and development(3).................... $ 609,000 17%
Working capital and general corporate
purposes(4).................................... $1,000,000 28%
</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,
and purchase equipment, estimated at approximately $400,000. See
"Business--Manufacturing and Supply."
(3) The Company intends to use an estimated approximately $100,000 of the net
proceeds to further develop and select technology associated with the
diagnostic breath test market, an estimated approximately $459,000 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.
15
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of July 31, 1997, and as adjusted to give effect to the sale and
application of the 800,000 Units offered hereby at an assumed initial public
offering price of $5.90 per Unit and the issuance of Underwriter's Warrants to
purchase 80,000 Units, after deducting underwriting discounts and commissions
and other estimated expenses of the offering.
<TABLE>
<CAPTION>
JULY 31, 1997
----------------------
ACTUAL AS ADJUSTED(1)
------ --------------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt...................................... $ 509 $ 206
Long-term debt....................................... 961 56
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: 4,550,268 shares issued and outstanding
actual and 5,350,268 as adjusted.................. 1,129 4,685
Notes receivable from shareholders................. (349) (349)
Accumulated deficit................................ (1,586) (1,857)
------ ------
Total stockholders' equity......................... (806) 2,479
------ ------
Total capitalization............................. $ 664 $2,741
====== ======
</TABLE>
- --------
(1) The "As Adjusted" amount includes a charge to retained earnings and the
statement of operations of $271,000, representing the unamortized value of
the Warrants and discounts relating to the Placement (as defined below in
"--Recent Financing Transactions").
The foregoing table excludes (i) 689,809 shares of Common Stock issuable
upon exercise of outstanding options at a weighted average exercise price of
$.77 per share, (ii) 720,000 shares reserved for future grants under the
Company's employee benefit plans, (iii) 1,572,034 shares of Common Stock
issuable upon the exercise of outstanding warrants at a weighted average
exercise price of $2.47 per share, (iv) 160,000 shares of Common Stock
issuable upon the exercise of the Underwriter's Warrants and the Warrants
included therein, (v) 800,000 shares of Common Stock issuable upon exercise of
the Warrants offered hereby and (vi) options to purchase 120,000 shares of
Common Stock at an exercise price equal to 110% of the deemed initial public
offering price per Share.
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 681,936 shares (the "Placement Shares") of Common Stock to a small
number of sophisticated investors (the "Placement Investors"). Net proceeds
were approximately $1,230,000.
The Placement Notes as originally issued 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 became due and payable monthly from September 1996 through May 1997 and
(ii) principal and accrued but unpaid interest at 15% per annum became 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
16
<PAGE>
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 340,968 Placement Shares are exercisable in
whole at any time or in part at $0.1771 per share, and Placement Warrants to
purchase 340,968 Placement Shares are exercisable in whole at any time or in
part at $1.4165 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 448,709 additional Placement Shares (such warrants referred to
as "Default Warrants") at $0.01 per share, and can require the holders of
approximately 3,801,234 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 304,098 shares of Common Stock exercisable for a period
of five years at $0.5788 per share to an advisor.
On July 23, 1997, the terms of the Placement Notes were amended. Effective
August 1, 1997, interest is payable monthly at 15% per annum. If the Placement
Notes are not paid in full by April 1998, the remaining principal and interest
is payable in equal monthly installments from May 1998 through April 1999. In
connection with the amendment of the Placement Notes, the Company issued
warrants to the noteholders to purchase a total of 450,000 shares of Common
Stock, exercisable for a period of four years, at $5.80 per share.
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 $561,000 is being 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
$30,000 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."
17
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of July 31, 1997 was
$(1,928,000) or $(.42) 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 $933,000 and the unamortized
warrant discount of $189,000, divided by 4,550,268 shares of Common Stock
outstanding at July 31, 1997. After giving effect to the sale of the 800,000
shares of Common Stock and 800,000 Warrants included in the 800,000 Units
offered by the Company hereby at an assumed initial public offering price of
$5.90 per Unit and ascribing no value to the Warrants for this purpose, and
after deducting the estimated underwriting discounts and commissions and
offering expenses, the pro forma net tangible book value of the Company as of
July 31, 1997 would have been $2,184,000 or $.41 per share. This represents an
immediate increase in net tangible book value of $.83 per share to existing
shareholders and an immediate dilution of $5.49 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................ $5.90
Net tangible book value per share at July 31, 1997........... $(.42)
Increase in net tangible book value per share attributable to
new investors............................................... $ .83
Pro forma net tangible book value per share after the offering. .41
-----
Net tangible book value dilution per share to new investors.... $5.49
=====
</TABLE>
The following table summarizes, on a pro forma basis as of July 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 $5.90 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.. 4,550,268 85.0% $ 735,000 13.5% $0.16
New investors.......... 800,000 15.0% $4,720,000 86.5% $5.90
--------- ----- ---------- -----
Totals............. 5,350,268 100.0% $5,455,000 100.0%
========= ===== ========== =====
</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 July 31, 1997, there were (i) 689,809
shares of Common Stock issuable at a weighted average exercise price of $.77
per share upon exercise of options granted under the Company's employee
benefit plan, (ii) 1,572,034 shares of Common Stock issuable at a weighted
average exercise price of $2.47 per share upon the exercise of Placement
Warrants and warrants issued in conjunction with the Placement, (iii) 800,000
shares of Common Stock issuable at an exercise price of $5.80 upon exercise of
the Warrants, (iv) 160,000 shares of Common Stock issuable upon exercise of
the Underwriter's Warrants, and (v) 120,000 shares of Common Stock issuable at
an exercise price equal to 110% of the deemed initial public offering 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."
18
<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, 1996 and 1997, have been derived from audited
financial statements, including the balance sheets at April 30, 1996 and 1997
and the related statements of operations for each of the two years ended April
30, 1997 and notes thereto appearing elsewhere herein. The selected financial
data as of July 31, 1997 and for the three months ended July 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 operation for
the period. Operating results for the three months ended July 31, 1997 are not
necessarily indicative of the results that may be expected for the entire
year.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
APRIL 30, ENDED JULY 31,
--------------- ---------------
1996 1997 1996 1997
------ ------- ------- ------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $5,567 $ 4,539 $ 1,564 $1,535
Cost of revenues.......................... 3,835 3,616 1,123 1,179
------ ------- ------- ------
Gross margin............................ 1,732 923 441 356
Operating expenses:
Selling, general and administrative..... 902 1,183 266 267
Research and development................ 308 655 90 149
------ ------- ------- ------
1,210 1,838 356 416
------ ------- ------- ------
Operating income (loss)................... 522 (915) 85 (60)
Other expenses, net....................... (66) (395) (12) (129)
------ ------- ------- ------
Income (loss) before income taxes......... 456 (1,310) 73 (189)
Income tax expense........................ 175 53 30 1
------ ------- ------- ------
Net income (loss)......................... $ 281 $(1,363) $ 43 $ (190)
====== ======= ======= ======
Net income (loss) per share ............ $ .04 $ (.22) $ 0.01 $(0.03)
====== ======= ======= ======
Shares used in computing per share
information............................ 6,304 6,213 6,305 6,361
====== ======= ======= ======
Pro forma (loss) per share.............. (.16) (0.01)
======= ======
Shares used in computing pro forma
information............................ 6,595 6,601
======= ======
<CAPTION>
JULY
APRIL 30, 31,
--------------- -------
1996 1997 1997
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 116 $ 28 $ 87
Working capital (deficiency).............. (61) (441) (955)
Total assets.............................. 1,788 2,684 2,521
Long-term debt............................ 276 1,268 961
Accumulated deficit....................... (33) (1,396) (1,586)
Total shareholder's equity (deficit)...... 170 (610) (806)
</TABLE>
19
<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 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.
Consistent with the Company's historical experience, the Company's quarterly
results are expected to be materially affected by the level of orders received
from significant DZ users 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
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
20
<PAGE>
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. 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 and 1997. The Company cannot determine what the
results of operations from sales of DZ would have been in fiscal 1996 and 1997
had the Company not acquired Isoserve.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total net revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
APRIL 30, ENDED JULY 31,
------------ -----------------
1996 1997 1996 1997
----- ----- ------- -------
<S> <C> <C> <C> <C>
Net revenues.............. 100.0% 100.0 % 100.0 % 100.0 %
Cost of revenues.......... 68.9 79.7 71.8 76.8
----- ----- ------- -------
Gross margin............ 31.1 20.3 28.2 23.2
Operating expenses:
Selling, general and
administrative......... 16.2 26.1 17.0 17.4
Research and
development............ 5.5 14.4 5.8 9.7
----- ----- ------- -------
Total operating expenses.. 21.7 40.5 22.8 27.1
----- ----- ------- -------
Operating income (loss)... 9.4 (20.2) 5.4 (3.9)
Other expense, net........ (1.2) (8.7) (0.7) (8.4)
----- ----- ------- -------
Income (loss) before
income taxes............. 8.2 (28.9) 4.7 (12.3)
Income tax expense
(benefit)................ 3.2 (1.1) 2.0 0.1
----- ----- ------- -------
Net income (loss)......... 5.0% (30.0)% 2.7 % (12.4)%
===== ===== ======= =======
</TABLE>
Net Revenues. Net revenues decreased from $5.6 million in fiscal 1996 to
$4.5 million in fiscal 1997, a decrease of approximately $1.1 million or 20%.
