<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 5, 1997
REGISTRATION NO. 333-13289
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 8
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
ISONICS CORPORATION
(Name of Small Business Issuer in Its Charter)
CALIFORNIA 2819 77-0338561
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
--------------
4010 MOORPARK AVENUE, SUITE 119
SAN JOSE, CALIFORNIA 95117
(408) 260-0155
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL
PLACE OF BUSINESS)
--------------
JAMES E. ALEXANDER
CHIEF EXECUTIVE OFFICER
ISONICS CORPORATION
4010 MOORPARK AVENUE, SUITE 119
SAN JOSE, CALIFORNIA 95117
(408) 260-0155
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
--------------
COPIES TO:
C. KEVIN KELSO, ESQ. GREGORY SICHENZIA, ESQ.
BRUCE F. MACKLER, ESQ. SINGER ZAMANSKY LLP
MARK PORTER, ESQ. 40 EXCHANGE PLACE, 20TH FLOOR
FENWICK & WEST LLP NEW YORK, NEW YORK 10005
TWO PALO ALTO SQUARE (212)809-8550
PALO ALTO, CALIFORNIA 94306
(415) 494-0600
--------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE
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<S> <C> <C> <C> <C>
Units(2), each
consisting of......... 920,000 $5.90 $5,428,000 $1,646
(a) 1 share of Common
Stock................ 920,000 -- -- --
(b) 1 Redeemable Class
A Common Stock
Purchase Warrant.... 920,000 -- -- --
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Common Stock issuable
upon exercise of
Redeemable Warrants... 920,000 $5.80 $5,336,000 $1,618
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Underwriter's
Warrants(3)........... 80,000 $.001 $80 $1
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Common Stock issuable
upon exercise of
Underwriter's
Warrants(4)........... 80,000 $9.57 $765,600 $232
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Redeemable Warrants
issuable upon exercise
of Underwriter's
Warrants.............. 80,000 $0.165 $13,200 $5
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Common Stock issuable
upon exercise of
Redeemable Warrants
issuable upon exercise
of Underwriter's
Warrants(4)........... 80,000 $5.80 $464,000 $141
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Total.................. 3,080,000 $12,006,880 $3,642(5)
</TABLE>
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(1) Estimated solely for purpose of determining the registration fee pursuant
to Rule 457 under the Securities Act.
(2) Includes 120,000 shares of Common Stock and 120,000 Redeemable Warrants
issuable upon exercise of the Underwriter's Over-Allotment Option.
(3) No registration fee required pursuant to Rule 457 under the Securities Act.
(4) Pursuant to Rule 416 of the Securities Act, there are also being registered
hereby such additional indeterminate number of Shares of Common Stock as
may become issuable pursuant to the anti-dilution provisions of the
Redeemable Warrants and the Underwriter's Warrants.
(5) Previously paid.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED 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 " ," " " and " ," 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.
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<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Unit................................... $5.90 $.59 $
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Per Share................................. $5.80 $.58 $
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Per Warrant............................... $.10 $.01 $
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Total (3).................................. $ $ $141,600
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</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
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. The Securities offered hereby involve a high degree of risk.
See "Risk Factors." Except where otherwise indicated, all share and per share
data in this Prospectus (including data with respect to options and warrants to
purchase shares) have been adjusted to reflect a 1-for-6.89 reverse stock split
of the Company's Common Stock effected in December 1996, 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-- ; Common Stock-- ; Warrants--
</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."
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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.
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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."
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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
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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,
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<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
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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
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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
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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,
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
$267,0000, 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
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<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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<PAGE>
BACKGROUND
The following discussion utilizes several technical terms which are
explained in greater detail in the Glossary preceding the financial statements
at the end of this Prospectus.
An isotope is one of two or more species of the same chemical element which
differ from one another only in the number of neutrons in the nucleus of the
atom. The different number of neutrons can create significantly different
nuclear physics characteristics. To take advantage of some of these different
characteristics, it is usually necessary to increase ("enrich") or decrease
("deplete") the concentration of a particular isotope. There are over 280
naturally occurring stable isotopes of 83 elements. Some elements have only
one naturally occurring stable isotope, while others have many. Stable
isotopes are not radioactive.
Stable isotopes of an element differ in mass and diameter as well as several
nuclear properties, such as cross-section, spin and magnetic moment.
Differences in these properties can result in substantially different effects,
and some of these differences have the potential for commercial application.