The decrease was due primarily to reduced sales of energy products and to a
lesser extent cadmium which was offset in part by sales of stable isotope
labeled compounds ("SILCs"). The decrease in net revenues from energy products
of approximately $1.3 million was the result of reduced unit sales of
approximately 29%, which was offset in part by increases in average unit
prices during the period from direct sales to end users and for additional
processing performed by the Company. The decrease in revenues from sales of
energy products was also due in part to a significant order to an end user
being deferred from the fourth quarter of fiscal 1997 to the first quarter of
fiscal 1998, and as well due to the decision of GE, which is the Company's
largest customer, and a reseller of the Company's products, to minimize
inventory levels and delay purchases until the first and second quarters of
fiscal 1998. Net revenues from cadmium decreased approximately $346,000 on
reduced unit sales of approximately 7%. The decrease was due primarily to
reduced average unit prices as a result of market competition and the
availability of superior lasers which do not utilize cadmium. The Company
anticipates that future sales of cadmium will continue to decrease as the next
generation of lasers, which do not require the use of cadmium, enter the
market. Net revenues from SILCs increased from approximately $5,000 during
fiscal 1996 to approximately $632,000 during fiscal 1997. The increase was the
result of the Company's entry into the SILC market.
21
<PAGE>
Net revenues for the three months ended July 31, 1997 were $1.53 million
compared to $1.56 million for the three months ended July 31, 1996, a decrease
of approximately $29,000 or 2%. The decrease was due primarily to reduced
sales of cadmium which was offset in part by sales of energy products and
SILCs. The increase in net revenues from energy product sales of approximately
$41,000 was the result of increased unit sales of approximately 4% and
relatively level average unit prices during the period. There were no revenues
from cadmium during the three months ended July 31, 1997, which was a decrease
of approximately $317,000. The decrease was due primarily to the availability
of superior lasers which do not utilize cadmium. The Company anticipates that
future sales of cadmium will continue to decrease in comparison to fiscal 1997
as the next generation of lasers, which do not require the use of cadmium,
enters the market. Net revenues from SILCs increased approximately $247,000.
The increase was due to the Company's expansion into the SILC market.
International sales represented 13% of net revenues in fiscal 1996 and less
than 10% for the three months ended July 31, 1997 and fiscal 1997.
International sales were principally to Asia and are denominated in U.S.
dollars.
Gross Margin. Gross margin is affected by the volume of product sales,
product mix and average selling price. The Company's gross margin percentage
decreased to 20.3% of net revenues in fiscal 1997 from 31.1% in fiscal 1996,
due to increased raw material and processing costs associated with energy
related products, which was offset in part by increased per unit sales prices.
Gross margin percentage was also negatively affected by a charge of
approximately $50,000 to reduce the Company's cadmium inventory to reflect a
decline in its value and a decrease in the average unit sales price of cadmium
and unchanged average unit costs. The gross margin percentage was also
negatively affected by the increased proportion of net revenues associated
with SILCs. During fiscal 1997, approximately 14% of net revenues were
generated from sales of SILCs, which at present have lower gross margins than
energy and cadmium products. During fiscal 1996, less than 1% of net revenues
were generated from sales of SILCs.
The Company's gross margin percentage decreased to 23.2% in the three month
period ended July 31, 1997 from 28.2% in the comparable period of the prior
year. The decrease was due to increased processing costs associated with
energy products sold to end users and a reduction of revenues from sales of
cadmium, which were replaced by lower margin revenues from SILCs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $902,000, or 16.2% of net revenues, to
$1,183,000, or 26.1% of net revenues, for fiscal 1996 and 1997, respectively.
The increase was due to additional finance and administrative staffing and
increased professional costs. The Company anticipates selling, general and
administrative expenses will generally continue to increase in absolute
dollars, but may vary as a percentage of net revenues.
Selling, general and administrative expenses increased from $266,000, or
17.0% of net revenues, in the three month period ended July 31, 1996, to
$267,000, or 17.4% of net revenues in the three month period ended July 31,
1997. The dollar amounts and percentage of revenues remained materially
consistent from period to period.
Research and Development Expenses. Research and development increased from
$308,000, or 5.5% of revenues, to $655,000, or 14.4% of net revenues, for
fiscal 1996 and 1997, respectively. The increase was due to material and
outside consulting costs associated with the development of isotopically pure
silicon wafers and 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.
Research and development expenses increased from $90,000, or approximately
5.8% of revenues, in the three month period ended July 31, 1996, to $149,000
or approximately 9.7% of revenues, in the three month period ended July 31,
1997. The increase was due to increased staffing and consulting costs
associated with the development of isotopically pure silicon wafers and
increased staffing for product development. The Company believes that the
development and introduction of new product applications is critical to its
future success and
22
<PAGE>
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, amortization of
issuance costs and discounts on long and short term borrowings. Other expense,
net, increased from $66,000 in fiscal 1996 to $395,000 in fiscal 1997. Other
expense, net, increased from $12,000 for the three months ended July 31, 1996
to $129,000 for the three months ended July 31, 1997. The increase in both
periods was due to cash payments of interest on debt issued in fiscal 1997, as
well as amortization of issuance costs and discount related to warrants issued
in conjunction with the debt of approximately $210,000 and $80,000 for fiscal
1997 and the three months ended July 31,1997, respectively. See
"Capitalization--Recent Financing Transactions."
Income Taxes. The provision for income taxes was $175,000 and $53,000 for
fiscal 1996 and 1997, respectively. The Company's effective tax rate of 38%
for fiscal 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 fiscal
1997 and effective rate of 4% were the result of providing a valuation
allowance on deferred tax assets, as the Company believes realization of such
assets is uncertain. 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.
The provision for income taxes was $30,000 and $1,000 for the three months
ended July 31, 1996 and 1997, respectively. The Company's effective tax rate
of 41% for the three months ended July 31, 1996 differs from the statutory
rate due to state income taxes, net of the federal benefit. The provision for
income taxes of $1,000 for the three months ended July 31, 1997 was the result
of state taxes.
Extraordinary Item. As a result of the Placement Notes issued in the
Placement, the Company is amortizing to interest expense an aggregate discount
of $561,000 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 quarter, and as a
result the Company expects to have a significant net loss for the quarter in
which the offering occurs. As of July 31, 1997 and April 30, 1997,
approximately $271,000 and $351,000 of the discount remained to be amortized,
respectively. 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 noncash items, increases in accounts payable and
income taxes payable offset by increased inventory. Cash used by operating
activities $1,021,000 for fiscal 1997 was principally the result of the net
loss of $1,363,000 and increases of inventory, offset by adjustments for
noncash expense items and increases in accounts payable and accrued
liabilities. The Company generated cash flow from operating activities of
$373,000 for the three months ended July 31, 1997, principally from decreases
in inventory and increases in accounts payable and accrued liabilities, offset
by the net loss of $190,000 adjusted for noncash expense items and increases
in accounts receivable.
The Company's investing activities used cash of $7,000, $10,000 and $57,000
in fiscal 1996 and 1997 and the three months ended July 31, 1997,
respectively. Such investing activities were for the purchases of property and
equipment.
Financing activities used cash of $95,000 in fiscal 1996. Such financing
activities consisted of the issuance of notes which were more than offset by
principal payments on outstanding debt. Financing activities provided cash of
$943,000 in fiscal 1997, consisting of the issuance of notes and common stock
which were offset in part
23
<PAGE>
by payment of debt, debt issuance costs, and deferred offering costs, while
financing activities consisting of debt payments used cash of $257,000 during
the three months ended July 31, 1997.
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 April 30, 1997, the Company has paid cumulative
royalties of $338,000 to Isoserve. As of July 31, 1997, the Company has paid
cumulative royalties of $385,000 to Isoserve.
As of April 30, 1996 and 1997 the Company had negative working capital of
$61,000 and $441,000, respectively. These working capital deficiencies were
the result of the significant losses from operations in the Company's early
stages, and losses incurred in fiscal 1997 and 1998 to increase its market
position for DZ and develop new products associated with the DBT and
semiconductor market. 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 $1,230,000 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 also
intends to use a portion of the net proceeds of this offering to conduct an
engineering study to determine the feasibility of purchasing or building an
isotope production facility. If the Company decides to proceed with purchasing
or constructing such a facility, additional financing would be required. The
Company currently has no arrangements for loans or other financing relating to
any such construction. The unavailability of such financing could adversely
affect its ability to increase sales of new products. The additional funding,
if needed, may not be available on terms attractive to the Company, if at all.
While the timing and amount of capital requirements cannot be predicted with
certainty, the Company believes that cash on hand at July 31, 1997, together
with 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."
24
<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 year
ended April 30, 1997 and for the three months ended July 31, 1997,
approximately 30% and 64% of net revenues were from sales made directly to end
users, respectively.
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 has obtained an option, 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 and others to evaluate these isotopically engineered semiconductor
applications. The Company believes that if evaluations demonstrate the
commercial feasibility of one or more products, demand could emerge in certain
segments of the semiconductor market. There can be no assurance, however, that
these evaluations will demonstrate the commercial feasibility of any products,
that the Company will be able to commercialize any such products or that a
market will emerge for any such products.
The Company was formed in March 1992 and incorporated in California in March
1993 under the name A&R Materials, Inc. In September 1996, the Company changed
its name to Isonics Corporation. The Company's principal executive offices are
located at 4010 Moorpark Avenue, Suite 119, San Jose, California, 95117. Its
telephone number is (408) 260-0155.