For example, in ultra chemically pure crystals grown for electronics or
optical applications, isotopic impurities are the greatest contributor to
crystal disorder due to mass and diameter variations. Eliminating this
disorder by using a single enriched isotope results in increased thermal
conductivity and optical transparency, and thus in improved product
performance. Similarly, enriching or depleting isotopes based upon their
cross-sections allows materials to be engineered for applications in the
nuclear power industry, for controlled doping of some semiconductors and for
use as targets to produce radioisotopes for medicine and industry.
Stable isotopes of an element do not differ significantly in their chemical
behavior. Tagging of materials can be performed by varying the natural
abundance of isotopes to give a compound its own mass or nuclear magnetic
signature without changing its chemical properties. Though chemically
equivalent, the "tagged" or labeled compound is discernible from its unlabeled
twin through the use of several types of instruments called spectrometers.
COMPANY STRATEGY
The Company believes that its strength is the ability to bring the necessary
elements together to identify, evaluate, develop, engineer and successfully
commercialize applications for stable isotopes and value-added products
manufactured from stable isotopes. This is evidenced by management's
experience (at the Company and in prior employment) in developing DZ from a
cost prohibitive concept to a commercial product. DZ is now one of the largest
worldwide commercial applications of a stable isotope product.
The Company believes it has created a product development model that can
serve as a basis for current and future expansion efforts of the Company.
Isonics believes that coordination with the ultimate user to establish a
product specification and, with the Company's Russian partners, to establish a
cost effective product manufacturing process to meet that specification, has
the potential to make the Company a viable competitor. This coordination
process also includes initiating and managing development projects necessary
to adapt existing manufacturing methods to new missions, assembling and
coordinating necessary project-specific product and service suppliers,
obtaining appropriate regulatory approvals, and verifying product conformance
to stringent customer requirements.
To capitalize on the commercial opportunities that have been identified for
stable isotopes, the Company has adopted a business strategy designed to
maximize the value of its technologies, business development and management
resources, while attempting to minimize capital costs arising from addressing
multiple markets. This strategy involves:
. focusing on development of high value-added products which have a
perceived competitive advantage in large or growing markets;
. leveraging research and development expenditures through collaborations,
government programs and corporate partnerships, including performing
substantial work in Russia, where the Company believes an attractive
value per dollar of cost can be obtained;
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<PAGE>
. minimizing early capital needs by obtaining stable isotopes through
alliances and supply agreements with Russian stable isotope sources,
followed by investment in Company owned isotope production facilities
when markets are more established and the optimum production technology
has been determined;
. obtaining value-added processing technology through sub-contract
manufacturing agreements, joint ventures and acquisitions of
strategically important technologies and companies; and
. developing a time-balanced product pipeline to provide a continual supply
of new business opportunities.
PRODUCTS
The Company's product pipeline includes products with current revenues
(consisting of DZ, 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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<PAGE>
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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<PAGE>
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.
40
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The members of the Board of Directors ("Board") and the executive officers
of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James E. Alexander 48 President, Chief Executive Officer and Chairman of the Board
Boris Rubizhevsky 46 Senior Vice President, Vice Chairman and Director
Joe Friscia 64 Vice President, Energy and Environmental Products
Daniel J. Grady 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.
41
<PAGE>
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 $3.40 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, 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.
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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
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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 " ,"
" " and " ," 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 civil 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 $5.76, 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 five
years from the date of the Prospectus except to the Underwriter of its
officers.
The Company has agreed to file, during the three-year period beginning one
year from the date of the Prospectus, on two separate occasions (on only one
occasion at the cost of the Underwriter), 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
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Common Stock and Warrants issued or issuable upon 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 two 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 a member of NASD and the customer states in writing that the transaction
was solicited and designates in writing the broker-dealer to receive
compensation for the exercise; (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.
58
<PAGE>
The frequency at which resonance occurs is a function of the chemical form of
the nuclei of interest. This property is exploited in NMR instruments used to
determine the make-up and structure of chemicals. It is also employed in
medicine to produce 3-dimensional images of the distribution of protons (the
1H isotope of hydrogen) incorporated in the chemicals of the human body.
SPIN: A fundamental property of all elementary particles, spin is the
intrinsic angular momentum of a sub-atomic particle--present even if the
particle is not moving. If the particle is charged, the spin results in a
magnetic moment.
STABLE ISOTOPE LABELED COMPOUND (SILC): Also referred to as a "labeled
compound," a chemical which has been "tagged" by substitution of a common
isotope with a rare one (i.e., an enriched stable isotope).
X-RAY CRYSTALLOGRAPHY: The study of crystal lattices using diffraction
patterns of X-ray waves that reflect the atomic structure based on atomic size
and position in space.
59
<PAGE>
ISONICS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants......................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Shareholders' Equity (Deficit)............................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Isonics Corporation
We have audited the accompanying balance sheets of Isonics Corporation as of
April 30, 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>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 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>
---------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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]
---------------
PROSPECTUS
---------------
MONROE PARKER
SECURITIES, INC.
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24 INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation include a provision that eliminates
to the fullest extent permitted by law the personal liability of its directors
to the Company and its shareholders for monetary damages for breach of the
directors fiduciary duties. This limitation has no effect on a director's
liability (i) for acts or omissions that involve intentional misconduct or a
knowing and culpable violation of law, (ii) for acts or omissions that a
director believes to be contrary to the best interests of the Company or its
shareholders or that involved the absence of good faith on the part of the
director, (iii) for any transaction from which the director derived an
improper personal benefit, (iv) for acts or omissions that show a reckless
disregard for the director's duty to the Company or its shareholders in
circumstances in which the director was aware, or should have been aware, in
the ordinary course of performing a director's duties, of a risk of serious
injury to the Company or its shareholders, (v) for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication
of the director's duty to the Company or its shareholders, (vi) under Section
310 of the California Corporations Code (the "California Code") concerning
contracts or transactions between the Company and a director or (vii) under
Section 316 of the California Code concerning directors liability for improper
dividends, loans and guarantees. The provision does not extend to acts or
omissions of a director in his capacity as an officer. Further, the provision
will not affect the availability of injunctions and other equitable remedies
available to the Company's shareholders for any violation of a director's
fiduciary duty to the Company or its shareholders.
The Company's Articles of Incorporation further authorize the Company to
indemnify its agents (as defined in Section 317(a) of the Code which includes
directors and officers) through Bylaw provisions, agreements with agents,
votes of shareholders or disinterested directors or otherwise, to the fullest
extent permissible under California law. Pursuant to this provision, the
Company's Bylaws provide for indemnification of directors and officers. The
Bylaws also permit the Company to enter into indemnity agreements with
individual directors, officers, employees and other agents. The Company
intends to enter into such agreements with its directors and executive
officers effective upon the closing of this offering. These Agreements,
together with the Company's Bylaws and Articles, may require the Company,
among other things, to indemnify directors or officers against certain
liabilities that may arise by reason of their status or service as directors
(other than liabilities resulting from willful misconduct of a culpable
nature), to advance expenses to them as they are incurred, provided that they
undertake to repay the amount advanced if it is ultimately determined by a
court that they are not entitled to indemnification, and to obtain and
maintain directors and officers' insurance if available on reasonable terms.
In addition to the rights to indemnification provided under California law,
in the Articles of Incorporation and in the Bylaws, the 1996 Stock Option Plan
provides indemnification to members of the Board of Directors, officers, or
employees of the Company to whom authority to act for the Board in connection
with the Existing Plan is delegated shall be indemnified against all
reasonable expenses, including attorneys' fees, actually and necessarily
incurred in defense of any proceeding to which he or she is made a party
because of any action allegedly taken or alleged failure to act in connection
with the Plan, and against amounts paid in settlement (if approved by
independent legal counsel), or in satisfaction of any judgment in such
proceeding, unless the director, officer, or employee, as the case may be, is
adjudged to have behaved in bad faith, in a grossly negligent manner, or with
intentional misconduct as to duties.
The Company currently has directors and officers' liability insurance. At
present, there is no pending litigation or proceeding involving a director,
officer or employee of the Company pursuant to which indemnification is
sought, nor is the Company aware of any threatened litigation that may result
in claims for indemnification.
Section 317 of the Code and the Company's Bylaws make provision for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons, under certain circumstances, for
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act.