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BACKGROUND
The following discussion utilizes several technical terms which are
explained in greater detail in the Glossary preceding the financial statements
at the end of this Prospectus.
An isotope is one of two or more species of the same chemical element which
differ from one another only in the number of neutrons in the nucleus of the
atom. The different number of neutrons can create significantly different
nuclear physics characteristics. To take advantage of some of these different
characteristics, it is usually necessary to increase ("enrich") or decrease
("deplete") the concentration of a particular isotope. There are over 280
naturally occurring stable isotopes of 83 elements. Some elements have only
one naturally occurring stable isotope, while others have many. Stable
isotopes are not radioactive.
Stable isotopes of an element differ in mass and diameter as well as several
nuclear properties, such as cross-section, spin and magnetic moment.
Differences in these properties can result in substantially different effects,
and some of these differences have the potential for commercial application.
For example, in ultra chemically pure crystals grown for electronics or
optical applications, isotopic impurities are the greatest contributor to
crystal disorder due to mass and diameter variations. Eliminating this
disorder by using a single enriched isotope results in increased thermal
conductivity and optical transparency, and thus in improved product
performance. Similarly, enriching or depleting isotopes based upon their
cross-sections allows materials to be engineered for applications in the
nuclear power industry, for controlled doping of some semiconductors and for
use as targets to produce radioisotopes for medicine and industry.
Stable isotopes of an element do not differ significantly in their chemical
behavior. Tagging of materials can be performed by varying the natural
abundance of isotopes to give a compound its own mass or nuclear magnetic
signature without changing its chemical properties. Though chemically
equivalent, the "tagged" or labeled compound is discernible from its unlabeled
twin through the use of several types of instruments called spectrometers.
COMPANY STRATEGY
The Company believes that its strength is the ability to bring the necessary
elements together to identify, evaluate, develop, engineer and successfully
commercialize applications for stable isotopes and value-added products
manufactured from stable isotopes. This is evidenced by management's
experience (at the Company and in prior employment) in developing DZ from a
cost prohibitive concept to a commercial product. DZ is now one of the largest
worldwide commercial applications of a stable isotope product.
The Company believes it has created a product development model that can
serve as a basis for current and future expansion efforts of the Company.
Isonics believes that coordination with the ultimate user to establish a
product specification and, with the Company's Russian partners, to establish a
cost effective product manufacturing process to meet that specification, has
the potential to make the Company a viable competitor. This coordination
process also includes initiating and managing development projects necessary
to adapt existing manufacturing methods to new missions, assembling and
coordinating necessary project-specific product and service suppliers,
obtaining appropriate regulatory approvals, and verifying product conformance
to stringent customer requirements.
To capitalize on the commercial opportunities that have been identified for
stable isotopes, the Company has adopted a business strategy designed to
maximize the value of its technologies, business development and management
resources, while attempting to minimize capital costs arising from addressing
multiple markets. This strategy involves:
. focusing on development of high value-added products which have a
perceived competitive advantage in large or growing markets;
. 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;
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. 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, stable isotope labeled compounds, cadmium and medical
imaging target materials), and other potential products that may, but will not
necessarily, generate revenues beginning in future years (such as electronic
materials and isotopically pure semiconductor fabrication materials,
diagnostic breath test substrates, manufactured labeled compounds).
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 26 of the approximately 95 BWRs in the world
including 23 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
1998, and that many 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 are demonstrating the commercial effectiveness of DZ
for PWRs.The Company believes that a market may develop for DZ use in PWRs,
due in part to the importance of environmental cracking mitigation. Initial
test results suggest that PWRs will probably use a smaller amount of DZ per
plant as compared to BWRs, but there are approximately 200 PWRs in the world.
At present prices, the Company estimates the potential market for sales to
nuclear power plants to be between approximately $50-$70 million. There can be
no assurance that a market will develop for DZ sales to PWRs, that the Company
will be able to sell DZ to all such potential customers, or that selling
prices of DZ will not decrease.
Sales of DZ are presently the Company's largest source of revenues,
representing approximately 88%, 89% and 81% of net revenues for fiscal 1996
and 1997 and for the three months ended July 31, 1997, respectively. In
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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 direct end-users, and for the year ended April 30, 1997 and for the three
months ended July 31, 1997, approximately 30% and 64% of net revenues,
respectively, were from end-users. 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 12% in fiscal 1996 and
less than 10% of net revenues in fiscal 1997 and the three months ended July
31, 1997. 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. Future
sales will likely decrease rapidly as a new solid state laser, capable of
higher power and generally improved performance, is already commercially
available.
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. Sales of SILCs represented approximately 14% and 19% of
net revenues in fiscal 1997 and for the three months ended July 31, 1997,
respectively, and were insignificant in fiscal 1996. SILCs allow researchers
to probe the metabolism of living systems, determine the structures of
important biological compounds, design new drugs and measure extremely low
levels of environmental toxins. The Company believes that greater availability
of stable isotopes and advances in instrumentation (improvements in
sensitivity and reduced cost) will promote increased demand for SILCs.
Examples of existing and emerging applications include:
. Metabolic studies. Increasingly, drug studies are performed with labeled
drugs to facilitate research on metabolism, distribution, mode of action
and elimination. The FDA may eventually mandate the labeling of all new
drugs for investigational use during some or all phases of pre-clinical
and clinical evaluations of these drugs, but there can be no assurance
that the FDA will make this mandate in the near future, if at all.
. Rational drug design. Nuclear magnetic resonance ("NMR") spectroscopy is
being developed as a tool to determine the structure of larger and larger
molecules in solution, many of which cannot be analyzed by the more
traditional x-ray crystallography techniques. The Company believes that
this new NMR sensitivity combined with the sophisticated isotopically
labeled cell growth media needed to produce the labeled human proteins
will require an increasing supply of the stable isotopes of carbon,
nitrogen and deuterium.
. Product tagging and stewardship applications. The source of materials and
explosives may be identified, without changing their chemistry, by
tagging with the stable isotopes of carbon, nitrogen, oxygen and
hydrogen. Several other approaches are currently being implemented, and
other technologies have also been proposed. These other approaches
involve the addition of extraneous materials such as dyes, exotic
chemical compounds or radioactive compounds. The Company believes that
adding such extraneous
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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 by
its customers 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 with several stable isotope producers. In
the near term, the Company will continue this strategy of supplying "building
block" forms of stable isotopes while at the same time increasing its
production capacity both at its alliance producers and Company facilities. See
"--Manufacturing and Supply."
In addition to providing additional revenue potential and possibly higher
margins, the Company believes that developing complex SILC synthesis
capability would be synergistic with any Company efforts to develop the breath
test diagnostics product area, and would also aid in early identification of
future stable isotope business opportunities.
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.
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The following table identifies additional 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>
/13/ C-Urea Helicobacter pylori
/13/ C-Triolein Fat malabsorption
/13/ C-Galactose Liver function
/13/ C-Xylose Small Bowel Bacterial Overgrowth (the
major cause of chronic diarrhea)
/13/ C-Aminopyrine Liver function
/13/ C-Caffeine Liver function
Cyclosporin dosage following
/13/ C-Erythromycin transplantation
Genotype of MSUD (Maple Syrup Urine
/13/ C-Valine Disease)
/13/ C-Phenylalanine Genotype of PKU (Phenylketonuria)
/13/ C-Sucrose Sucrose malabsorption (sucrase-isomaltase
complex deficiency)
/13/ C-Starch Pancreas amylase function
/13/ 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.
Medical Imaging and Therapy Materials
Stable isotopes of thallium, zinc, cadmium, xenon, oxygen, strontium and
many others are routinely used in a variety of medical imaging and therapy
applications. In their enriched form or converted to a specific radioactive
isotope in a cyclotron or nuclear reactor, these materials are incorporated in
chemical compounds which concentrate in specific parts of the human body upon
injection, inhalation or ingestion. Measuring the distribution of the
materials in the patient can assist physicians in diagnosing disease states
and developing appropriate treatment therapies, some of which incorporate
radioactive materials produced from stable isotopes.
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.
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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 estimated
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 would be harder than any other presently-known material. Studies
conducted at Lawrence Berkeley Laboratory and the Max Planck Institute on
isotopically pure germanium have shown thermal conductivity improvements
similar to those found in isotopically pure carbon-12 diamonds.
The Company believes that these and other improved properties might be found
in other isotopically pure materials and may result in commercial
opportunities, particularly in the area of semiconductors. According to the
Semiconductor Industry Association, the 1995 market for silicon wafers and
other semiconductor substrates was approximately $6 billion. This market is
projected to grow 50% by the year 1999 to over $9 billion. Improvement in the
thermal conductivity of these materials is important since as the feature size
continuously decreases, the power density increases. As power density
increases, more heat is generated per unit volume, causing device operating
temperature to rise. The semiconductor industry is moving toward lower
operating voltages and is using mechanical means to remove bulk heat, but the
Company believes that greater heat dissipation on the micro scale will become
even more important to the industry in the future. Better thermal conductivity
directly affects heat removal capability and indirectly improves device speed.
As the industry moves toward multi-layer devices and true 3-D chips, the
ability to remove heat will be a material consideration for the semiconductor
industry.
Natural silicon contains three isotopes, silicon-28 (92%), silicon-29 (5%)
and silicon-30 (3%). An otherwise perfect crystal of silicon will contain
imperfections in the form of isotopes of different mass, with the density of
these imperfections amounting to nearly 8%. This far exceeds the doping levels
and density of imperfections ordinarily found in device-quality crystals. The
Company believes that removal of the minor isotopes should result in
substantially improved thermal conductivity.