II-1
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
-------- --------------
<S> <C>
Underwriting Agreement ....................................... 1.01
Registrant's Certificate of Incorporation..................... 3.01
Registrant's Bylaws........................................... 3.02
Form of Indemnity Agreement................................... 10.09
</TABLE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses to be paid in
connection with the sale of the shares of Common Stock being registered
hereby. All amounts are estimates except for the Securities and Exchange
Commission registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 3,642
NASD filing fee.................................................... 1,845
Accounting fees and expenses....................................... 85,000
Legal fees and expenses............................................ 200,000
Printing fees and expenses......................................... 140,000
Blue sky fees and expenses......................................... 50,000
Transfer agent and registrar fees and expenses..................... 5,000
Miscellaneous...................................................... 114,513
--------
Total.............................................................. $600,000
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
<TABLE>
<CAPTION>
NUMBER AGGREGATE FORM OF
CLASS OF PURCHASERS DATE OF SALE TITLE OF SECURITIES OF SHARES PURCHASE PRICE CONSIDERATION
- ------------------- ------------ ------------------- --------- -------------- -------------
<S> <C> <C> <C> <C> <C>
2 Founders 5/10/93 Common Stock 3,282,879 $ 12,000 Property
1 Investor 11/20/93 Common Stock 172,785 $ 6,000 Cash
2 Investors 12/1/94 and 12/7/95 Preferred Stock 6,250 $ 125,000 Cash
1 Acquired Entity 3/31/95 Common Stock 114,382 $ 60,000 Property
1 Advisor 9/96 Warrants 304,098 $ 141,000 Services
1 Investor 8/96 Common Stock 115,200 100,000 Cash
1 Investor 9/96 Common Stock 117,348 $ 101,885 Cash
2 Investors 9/96 Common Stock 518,352 $ 330,000 Notes
11 Investors 6/96 Notes and Warrants 681,939 $1,397,000 Loans
11 Investors 7/97 Warrants 450,000 $ -- Amendment of Loans
</TABLE>
All sales of Common Stock, Preferred Stock and warrants were made in
reliance on Section 4(2) of the Securities Act. The purchasers were
sophisticated investors who represented to the Registrant that the shares were
being acquired for investment. All issuances of shares and options under the
Company's existing plan were made in reliance on Section 4(2) or Rule 701. In
addition, with respect to the warrants issued in June 1996, in July 1997 one
holder transferred 99,392 of such warrants to two other investors. The
transfers were effected in reliance on Section 4(1) of the Securities Act as
involving transactions by a person other than an issuer, underwriter or dealer
in light of, among other factors, the small number of purchasers, the time
between the initial issuance and transfer of such warrants, the sophistication
of the transferees and the investment representations made by such transferees
concerning, among other things, their lack of intent to distribute.
II-2
<PAGE>
Between January 1996 and the date of this registration statement, the
Company granted options under the Company's Existing Plan to purchase a total
of 1,475,266 shares of Common Stock at exercise prices ranging from $0.58 to
$3.50 per share, to a limited number of employees. No consideration was paid
to the Company by any recipient of any of the foregoing options for the grant
of any such options. As of the date of this Prospectus, such options have been
exercised to acquire a total of 750,898 shares of Common Stock.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.01 Form of Underwriting Agreement.
3.01 Registrant's Form of Amended and Restated Articles of Incorporation.*
3.02 Registrant's Bylaws.*
3.03 Registrant's Amended and Restated Articles of Incorporation, to be in
effect at the closing of this offering.*
4.01 Specimen Common Stock Certificate.*
4.02 Form of Underwriter's Warrant Agreement.
4.03 Form of Warrant Agreement between the Registrant and Continental Stock
Transfer & Trust Company, and Monroe Parker Securities, Inc.
4.04 Specimen Warrant Certificate.
5.01 Opinion of Fenwick & West LLP.
10.01 Registrant's 1996 Stock Option Plan.*
10.02 Form of Employment Agreement between the Registrant and certain
officers of the Registrant.*
10.03 Registrant's 1996 Executives Equity Incentive Plan.*
10.04 Registrant's 1996 Equity Incentive Plan.*
10.05 Memorandum of Agreement between Electrochemical Plant, AO
Techsnabexport, Co., Ltd. and Registrant.*
10.06 Option Agreement between the Registrant and Yale University.*/**
10.07 Office Lease Agreement between Paulsen Properties and the Registrant
as of January 1, 1996, as amended.*
10.08 Letter from Yale University to Registrant dated February 10, 1996.*
10.09 Form of Indemnity Agreement to be entered into by Registrant with each
of its directors and executive officers.*
10.10 Warrant Agreement dated as of September 27, 1996 by and among
Registrant and certain investors.*
10.11 Registration Rights Agreement dated as of September 27, 1996 by and
among Registrant and certain investors.*
10.12 Employment Agreement between the Registrant and James E. Alexander.*
10.13 Employment Agreement between the Registrant and Boris Rubizhevsky.*
10.14 Security Agreement dated March 31, 1995 between the Company and
Isoserve, Inc.*
10.15 Consulting Agreement between the Registrant and Larry Wells Co., Inc.*
10.16 February 1997 Agreement between the Registrant, Electrochemical Plant
and AO Techsnabexport, Co., Ltd.*/**
10.17 Letter from Yale University to Registrant dated January 28, 1997.*
11.01 Statement regarding computation of per share earnings.
21.01 Subsidiaries of the Registrant.*
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of Grant Thornton LLP, independent certified public
accountants.
24.01 Power of Attorney.*
27.01 Financial Statement Schedule.
</TABLE>
- --------
* Previously filed.
** Confidential Treatment Requested.
II-3
<PAGE>
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes the following:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to: (i) include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect
in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration
statement; and (iii) include any additional or changed material information
of the plan of distribution.
(2) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.
(3) For determining liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the
time the Commission declared it effective.
(4) For determining liability under the Securities Act, each post-
effective amendment that contains a form of prospectus shall be deemed as a
new registration statement for the securities offered therein, and that
offering of the securities at that time shall be deemed to be the initial
bona fide offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 24 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
IN ACCORDANCE WITH TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENT FOR FILING ON FORM SB-2 AND AUTHORIZED THIS AMENDMENT TO
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN THE
CITY OF SAN JOSE, STATE OF CALIFORNIA, ON SEPTEMBER 5, 1997.
Isonics Corporation
/s/ Paul J. Catuna
By: _________________________________
PAUL J. CATUNA,
CHIEF FINANCIAL OFFICER
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT TO
REGISTRATION STATEMENT WAS SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES
AND ON THE DATES STATED.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
James E. Alexander* President, Chief
- ------------------------------- Executive Officer September 5, 1997
JAMES E. ALEXANDER and Director
PRINCIPAL FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER:
/s/ Paul J. Catuna Vice President,
- ------------------------------- Finance, Chief September 5, 1997
PAUL J. CATUNA Financial Officer
and Director of
Administration
ADDITIONAL DIRECTORS
Boris Rubizhevsky* Senior Vice
- ------------------------------- President and September 5, 1997
BORIS RUBIZHEVSKY Director
Lindsay A. Gardner* Director
- ------------------------------- September 5, 1997
LINDSAY A. GARDNER
Larry J. Wells* Director
- ------------------------------- September 5, 1997
LARRY J. WELLS
*By: /s/ Paul J. Catuna
---------------------------------
PAUL J. CATUNA,
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE PAGE
------- ------------- ----
<C> <S> <C>
1.01 Form of Underwriting Agreement.
3.01 Registrant's Form of Amended and Restated Articles of
Incorporation.*
3.02 Registrant's Bylaws.*
3.03 Registrant's Amended and Restated Articles of Incorporation, to
be in effect at the closing of this offering.*
4.01 Specimen Common Stock Certificate.*
4.02 Form of Underwriter's Warrant Agreement.
4.03 Form of Warrant Agreement between the Registrant and
Continental Stock Transfer & Trust Company, and Monroe Parker
Securities, Inc.