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 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,
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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 delivered to Yale specimens of isotopically pure silicon-28 meeting
certain specifications. 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, when finalized, 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
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 chemical
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."
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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 may 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.
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
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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.
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
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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.
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.
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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 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
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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.
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.
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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 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
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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
predominantly 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 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."
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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 July 31, 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 1998. 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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The members of the Board of Directors ("Board") and the executive officers
of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James E. Alexander 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 43 Vice President, Medical, Research & Diagnostics
Paul J. Catuna 33 Vice President, Finance, Chief Financial Officer, Director of
Administration and Secretary
Lindsay A. 45 Director
Gardner(1)(2)
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.
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Mr. Catuna joined the Company in July 1996 as Chief Financial Officer and
Director of Administration. From January 1994 to July 1996, Mr. Catuna was
employed at Deloitte & Touche LLP, an international accounting and consulting
firm, where he most recently served as an audit senior manager. From January
1988 to January 1994, Mr. Catuna worked for Grant Thornton LLP, an
international accounting and consulting firm, where he most recently served as
an audit manager. Mr. Catuna received his bachelors degree in Business
Administration-Accounting from California State University Fresno, and is a
certified public accountant.
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.
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.
42
<PAGE>
John Engdahl, Ph.D. Dr. Engdahl is currently the director of Advanced
Research for Siemans Nuclear Medicine. Dr. Engdahl serves as President of
Applied Nuclear Imaging, Inc., a consulting company, which he founded in 1996.
Since 1982, Dr. Engdahl has worked in nuclear medicine in design of equipment
and image processing applications. Dr. Engdahl was Vice President of Clinical
Science at Sopha Medical Systems from 1990 to 1996. Dr. Engdahl was employed
as radiologic physicist in nuclear medicine at Henry Ford Hospital from 1987
to 1990, and from 1982 to 1987 he was employed at GE Medical Systems as
manager of product development for GE's nuclear imaging business. Dr. Engdahl
chaired the National Electrical 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, 1997 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 1997 (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 .... 1997 $174,000 $ -- $ -- --
President and Chief
Executive Officer
Boris Rubizhevsky...... 1997 $147,000 $ -- $ -- --
Senior Vice President
Daniel J. Grady........ 1997 $107,000 $ -- $ -- --
Vice President,
Medical, Research and
Diagnostics
</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.
43
<PAGE>
In September 1996, Mr. Alexander and Mr. Rubizhevsky each exercised his
option to acquire 259,175 shares at $0.64 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 $165,000. The principal bears
interest at the minimum applicable federal rate, which is payable in annual
installments over the term of the note. All accrued and unpaid interest and
all principal is due five years after the exercise date. The purchased shares
have been pledged to secure repayment of the loan. Upon a sale of any shares,
a portion of the net proceeds equal to the exercise price per share of the
shares sold will be used to repay the loan. See "--Certain Transactions."
The following table sets forth certain information with respect to the
exercise of options to purchase Common Stock during fiscal 1997, and the
unexercised options, if any, and the value thereof at that date, for each of
the Named Persons.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
SHARES VALUE OPTIONS AT IN-THE-MONEY
ACQUIRED ON REALIZED FY- OPTIONS AT
NAME EXERCISE (#)(1) ($)(1) END (#)(2) FY-END ($)(2)
- ---- --------------- -------- ----------- -------------
<S> <C> <C> <C> <C>
James E. Alexander........... 259,175 $150,000 $ 0 0
Boris Rubizhevsky............ 259,175 $150,000 $ 0 0
Daniel J. Grady.............. 0 0 207,340 $606,000
</TABLE>
- --------
(1) Represents the difference between the deemed fair market value of the
Common Stock on the date of exercise and the exercise price of $.6366 per
share.
(2) Based on the deemed fair market value of the Common Stock at fiscal year
end (April 30, 1997) of $3.50 per share, as determined by the Company's
Board of Directors, less the exercise price payable for such shares.
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. Under the agreements,
the officer is entitled to receive executive compensation up to 50% of the
officer's annual salary, as approved by the Company pursuant to such Executive
Compensation Plan as the Company may approve. 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, 25% of the officer's
annual prevailing salary, paid upon termination, 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 120,000 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
44
<PAGE>
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 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.
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 570,000 shares of Common
Stock and 150,000 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 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 Plans. 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.
45
<PAGE>
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 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.
46
<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 99,393 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.
On July 23, 1997, the terms of the Placement Notes were amended. Effective
August 1, 1997, interest is payable monthly at 15% per annum. If the notes are
not paid in full by April 1998, the remaining principal and interest is
payable in equal monthly installment from May 1998 through April 1999. In
connection with the amendment of the notes, the Company issued warrants to the
noteholders to purchase a total of 450,000 shares of Common Stock, exercisable
for a period of four years, at $5.80 per share. Of these, warrants to acquire
196,815 shares were issued to Lindsay Gardner, one employee of the Company and
four affiliates of directors or officers of the Company. DayStar Partners
received 72,464 of the warrants issued in connection with the amendment. On
July 31, 1997, two employees purchased $200,000 of Placement Notes that were
previously issued to unrelated third parties. 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 259,175
and 259,175 shares, respectively, of Common Stock at an exercise price of
$0.64 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 1,805,587 and 1,477,296 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.
47
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Common Stock as of July 31, 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).......... 2,155,764 46.4 2,155,764 39.6
Boris Rubizhevsky(3)(8)(9)......... 1,919,201 41.4 1,919,201 35.3
Jacques Delente(4)................. 355,401 7.6 355,401 6.5
Lindsay Gardner(5)................. 263,785 5.7 263,785 4.8
Larry Wells(6)..................... 171,857 3.6 171,857 3.1
Daniel J. Grady(11)................ 207,340 4.4 207,340 3.7
All executive officers and
directors as a group (7
persons)(7)........................ 4,994,399 91.2 4,994,399 79.5
</TABLE>
- --------
(1) The persons named in the table have sole voting and sole investment power
with respect to all shares beneficially owned, subject to community
property laws where applicable.
(2) Assumes that the Underwriters' over-allotment option to purchase up to
120,000 Shares and 120,000 Warrants included in 120,000 Units from the
Company is not exercised. See "Underwriting."
(3) Includes 164,144 shares of Common Stock subject to a repurchase right in
favor of the Company.
(4) Includes 217,707 shares of Common Stock subject to a repurchase right in
favor of the Company, and warrants to purchase 122,854 shares of Common
Stock issued in connection with the Placement.
(5) Includes warrants to purchase 91,003 shares of Common Stock issued in
connection with the Placement.
(6) Includes 171,857 shares issuable upon the exercise of Placement Warrants
held by an entity with which Mr. Wells is affiliated.
(7) Includes 328,288 shares of Common Stock subject to a repurchase right in
favor of the Company, options to purchase 483,794 shares of Common Stock,
and warrants to purchase 444,865 shares of Common Stock issued in
connection with the Placement and 91,729 shares of Common Stock held by
Mr. Rubizhevsky's wife.
(8) Includes 91,729 shares of Common Stock held by Mr. Rubizhevsky's wife.
(9) Includes 91,002 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 91,002 shares issuable upon the exercise of Placement Warrants
held by the brother-in-law, mother-in-law and father-in-law of Mr.
Alexander.
(11) Includes 207,340 shares issuable upon the exercise of fully exercisable
stock options.
48
<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 July 31, 1997,
there were outstanding 4,550,268 shares of Common Stock held of record by
seven shareholders and options and warrants to purchase 2,261,843 shares of
Common Stock, which included options to purchase 689,809 shares of Common
Stock issued under the Company's employee benefit plans and warrants to
purchase 1,572,034 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.
OTHER SECURITIES
Underwriter's Warrants
In connection with this offering, the Company has authorized the issuance to
the Underwriter of the Underwriter's Warrants and has reserved 160,000 shares
of Common Stock for issuance upon exercise of the Underwriter's Warrants and
the Warrants issuable upon exercise of the Underwriter's Warrants. Each
Underwriter's Warrant will entitle the holder to purchase one share of Common
Stock at a price of $9.57 per
49
<PAGE>
share (assuming a public offering price of $5.80 per share of Common Stock),
which is 165% of the initial public offering price per Share, and, upon
payment of $.165, which is 165% of the initial public offering price per
Warrant of the Warrants (assuming the effective public offering price for the
Warrants is $.10) to acquire one Warrant. Each such Warrant will entitle the
holder to purchase one share of Common Stock at a price of $5.80 per share,
which is the same exercise price as that of the Warrants to be sold to the
public in this offering. The Underwriter's Warrants will, subject to certain
conditions, be exercisable at any time commencing one year after the date of
this Prospectus until the expiration of five years from the date of this
Prospectus. See "Underwriting."
The Underwriter'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 an
Underwriter's Warrant, and the holder thereof will not possess any rights as a
shareholder of the Company until such holder exercises the Underwriter's
Warrants. The other terms of the Underwriter's Warrants are similar in
material respects to the Warrants, except that the Underwriter's Warrants will
not be publicly tradeable and will not be redeemable by the Company.
The foregoing discussion of certain terms and provisions of the
Underwriter's Warrants is qualified in its entirety by reference to the
detailed provisions of the Underwriter's Warrant Agreement, the form of which
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
Units
Each Unit consists of one share of Common Stock and one Warrant, each
Warrant entitling the holder thereof to purchase one share of Common Stock.