4.04 Specimen Warrant Certificate.
5.01 Opinion of Fenwick & West LLP.
10.01 Registrant's 1996 Stock Option Plan.*
10.02 Form of Employment Agreement between the Registrant and certain
officers of the Registrant.*
10.03 Registrant's 1996 Executives Equity Incentive Plan.*
10.04 Registrant's 1996 Equity Incentive Plan.*
10.05 Memorandum of Agreement between Electrochemical Plant, AO
Techsnabexport, Co., Ltd. and Registrant.*
10.06 Option Agreement between the Registrant and Yale
University.*/**
10.07 Office Lease Agreement between Paulsen Properties and the
Registrant as of January 1, 1996, as amended.*
10.08 Letter from Yale University to Registrant dated February 10,
1996.*
10.09 Form of Indemnity Agreement to be entered into by Registrant
with each of its directors and executive officers.*
10.10 Warrant Agreement dated as of September 27, 1996 by and among
Registrant and certain investors.*
10.11 Registration Rights Agreement dated as of September 27, 1996 by
and among Registrant and certain investors.*
10.12 Employment Agreement between the Registrant and James E.
Alexander.*
10.13 Employment Agreement between the Registrant and Boris
Rubizhevsky.*
10.14 Security Agreement dated March 31, 1995 between the Company and
Isoserve, Inc.*
10.15 Consulting Agreement between the Registrant and Larry Wells
Co., Inc.*
10.16 February 1997 Agreement between the Registrant, Electrochemical
Plant and AO Techsnabexport, Co., Ltd.*/**
10.17 Letter from Yale University to Registrant dated January 28,
1997.*
11.01 Statement regarding computation of per share earnings.
21.01 Subsidiaries of the Registrant.*
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of Grant Thornton LLP, independent certified public
accountants.
24.01 Power of Attorney.*
27.01 Financial Statement Schedule.
</TABLE>
- --------
* Previously filed.
** Confidential Treatment Requested.
<PAGE>
EXHIBIT 1.01
800,000 UNITS, EACH UNIT CONSISTING OF
ONE SHARE OF COMMON STOCK
AND
ONE CLASS A REDEEMABLE COMMON STOCK
PURCHASE WARRANT
ISONICS CORPORATION
UNDERWRITING AGREEMENT
<PAGE>
____________________, 1997
Monroe Parker Securities, Inc.
2500 Westchester Avenue
Purchase, NY 10577
Ladies and Gentlemen:
Isonics Corporation, a California corporation (the "Company"), hereby
agrees with Monroe Parker Securities, Inc. (the "Underwriter," in such capacity,
shall hereinafter be referred to as "Monroe" or "you"), with respect to the sale
by the Company and the purchase by the Underwriter of 800,000 Units (the
"Units"), each Unit consisting of one share of the Company's common stock, no
par value per share (the "Common Stock"), and one Class A redeemable common
stock purchase warrant (the "Warrants"). The aggregate 800,000 shares of
Common Stock and 800,000 Warrants will be separately tradeable upon issuance of
the Units at the sole discretion of the Underwriter, and the Units thereof are
hereinafter referred to as the "Firm Securities." Each Warrant entitles the
holder thereof to purchase one (1) share of Common Stock during the period
commencing twelve (12) months from the effective date of the Registration
Statement, as defined below, (the "Effective Date") and expiring at the close of
business on the last day of the four (4) year period following the Effective
Date, unless previously redeemed by the Company, at an initial exercise price of
$5.80 per share of Common Stock. The Warrants may be redeemed by the Company at
a redemption price of $.10 per Warrant commencing eighteen (18) months after the
Effective Date (or earlier at the sole discretion of the Underwriter), on not
less than thirty (30) days' prior written notice, provided that the closing sale
price of the Common Stock equals or exceeds 250% of the then exercise price of
the Warrants on all twenty (20) of the trading days ending on the third day
prior to the day on which notice is given, all in accordance with the terms and
conditions of the Warrant Agreement, dated as of the same date hereof, among the
Company, the Underwriter and the Transfer Agent (the "Warrant Agreement").
Upon your request, as provided in Section 2(b) of this Agreement, the
Company shall also issue and sell to the Underwriter, up to an additional
120,000 Units consisting of 120,000 shares of Common Stock and 120,000 Warrants
for the purpose of covering over-allotments, if any. Such Units of Common
Stock and Warrants are hereinafter collectively referred to as the "Option
Securities." The Company also proposes to issue and sell to you warrants (the
"Underwriter's Warrants") pursuant to the Underwriter's Warrant Agreement (the
"Underwriter's Warrant Agreement") for the purchase of an additional 80,000
shares of Common Stock and/or 80,000 Warrants. The shares of Common Stock and
Warrants issuable upon exercise of the Underwriter's Warrants are hereinafter
referred to as the "Underwriter's Securities." The Firm Securities, the Option
Securities, the Underwriter's Warrants and the Underwriter's Securities
(collectively, hereinafter referred to as the "Securities") are more fully
described in the Registration Statement and the Prospectus referred to below.