The Common Stock and Warrants comprising the Units will be immediately
separately transferable at the sole discretion of the Underwriter.
Class A 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, the Underwriter 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.
The Company has authorized the issuance of Warrants to purchase an aggregate
of 800,000 shares of Common Stock (exclusive of up to 120,000 Warrants
issuable upon exercise of the Underwriter's over-allotment option and 80,000
Warrants underlying the Underwriter's Warrants), and has reserved an
equivalent number of shares for issuance upon exercise of such Warrants. Each
Warrant entitles the registered holder thereof to purchase one share of Common
Stock at a price of $5.80, subject to adjustment, for three years commencing
one year from the date of this Prospectus. After expiration, the Warrants will
be void and of no value. The Warrants underlying the Underwriter's Warrants
have the same terms and conditions as the Warrants to be sold to the public in
this offering, except that they are not subject to redemption by the Company
until the Underwriter's Warrants have been exercised and the underlying
Warrants are outstanding.
The Company may redeem the Warrants commencing , 1999 (18 months from
the date of the Prospectus), or earlier with the consent of the Underwriter,
at a price of $.10 per Warrant, on not less than 30 days' prior written
notice, if the average of the last reported bid and asked prices of the Common
Stock (if the Common Stock is then traded in the over-the-counter market) or
the last reported sale price of the Common Stock (if the Common Stock is then
traded on a national securities exchange or the Nasdaq National Market or
SmallCap Market) has been at least 250% ($14.50 per share) of the current
Warrant exercise price, subject to adjustment, for at least 20 consecutive
trading days ending within three days prior to the date on which notice of
redemption is given.
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The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price and number of shares issuable
upon exercise, on the occurrence of certain events, such as stock dividends,
stock splits and recapitalizations. The Company is not required to issue
fractional shares. In lieu of the issuance of such fractional shares, the
Company will pay cash to such holders of the Warrants. In computing the cash
payable to such holders, a share of Common Stock will be valued at its price
immediately prior to the close of business on the expiration date. The holder
of a Warrant will not possess any rights as a shareholder of the Company
unless such shareholder exercises such Warrant.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion sets forth certain federal income tax consequences,
under current law, relating to the purchase and ownership of the Units, the
Common Stock and the Warrants constituting the Units. The Company has not
requested and does not intend to request a ruling from the Internal Revenue
Service or a tax opinion from its counsel on any tax aspect of the offering.
This tax discussion does not purport to be a complete analysis or list of all
potential federal income tax consequences of the purchase, ownership and sale
of the Common Stock or Warrants. The discussion does not address the tax
treatment for certain unique taxpayers, such as insurance companies, tax
exempt organizations, financial institutions, and dealers in securities which
may be subject to special rules not discussed herein. This discussion presents
no analysis of the tax attributes of the Company either before or after this
offering. PROSPECTIVE PURCHASERS OF THE UNITS, 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 18 months 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 20%, while certain ordinary income is currently
taxed at a maximum rate of 39.6%. Section 1202 of the Code in certain
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circumstances allows certain noncorporate taxpayers to exclude from income
one-half of the gain (up to certain limits) from the sale or exchange of
"qualified small business stock" held for more than five years. In addition,
25% of such gain (up to certain limits) is excluded for alternative minimum
tax purposes. In order for stock to be "qualified small business stock," the
issuer of the stock must meet certain requirements, some of which apply to the
period after the stock is issued. Consequently, it is unclear whether the
Common Stock acquired upon exercise of a Warrant will qualify as qualified
small business stock.
Under Section 305 of the Code, certain actual or constructive distributions
of stock (including warrants to purchase stock) with respect to such stock (or
warrants) may be taxable to the shareholders (or Warrant holders) of the
Company. Adjustments in the exercise price of the Warrants, or the number of
shares purchasable upon exercise of the Warrants, in each case made pursuant
to the anti-dilution provisions of the Warrants, among other things, may
result in a distribution which is taxable as a dividend to the holders of
Warrants. Distributions may be taxed as ordinary dividend income, return of
capital, or gain from the sale or exchange of stock, depending on the earnings
and profits of the Company and the tax basis of each of its shareholders or
Warrant holders.
A Warrant that expires unexercised will be deemed to have been sold or
exchanged for no consideration on the expiration date. The holder of an
expired Warrant would recognize loss to the extent of the holder's basis in
that Warrant. Any loss to the holder of an expired Warrant will be a capital
loss if the Warrant was held as a capital asset and if the Common Stock
underlying the Warrant would have been a capital asset had such Warrant been
exercised. Any capital loss will be long-term if the holding period of the
Warrant exceeds one year when it expires. The use of capital losses to offset
ordinary income is strictly limited for noncorporate shareholders and
prohibited for corporate shareholders.
No gain or loss will be recognized by the Company upon the acquisition,
exercise or expiration of any Warrants.
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 Underwriter's Warrants (including shares
obtainable upon exercise of the Warrants included therein). The holders of the
Underwriter'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 Underwriter's 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
Underwriter's Warrants, and the second registration is at the expense of the
Underwriter.
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.
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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 anticipates that the Units, Common Stock and Warrants will be
quoted on the OTC Electronic Bulletin Board under the trading symbols "ISNU,"
"ISNX" and "ISNXW," respectively.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock.
Future sales of substantial amounts of Common Stock in the public market could
adversely affect market prices prevailing from time to time.
Upon completion of this offering, and assuming no exercises of options or
warrants after July 31, 1997, the Company will have outstanding approximately
5,350,268 shares of Common Stock. Of these shares, the 800,000 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
4,550,268 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 three years from the initial closing of this offering (the
"Lock-up Period"), subject to certain exceptions, without the consent of the
Underwriter.
As a result of the foregoing lock-up agreements and securities law
restrictions, assuming no exercises of options or warrants after July 31,
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). Without giving effect to the foregoing lock-up agreements, of the
4,550,268 shares that are outstanding on the date of this Prospectus, 251,976
shares would be eligible for resale, pursuant to Rule 144 or Rule 701 without
volume restriction and the remaining 3,779,942 shares would become eligible
for resale subject to the volume limit restrictions of Rule 144 or Rule 701,
beginning 90 days from the closing of this offering. In addition to such
shares of Common Stock outstanding on July 31, 1997, 1,572,034 shares of
Common Stock issuable upon exercise of the warrants issued in connection with
the Placement and Underwriter'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 2,160,707 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 for shares held
by certain directors, officers and employees of the Company that were acquired
upon the exercise of such options, 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.
Under the revised Rule 144, 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 5,350,268 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.
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UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
by and between the Company and the Underwriter (the "Underwriting Agreement"),
the Underwriter has agreed to purchase from the Company, and the Company has
agreed to sell to the Underwriter, an aggregate of 800,000 Units, at the
initial public offering price less the underwriting discounts and commissions
set forth on the cover page of this Prospectus.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of the Units is subject to certain conditions
precedent, and that the Underwriter will purchase all of the Units offered
hereby on a "firm commitment" basis if any are purchased.
The Underwriter has advised the Company that it proposes initially to offer
the Units directly to the public at the initial 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 Unit. After the initial
public offering, the public offering price and concession may be changed.
The Company has granted to the Underwriter an option, exercisable during the
45-day period after the date of this Prospectus, to purchase up to an
aggregate of 120,000 additional Units at the initial per Unit public offering
price less the Underwriting discounts and commissions set forth on the cover
page of this Prospectus. The Underwriter may exercise this option only to
cover over-allotments, if any, made in connection with the sale of the Units
offered hereby.
The Company has agreed to pay to the Underwriter a non-accountable expense
allowance equal to 3% of the gross proceeds of this offering, including any
Units purchased pursuant to the Underwriter's over-allotment option, no
portion of which has been paid to date.
The Company and the Underwriter have agreed to indemnify each other against,
or to contribute to losses arising out of, certain liabilities in connection
with this offering, including liabilities under the Securities Act.
The Company and all of its current shareholders have agreed not to offer,
sell, contract to sell or otherwise dispose of any shares of Common Stock or
rights to acquire shares of Common Stock subject to certain exceptions without
the prior written consent of the Underwriter for a period of three years after
the date of this Prospectus.
The Company has agreed to sell to the Underwriter, for an aggregate price of
$80, the Underwriter's Warrants to purchase up to 80,000 shares of Common
Stock and 80,000 Warrants. Each Underwriter's Warrant will be exercisable, for
a four-year period commencing one year after the date of the Prospectus, to
purchase one share of Common Stock at a price of $9.57, which is 165% of the
deemed initial public offering price per share, and upon payment of $.165,
which is 165% of the deemed initial public offering price per Warrant, to
acquire one Warrant, which is exercisable to purchase one share of Common
Stock at a price of $5.80, which is the same exercise price as that of the
Warrants sold in this offering. The Warrants underlying the Underwriter's
Warrants have the same terms and conditions as the Warrants to be sold to the
public in this offering, except that they are not subject to redemption by the
Company until the Underwriter's Warrants have been exercised and the
underlying Warrants are outstanding. The Underwriter's Warrants may not be
sold, assigned, transferred, pledged or hypothecated for a period of one year
from the date of the Prospectus except to its officers, directors or
principals.