<PAGE>
1. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to, and agrees with, the Underwriter as of the date hereof, and as
of the Closing Date and the Option Closing Date, if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form SB-2 (No. 333-13289) including any
related preliminary prospectus (the "Preliminary Prospectus"), for the
registration of the Firm Securities, the Option Securities and the Underwriter's
Securities under the Securities Act of 1933, as amended (the "Act"), which
registration statement and amendment or amendments have been prepared by the
Company in conformity with the requirements of the Act, and the Regulations (as
defined below) of the Commission under the Act. The Company will not file any
other amendment thereto to which the Underwriter shall have objected in writing
after having been furnished with a copy thereof. Except as the context may
otherwise require, such registration statement, as amended, on file with the
Commission at the time the registration statement becomes effective (including
the prospectus, financial statements, schedules, exhibits and all other
documents filed as a part thereof or incorporated therein and all information
deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule
430(A) of the Regulations), is hereinafter called the "Registration Statement,"
and the form of prospectus in the form first filed with the Commission pursuant
to Rule 424(b) of the Regulations, is hereinafter called the "Prospectus." For
purposes hereof, "Regulations" mean the rules and regulations adopted by the
Commission under either the Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any preliminary prospectus,
the Registration Statement or the Prospectus and no proceedings for a stop order
suspending the effectiveness of the Registration Statement have been instituted,
or, to the Company's knowledge, are threatened. Each of any preliminary
prospectus, the Registration Statement and the Prospectus at the time of filing
thereof conformed in all material respects with the requirements of the Act and
Regulations, and none of any preliminary prospectus, the Registration Statement
or the Prospectus at the time of filing thereof contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein and necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that this
representation and warranty does not apply to (i) statements made in reliance
upon and in conformity with written information furnished to the Company with
respect to the Underwriter by or on behalf of the Underwriter expressly for use
in such preliminary prospectus, Registration Statement or Prospectus, or (ii)
statements made in the initial preliminary prospectus which were revised in any
subsequent preliminary prospectus or the Registration Statement and Prospectus.
(c) When the Registration Statement becomes effective and at all times
subsequent thereto up to the Closing Date (as defined in Section 2(c) hereof)
and
<PAGE>
each Option Closing Date (as defined in Section 2(b) hereof), if any, and
during such longer period as the Prospectus may be required to be delivered in
connection with sales by the Underwriter or a dealer, the Registration Statement
and the Prospectus, as amended or supplemented as required, will contain all
statements which are required to be stated therein in accordance with the Act
and the Regulations, and will conform in all material respects to the
requirements of the Act and the Regulations; neither the Registration Statement
nor the Prospectus, nor any amendment or supplement thereto, will contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, provided, however,
that this representation and warranty does not apply to statements made or
statements omitted in reliance upon and in conformity with information furnished
to the Company in writing by or on behalf of the Underwriter expressly for use
in the Registration Statement or the Prospectus or any amendment thereof or
supplement thereto.
(d) The Company and each of its subsidiaries have been duly organized
and are validly existing as corporations in good standing under the laws of the
respective states of their incorporation. The Company does not own or control,
directly or indirectly, any corporation, partnership, trust, joint venture or
other business entity other than the subsidiaries listed in Exhibit 21 of the
Registration Statement. The Company and each of its subsidiaries are duly
qualified and licensed and in good standing as a foreign corporation in each
jurisdiction in which its ownership or leasing of any properties or the
character of its operations require such qualification or licensing, except
where the failure to be so qualified or licensed would not have a material and
adverse effect on the condition, financial or otherwise, or the business
affairs, operations, properties, or results of operations of the Company and its
subsidiaries, taken as a whole (the "Business"). The Company and each of its
subsidiaries have all requisite power and authority (corporate and other), and
have obtained any and all necessary authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental or regulatory
officials and bodies (including, without limitation, those having jurisdiction
over environmental or similar matters), to own or lease its properties and
conduct its business as described in the Prospectus, except where the failure to
have such authorizations, approvals, orders, licenses, certificates, franchises
or permits would not have a material and adverse effect on the Business; the
Company and each of its subsidiaries have been doing business in compliance in
all material respects with all such authorizations, approvals, orders, licenses,
certificates, franchises and permits and all federal, state, local and foreign
laws, rules and regulations; and neither the Company nor any of its subsidiaries
have received any notice of proceedings relating to the revocation or
modification of any such authorization, approval, order, license, certificate,
franchise, or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would materially and adversely affect
the Business. The disclosures in the Registration Statement concerning the
effects of federal, state, local, and foreign laws, rules and regulations on the
Company's business as currently conducted and as contemplated are correct in all
material respects and do not omit to state a material fact
<PAGE>
necessary to make the statements contained therein not misleading in light of
the circumstances in which they were made.