The Company has agreed to file, during the four-year period beginning one
year from the date of the Prospectus, on one occasion, at the request of the
holders of a majority of the Underwriter's Warrants and the underlying shares
of Common Stock and Warrants, and to use its best efforts to cause to become
effective, a post-effective amendment to the Registration Statement or a new
registration statement under the Securities Act, as required to permit the
public sale of the shares of Common Stock and Warrants issued or issuable upon
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exercise of the Underwriter's Warrants. In addition, the Company has agreed to
give advance notice to holders of the Underwriter's Warrants of its intention
to file certain registration statements commencing one year and ending five
years after the date of the Prospectus, and in such case, holders of such
Underwriter's Warrants or underlying shares of Common Stock and Warrants shall
have the right to require the Company to include all or part of such shares of
Common Stock and Warrants underlying such Underwriter's Warrants in such
registration statement at the Company's expense.
For the life of the Underwriter's Warrants the holders thereof are given the
opportunity to profit from a rise in the market price of the shares of Common
Stock and Warrants, which may result in a dilution of the interests of other
shareholders. As a result, the Company may find it more difficult to raise
additional equity capital if it should be needed for the business of the
Company while the Underwriter's Warrants are outstanding. The holders of the
Underwriter's Warrants might be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain additional equity capital
or terms more favorable to the Company than those provided by the
Underwriter's Warrants. Any profit realized on the sale of the shares of
Common Stock issuable upon the exercise of the Underwriter's Warrants may be
deemed additional underwriting compensation.
The Underwriting Agreement provides that, for a period of three years from
the date of the Prospectus, the Company will nominate a person selected by the
Underwriter, and reasonably acceptable to the Company, for election to serve
as a member of the Company's Board of Directors.
Upon the exercise of the Warrants, the Company will pay the Underwriter a
fee of 4% of the aggregate exercise price if (i) the market price of its
Common Stock on the date the Warrant is exercised is greater than the then
exercise price of the Warrants; (ii) the exercise of the Warrant was solicited
by the Underwriter and the customer states in writing that the transaction was
solicited and so designates in writing; (iii) the Warrants are not held in a
discretionary account; (iv) disclosure of compensation arrangements was made
both at the time of the offering and at the time of exercise of the Warrants;
and (v) the solicitation of exercise of the Warrant was not in violation of
Regulation M promulgated under the Exchange Act.
The Commission has recently adopted Regulation M to replace Rule 10b-6 and
certain other rules promulgated under the Exchange Act. Regulation M may
prohibit the Underwriter from engaging in any market making activities with
regard to the Company's securities for the period from five business days (or
such other applicable period as Regulation M may provide) prior to any
solicitation by the Underwriter of the exercise of Warrants until the later of
the termination of such solicitation activity or the termination (by waiver or
otherwise) of any right that the Underwriter may have to receive a fee for the
exercise of Warrants following such solicitation. As a result, the Underwriter
may be unable to provide a market for the Company's securities during certain
periods while the Warrants are exercisable.
Prior to this offering there has been no public trading market for the
Company's securities. The initial public offering price of the Units and the
exercise price and the term of the Warrants have been determined by
negotiation between the Company and the Underwriter. Factors considered in
determining the initial public offering price, in addition to prevailing
market conditions, included the history of and prospects for the industry in
which the Company competes, and assessment of the Company's management, the
prospects of the Company, its capital structure and such other factors as were
deemed relevant.
The foregoing includes a summary of all of the material terms of the
Underwriting Agreement and does not purport to be complete. Reference is made
to the copy of the Underwriting Agreement that is on file as an exhibit to the
Registration Statement of which this Prospectus is a part.
The Underwriter has informed the Company that no sales will be made to any
account over which the Underwriter exercises discretionary authority.
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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. Fenwick & West LLP holds a warrant to purchase 20,000 shares of
Common Stock. Certain legal matters in connection with this offering will be
passed upon for the Underwriter by Singer Zamansky LLP, New York, New York.
EXPERTS
The balance sheets as of April 30, 1996 and 1997, and the statements of
operations, shareholders' (deficit) equity, and cash flows for the years then
ended, have been audited by Grant Thornton LLP, independent certified public
accountants, as set forth in their report thereon appearing elsewhere herein
and in the Registration Statement, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act with respect to the shares of Common Stock and
Warrants offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and its exhibits. For
further information with respect to the Company and the Units, Common Stock
and Warrants offered hereby, reference is made to the Registration Statement
and exhibits. Statements contained in this Prospectus regarding the contents
of any contract or any other document to which reference is made are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement, including the exhibits
thereto, may be inspected without charge at the Commission's principal office
in Washington, D.C., and copies of all or any part thereof may be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of certain prescribed rates.
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GLOSSARY OF TERMS
CELL GROWTH MEDIA: Substances used in a gel or solution that promote the
growth and multiplication of cells from simple or more complex organisms.
Organisms grown (fed) cell growth media labeled with enriched stable isotopes
result in new and more complex stable isotope labeled compounds.
CGMP (CURRENT GOOD MANUFACTURING PRACTICE): Part of quality assurance aimed at
ensuring that products are consistently manufactured to a quality appropriate
to their intended use; it incorporates manufacturing, engineering, quality
control and quality assurance activities.
CROSS SECTION: A fundamental property of the nucleus of an isotope, cross
section is a measure of the probability of interaction of the nucleus with
another nucleus, particle or photon.
DEPLETED STABLE ISOTOPE: An isotope of an element whose concentration or
"abundance" has been decreased with respect to that of the naturally occurring
element.
DEPLETED ZINC (DZ): Zinc oxide in which the stable isotope Zn-64 has been
depleted for application in nuclear power plants for corrosion control and the
mitigation of radiation fields.
DOPING: An impurity, such as boron, is added in small amounts to a pure
semiconductor to alter its conductive properties.
ENRICHED STABLE ISOTOPE: An isotope of an element whose concentration or
"abundance" has been increased with respect to that of the naturally occurring
element.
HIGH PURITY MATERIALS, CHEMICAL: Materials in which the relevant chemical
compound makes up more than 99.99% of the material.
H.PYLORI (Helicobacter pylori): A pathogenic bacterium found in the human
stomach, responsible for most peptic ulcers and some stomach cancers.
ISOTOPE: One of two or more naturally occurring species of atom having the
same atomic number, hence constituting the same element, but differing in mass
number. As atomic number is equivalent to the number of protons in the
nucleus, and mass number is the sum total of the protons plus the neutrons in
the nucleus, isotopes of the same element differ from one another only in the
number of neutrons in their nuclei. Isotopes may be radioactive or stable.
Isonics deals only with stable isotopes.
ISOTOPICALLY PURE MATERIALS: Materials in which a particular isotope has been
enriched to 99.5% abundance or greater in an element or in a compound.
ISOTOPICALLY ENGINEERED MATERIALS (IEM): Materials in which the natural
abundance of isotopes of constituent elements has been substantially altered
to enhance performance characteristics or provide unique properties.
MAGNETIC MOMENT: A fundamental property of the nucleus of an isotope, magnetic
moment is a vector quantity related to the intrinsic spin of a charged
particle. It is unique to each isotope and can be used to describe how a
spinning, charged particle will interact with an externally imposed magnetic
field (as in an NMR instrument or imaging scanner).
MASS SPECTROMETER: An apparatus that converts molecules and atoms into ions
and then separates the ions according to their mass-to-charge ratio. Mass
spectrometers are used to identify atoms and isotopes, and determine the
chemical composition of a sample.
NUCLEAR MAGNETIC RESONANCE (NMR): A phenomenon exhibited by a large number of
atomic nuclei, in which nuclei in a static magnetic field absorb energy from a
radio-frequency field at certain characteristic frequencies.
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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.
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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 Stockholders' 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, 1996 and 1997, 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, 1996 and 1997, 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
August 13, 1997
F-2
<PAGE>
ISONICS CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30,
--------------- JULY 31,
1996 1997 1997
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 116 $ 28 $ 87
Accounts receivable............................. 2 4 47
Note receivable from shareholder................ 33 -- --
Inventories..................................... 1,006 1,539 1,226
Prepaid expenses................................ 10 14 51
Deferred income taxes........................... 114 -- --
------ ------- ------
Total current assets.......................... 1,281 1,585 1,411
PROPERTY AND EQUIPMENT, net....................... 81 70 123
GOODWILL (net of accumulated amortization of $79,
$157 and $177)................................... 393 315 295
NOTES RECEIVABLE FROM SHAREHOLDERS................ -- 41 44
OTHER ASSETS...................................... 4 11 10
DEFERRED OFFERING COSTS........................... -- 556 556
DEBT ISSUANCE COSTS (net of accumulated amortiza-
tion of $61 and $85)............................. -- 106 82
DEFERRED INCOME TAXES............................. 29 -- --
------ ------- ------
TOTAL............................................. $1,788 $ 2,684 $2,521
====== ======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt............... $ 176 $ 403 $ 509
Accounts payable................................ 792 1,105 1,298
Accrued liabilities............................. 285 518 559
Income taxes payable............................ 89 -- --
------ ------- ------
Total current liabilities..................... 1,342 2,026 2,366
LONG-TERM DEBT.................................... 276 1,268 961
COMMITMENTS....................................... -- -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Class A Preferred Stock--no par value; 100,000
shares authorized April 1996; 10,000,000, at
April 1997 and July 31, 1997; issued and
outstanding: 6,250 at April 1996; none at April
1997 and July 31, 1997......................... 125 -- --
Common stock--$.001 par value 1996; no par value
April 1997 and July 31, 1997; 100,000,000
shares authorized 1996; 20,000,000, April 1997
and July 31, 1997; issued and outstanding:
April 1996, 3,570,046; April 1997 and July 31,
1997, 4,550,268................................ 1 1,129 1,129
Additional paid-in capital...................... 77 -- --
Notes receivable from shareholders.............. -- (343) (349)
Accumulated deficit............................. (33) (1,396) (1,586)
------ ------- ------
Total stockholders' equity (deficit).......... 170 (610) (806)
------ ------- ------
TOTAL............................................. $1,788 $ 2,684 $2,521
====== ======= ======
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
ISONICS CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
APRIL 30, JULY 31,
--------------- --------------------
1996 1997 1996 1997
------ ------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues............................ $5,567 $ 4,539 $ 1,564 $ 1,535
Cost of revenues........................ 3,835 3,616 1,123 1,179
------ ------- --------- ---------
Gross margin.......................... 1,732 923 441 356
Operating expenses:
Selling, general and administrative... 902 1,183 266 267
Research and development.............. 308 655 90 149
------ ------- --------- ---------
Total operating expenses............ 1,210 1,838 356 416
------ ------- --------- ---------
Operating income (loss)................. 522 (915) 85 (60)
Other income (expense)
Interest income....................... 1 14 1 6
Interest expense...................... (67) (409) (13) (135)
------ ------- --------- ---------
Total other expense, net............ (66) (395) (12) (129)
------ ------- --------- ---------
Income (loss) before income taxes....... 456 (1,310) 73 (189)
Income tax expense...................... 175 53 30 1
------ ------- --------- ---------
NET INCOME (LOSS)....................... $ 281 $(1,363) $ 43 $ (190)
====== ======= ========= =========
Net income (loss) per share............. $ .04 $ (.22) $ .01 $ (.03)
====== ======= ========= =========
Shares used in computing per share in-
formation.............................. 6,304 6,213 6,305 6,361
====== ======= ========= =========
Pro forma (loss) per share.............. $ (.16) $ (.01)
======= =========
Shares used in computing per share in-
formation.............................. 6,595 6,601
======= =========
</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, 1995... 6,250 $ 125 3,570,046 $ 1 $ 77 $ -- $ (314) $ (111)
Net income............ -- -- -- -- -- -- 281 281
-------- ------- --------- ------ ------- ----- ------- -------
BALANCES, April 30,
1996................... 6,250 125 3,570,046 1 77 -- (33) 170
Exercise of stock
options.............. -- -- 750,898 1 531 (330) -- 202
Interest on notes
receivable from
shareholders......... -- -- -- -- -- (13) -- (13)
Conversion of
preferred stock...... (6,250) (125) 229,324 -- 125 -- -- --
Issuance of warrants
with promissory
notes................ -- -- -- -- 394 -- -- 394
Recapitalization...... -- -- -- 1,127 (1,127) -- -- --
Net loss.............. -- -- -- -- -- -- (1,363) (1,363)
-------- ------- --------- ------ ------- ----- ------- -------
BALANCES, April 30,
1997................... -- -- 4,550,268 1,129 -- (343) (1,396) (610)
Interest on notes
receivable from
shareholders*........ -- -- -- -- -- (6) -- (6)
Net loss*............. -- -- -- -- -- -- (190) (190)
-------- ------- --------- ------ ------- ----- ------- -------
BALANCES, July 31,
1997*.................. -- $ -- 4,550,268 $1,129 $ -- $(349) $(1,586) $ (806)
======== ======= ========= ====== ======= ===== ======= =======
</TABLE>
- --------
* Unaudited
See Notes to Financial Statements.
F-5
<PAGE>
ISONICS CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
APRIL 30, ENDED JULY 31
-------------- ---------------
1996 1997 1996 1997
----- ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ 281 $(1,363) $ 43 $ (190)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................ 87 310 25 104
Interest on notes receivable from
shareholders................................ -- (13) -- (6)
Deferred income taxes........................ 73 143 53 --
Changes in assets and liabilities:
Accounts and notes receivable............... (8) (10) (14) (46)
Inventories................................. (723) (533) (348) 313
Prepaid expenses............................ (6) (4) (2) (37)
Other assets................................ 4 (8) (29) 1
Accounts payable............................ 378 313 507 193
Accrued liabilities and other............... 5 233 (125) 41
Income taxes payable........................ 89 (89) (32) --
----- ------- ------ -------
Net cash provided by (used in) operating
activities................................ 180 (1,021) 78 373
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........... (7) (10) (4) (57)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt and warrants... 142 1,751 -- --
Payments of debt.............................. (237) (339) (43) (257)
Proceeds from issuance of common stock........ -- 202 -- --
Payment of debt issuance costs................ -- (115) -- --
Payment of deferred offering costs............ -- (556) -- --
----- ------- ------ -------
Net cash provided by (used in) financing
activities................................ (95) 943 (43) (257)
----- ------- ------ -------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS............................... 78 (88) 31 59
Cash and cash equivalents at beginning of peri-
od............................................ 38 116 116 28
----- ------- ------ -------
Cash and cash equivalents at end of period..... $ 116 $ 28 $ 147 $ 87
===== ======= ====== =======
Supplemental disclosure of noncash financing
activities:
Stock issued for note receivable.............. $ -- $ 330 $ -- $ --
===== ======= ====== =======
Supplemental disclosures of cash flow informa-
tion:
Cash paid during the period for:
Interest..................................... $ 67 $ 135 $ 15 $ 63
Income taxes................................. 14 9 9 1
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JULY 31, 1997, AND FOR THE THREE MONTHS ENDED JULY 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., 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, 1997 and July 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 warranty
costs have not been material in any period.
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.
F-7
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1997, AND FOR THE THREE MONTHS ENDED JULY 31, 1996
AND 1997 IS UNAUDITED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
NOTE 2--INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30, JULY
------------- 31,
1996 1997 1997
------ ------ ------
<S> <C> <C> <C>
Finished goods....................................... $ 892 $1,387 $1,043
Work in process...................................... 107 -- --
Raw Materials........................................ 7 152 183
------ ------ ------
$1,006 $1,539 $1,226
====== ====== ======
</TABLE>
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
---------- JULY 31,
1996 1997 1997
---- ---- --------
<S> <C> <C> <C>
Office furniture and equipment....................... $ 88 $ 93 $ 93
Leasehold Improvements............................... 3 4 4
Construction-in-process.............................. -- -- 57
---- ---- ----
91 97 154
Accumulated depreciation and amortization............ (10) (27) (31)
---- ---- ----
$ 81 $ 70 $123
==== ==== ====
</TABLE>
F-8
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1997, AND FOR THE THREE MONTHS ENDED JULY 31, 1996
AND 1997 IS UNAUDITED)
NOTE 4--ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
--------- JULY 31,
1996 1997 1997
---- ---- --------
<S> <C> <C> <C>
Compensation........................................... $268 $328 $280
Other.................................................. 17 190 278
---- ---- ----
$285 $518 $559
==== ==== ====
</TABLE>
NOTE 5--INCOME TAXES
Deferred tax assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
----------
1996 1997
---- -----
<S> <C> <C>
Deferred tax assets
Accruals and reserves deductible in future periods.......... $143 $ 226
Net operating loss carryforwards............................ -- 508
Valuation allowance......................................... -- (734)
---- -----
$143 $ --
==== =====
</TABLE>
Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
---------
1996 1997
---- ----
<S> <C> <C>
Current
Federal...................................................... $ 78 $(78)
State........................................................ 24 (12)
---- ----
102 (90)
Deferred
Federal...................................................... 69 110
State........................................................ 4 33
---- ----
73 143
---- ----
$175 $ 53
==== ====
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
tax rate is as follows:
<TABLE>
<CAPTION>
APRIL 30,
-----------
1996 1997
---- -----
<S> <C> <C>
Statutory federal income tax rate........................... 35.0% (35.0)%
State income taxes (net of federal income tax benefit)...... 3.5 (5.5)
Amortization of warrants issued with promissory notes....... -- 3.9
Other....................................................... .3 .5
Change in valuation allowance............................... -- 40.1
---- -----
Effective tax rate.......................................... 38.8% 4.0%
==== =====
</TABLE>
F-9
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1997, AND FOR THE THREE MONTHS ENDED JULY 31, 1996
AND 1997 IS UNAUDITED)
NOTE 5--INCOME TAXES--(CONTINUED)
The valuation allowance for deferred tax assets as of April 30, 1996 and
1997 was none and $734,000, respectively. The Company provided a valuation
allowance for its deferred tax asset as it believes realization of such asset
is uncertain.
The Company has $1,100,000 and $1,000,000 of net operating loss
carryforwards for state and federal purposes available through 2002 and 2112,
respectively.
NOTE 6--LONG TERM DEBT
Long term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
----------- JULY 31,
1996 1997 1997
---- ------ --------
<S> <C> <C> <C>
Note payable, guaranteed by the SBA, payable in
monthly installments of $700 including interest
at prime (8.5% at April 30, 1997 and July 31,
1997) plus 2.75%, final payment due January 2005. $ 46 $ 43 $ 42
Notes payable, unsecured; payable upon demand,
plus interest ranging from 8.0% to 24.0%......... 85 291 85
Nonconvertible promissory notes (net of
unamortized discount of $245,000 and $189,000 at
April 30, 1997 and July 31, 1997, respectively).. -- 1,153 1,208
Capital leases (see Note 7)....................... 69 49 43
Royalty payable to Isoserve, Inc. (see Note 7).... 252 135 92
---- ------ -----
452 1,671 1,470
Less current maturities........................... 176 403 509
---- ------ -----
$276 $1,268 $ 961
==== ====== =====
</TABLE>
Maturities of long-term debt as of April 30, 1997 are as follows (in
thousands):
<TABLE>
<S> <C>
1998............................................................... $ 403
1999............................................................... 1,232
2000............................................................... 5
2001............................................................... 5
2002............................................................... 6
Thereafter......................................................... 20
------
$1,671
======
</TABLE>
During fiscal 1997, the Company issued $1,397,000 in nonconvertible
promissory notes, collateralized by the Company's assets. Interest was
originally payable monthly at 12% through May 1, 1997. Effective May 1, 1997,
the principal and interest at 15% became 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 681,936 shares of common stock, exercisable
for a period of five years commencing in August 1996. Of the warrants issued,
340,968 are exercisable at $0.1771 per share and 340,968 are exercisable at
$1.4165 per share. If the Company defaults in its payment obligations, then
additional warrants totaling 898,709 are exercisable at $.01 per share. In
conjunction with the financing, the Company issued warrants to purchase
304,098 shares of common stock
F-10
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1997, AND FOR THE THREE MONTHS ENDED JULY 31, 1996
AND 1997 IS UNAUDITED)
NOTE 6--LONG TERM DEBT--(CONTINUED)
exercisable for a period of five years, at $0.5788 per share to a financial
advisor. The aggregate fair value of the warrants issued in connection with
the financing was $394,000 and is being amortized to operations as additional
interest expense over the term of the promissory notes. Of the total original
promissory notes and original warrants issued, $620,000 and 303,696 warrants
were purchased by related parties.
On July 23, 1997, the terms of the nonconvertible promissory notes were
amended. Effective August 1, 1997, interest became payable monthly at 15%. If
the notes are not paid in full by April 1998, the remaining principal and
interest is payable in equal monthly payments from May 1998 through April
1999. In connection with the amendment of the notes, the Company issued
warrants to the noteholders to purchase a total of 450,000 shares of common
stock, exercisable for a period of four years, at $5.80 per share and reduced
the number of potential default warrants issuable from 898,709 to 448,709.
NOTE 7--COMMITMENTS
At April 30, 1997, furniture and equipment with a cost and accumulated
amortization of $68,000 and $16,000 ($68,000 and $19,000 at July 31, 1997) has
been acquired under capital leases. The Company also rents office and research
facilities, equipment and vehicles under operating leases expiring through
1998.
Future minimum annual operating and capital lease commitments are as follows
(in thousands):
<TABLE>
<CAPTION>
APRIL 30, 1997
-----------------
OPERATING CAPITAL
--------- -------
<S> <C> <C>
1998.................................................... $ 54 $ 31
1999.................................................... -- 25
---- ----
Total minimum lease payments.......................... $ 54 56
====
Amount representing interest............................ (7)
----
Present value of minimum lease payments................. 49
Current portion......................................... (25)
----
Long-term portion....................................... $ 24
====
</TABLE>
Rent expense for operating leases was approximately $19,000, $61,000,
$13,000, and $16,000 for the years ended April 30, 1996 and 1997 and for the
three months ended July 31, 1996 and 1997, respectively.
The Company is required to make royalty payments to Isoserve, Inc. for
depleted zinc metal sold through fiscal 2000. 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 certain assets
of the Company. The Company paid royalties of $198,000, $140,000 and $47,000
for the years ended April 30, 1996 and 1997 and the three month period ended
July 31, 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. On August 11, 1997, the Board of Directors approved a 3 for 1
stock split of its common shares. All per share amounts, number of shares,
stock options and warrant data have been restated to reflect the reverse stock
splits and 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.
F-11
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1997, AND FOR THE THREE MONTHS ENDED JULY 31, 1996
AND 1997 IS UNAUDITED)
NOTE 8--STOCKHOLDERS' EQUITY--(CONTINUED)
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 of Series
A-1 and A-2 Preferred were outstanding at April 30, 1996. 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 384 shares of common stock. The preferred
shares can be redeemed 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, 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.
On July 31, 1997, the Company issued to certain consultants and advisory
board members warrants to acquire 136,000 shares of common stock at a weighted
average exercise price of $4.11 per share, an amount in excess of the
estimated fair value of the Company's common stock on the date of issue.
RESERVED COMMON STOCK
The Company has reserved shares of common stock for issuance as follows:
<TABLE>
<CAPTION>
JULY 31,
1997
---------
<S> <C>
Exercise of stock options....................................... 1,696,933
Exercise of warrants............................................ 1,572,034
---------
3,268,967
=========
</TABLE>
F-12
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1997, AND FOR THE THREE MONTHS ENDED JULY 31, 1996
AND 1997 IS UNAUDITED)
NOTE 8--STOCKHOLDERS' EQUITY--(CONTINUED)
STOCK OPTION PLAN
The Company's 1996 Stock Option Plan authorizes the granting of 1,727,832
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. In November 1996, the Board of Directors
adopted the Executive and Incentive Stock Option Plans. A total of 720,000
shares of common stock are reserved for issuance under the plans.
The options, which have terms of 5 or 10 years when issued, vest over a
three to five year period. The exercise price of each option generally
approximates the fair market value per share of the Company's stock on the
date of grant. Accordingly, no compensation cost has been recognized for the
plan. Had compensation cost for the plan been determined based on the fair
value of the options at the grant dates consistent with the method of
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, the Company's net earnings (loss) and earnings
(loss) per share for the years ended April 30, 1996 and 1997 would have been
changed to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1996 1997
-------- -----------
<S> <C> <C>
Net earnings (loss)
As reported........................................ $281,000 $(1,363,000)
Pro forma.......................................... 263,000 (1,465,000)
Earnings (loss) per share
As reported........................................ $0.05 $(0.23)
Pro forma.......................................... 0.05 (0.25)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 1996 and 1997, respectively; no expected
dividends; no volatility; risk-free interest rates ranging from 5.8% to 7.1%;
and expected lives of 10 years. A summary of the status of the Company's stock
option plan as of April 30, 1996 and 1997, and changes during the years ending
on those dates is presented below.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
-------- --------
<S> <C> <C>
Outstanding at May 1, 1995.............................. -- --
Granted............................................... 993,503 $0.61
Exercised............................................. -- --
Forfeited............................................. -- --
--------
Outstanding at April 30, 1996........................... 993,503 0.61
Granted............................................... 476,761 0.94
Exercised............................................. (750,898) 0.71
Forfeited............................................. (34,557) 0.87
--------
Outstanding at April 30, 1997........................... 684,809 0.72
Granted............................................... 5,000 3.50
Exercised............................................. -- --
Forfeited............................................. -- --
--------
Outstanding at July 31, 1997............................ 689,809 0.74
========
</TABLE>
F-13
<PAGE>
ISONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1997, AND FOR THE THREE MONTHS ENDED JULY 31, 1996
AND 1997 IS UNAUDITED)
NOTE 8--STOCKHOLDERS' EQUITY--(CONTINUED)
The weighted-average fair value of options granted during the years ended
April 30, 1996 and 1997 and for the three months ended July 31, 1997 was
$0.23, $0.44, and $3.50, respectively.
The following information applies to options outstanding at July 31, 1997:
<TABLE>
<S> <C> <C> <C>
Range of exercise prices........................ $0.58--$0.87 $1.35 $3.50
Options outstanding............................. 613,380 71,429 5,000
Weighted average exercise price................. $0.64 $1.35 $3.50
Weighted average remaining contractual life
(years)........................................ 9 10 10
Options exercisable............................. 613,380 71,429 0
Weighted average exercise price................. $0.64 $1.35 --
</TABLE>
Options to purchase 34,557, 399,285, and 520,233 shares of common stock at
weighted average exercise prices of $0.58, $0.61, and $.063 per share were not
subject to rights of repurchase at April 30, 1996 and 1997 and July 31, 1997,
respectively.
Two executive officers of the Company exercised stock options to each
acquire 259,175 shares of Common Stock at an exercise price of $0.64 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. At
April 30, 1997 and July 31, 1997, principal and interest due on the loans
totaled $343,000 and $349,000, respectively.
NOTE 9--SIGNIFICANT CUSTOMERS AND SUPPLIERS
In 1997, four customers accounted for approximately 49%, 20%, 13% and 10% of
net revenues. In 1996, two customers accounted for 88% and 11% of net
revenues. In the three months ended July 31, 1997, three customers accounted
for 51%, 19%, and 17% of net revenues. Export sales were 13% of net revenues
in 1996 and less than 10% in 1997 and the three months ended July 31, 1997.
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.
F-14
<PAGE>
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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.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 18
Selected Financial Data................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 25
Management................................................................ 41
Certain Transactions...................................................... 47
Principal Shareholders.................................................... 48
Description of Capital Stock.............................................. 49
Shares Eligible for Future Sale........................................... 54
Underwriting.............................................................. 55
Legal Matters............................................................. 57
Experts................................................................... 57
Additional Information.................................................... 57
Index to Financial Statements............................................. F-1
</TABLE>
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UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE UNITS, 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.
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800,000 UNITS, CONSISTING OF 800,000 SHARES OF COMMON STOCK AND 800,000
REDEEMABLE CLASS A COMMON STOCK PURCHASE WARRANTS
[LOGO OF ISONICS CORPORATION]
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PROSPECTUS
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MONROE PARKER
SECURITIES, INC.
, 1997
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