(e) At the dates as of which such information is set forth in the
Prospectus, the Company had a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under the headings
"Capitalization" and "Description of Capital Stock" and will have the adjusted
capitalization set forth therein on the Closing Date and the Option Closing
Date, if any, based upon the assumptions set forth therein, and the Company is
not a party to or bound by any instrument, agreement or other arrangement
providing for it to issue any capital stock, rights, warrants, options or other
securities, except for this Agreement and as described in the Prospectus. The
Securities and all other securities issued or issuable by the Company conform
or, when issued and paid for, will conform, in all material respects to all
statements with respect thereto contained in the Registration Statement and the
Prospectus. All issued and outstanding shares of capital stock of each
subsidiary of the Company have been duly authorized and validly issued and are
fully paid and non assessable. Except as disclosed in or contemplated by the
Prospectus and the financial statements of the Company and the related notes
thereto included in the Prospectus, neither the Company nor any subsidiary has
outstanding any options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The
description of the Company's stock option, stock bonus and other stock plans or
arrangements and the options or other rights granted and exercised thereunder as
set forth in the Prospectus conforms in all material respects with the
requirements of the Act. All issued and outstanding securities of the Company
have been duly authorized and validly issued and are fully paid and non
assessable, and the holders thereof have no rights of rescission with respect
thereto and are not subject to personal liability by reason of being such
holders; and none of such securities were issued in violation of the preemptive
rights of any holders of any security of the Company or similar contractual
rights granted by the Company.
(f) The Securities are not and will not be subject to any preemptive
or other similar rights of any stockholder, have been duly authorized and, when
issued, paid for and delivered in accordance with the terms hereof, will be
validly issued, fully paid and non assessable and will conform in all material
respects to the description thereof contained in the Prospectus; the holders
thereof will not be subject to any liability solely as such holders; all
corporate action required to be taken for the authorization, issue and sale of
the Securities has been duly and validly taken; and the certificates
representing the Securities will be in due and proper form. Upon the issuance
and delivery pursuant to the terms hereof of the Securities to be sold by the
Company hereunder, the Underwriter will acquire good and marketable title to
such Securities free and clear of any lien, charge, claim, encumbrance, pledge,
security interest, defect, or other restriction or equity of any kind
whatsoever. No stockholder of the Company has any right which has not been
waived in writing to require the Company to register the sale of any shares
owned by such stockholder under the Act in the public offering contemplated by
this Agreement.
<PAGE>
No further approval or authority of the stockholders or the Board of Directors
of the Company will be required for the issuance and sale of the Firm
Securities, the Option Securities and the Underwriter's Warrants to be sold by
the Company as contemplated herein.
(g) The financial statements of the Company, together with the
related notes and schedules thereto, included in the Registration Statement,
each Preliminary Prospectus and the Prospectus fairly present the financial
position, changes in stockholders' equity and the results of operations of the
Company and its consolidated subsidiaries (of which there are none) at the
respective dates and for the respective periods to which they apply and such
financial statements have been prepared in conformity with generally accepted
accounting principles and the Regulations, consistently applied throughout the
periods involved. Except as disclosed in the Prospectus, there has been no
material adverse change or development involving a material prospective change
in the Business, whether or not arising in the ordinary course of business since
the date of the financial statements included in the Registration Statement and
the Prospectus and the outstanding debt, the property, both tangible and
intangible, and the business of the Company and its subsidiaries taken as a
whole conform in all material respects to the descriptions thereof contained in
the Registration Statement and the Prospectus. Financial information set forth
in the Prospectus under the headings "Prospectus Summary - Selected Financial
Data," "Capitalization," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," fairly present, on the basis stated in the
Prospectus, the information set forth therein and have been derived from or
compiled on a basis consistent with that of the audited and unaudited financial
statements included in the Prospectus.
(h) The Company (i) has paid all federal, state, local, franchise,
and foreign taxes for which it is liable (except for immaterial non payments, if
any), including, but not limited to, withholding taxes and amounts payable under
Chapters 21 through 24 of the Internal Revenue Code of 1986, as amended (the
"Code"), and has furnished all information returns it is required to furnish
pursuant to the Code, (ii) has established adequate reserves for such taxes
which are not due and payable, and (iii) does not have any material tax
deficiency or claims outstanding, proposed or assessed against it.
(i) No transfer tax, stamp duty or other similar tax is payable by or
on behalf of the Underwriter in connection with (i) the issuance by the Company
of the Securities, (ii) the purchase by the Underwriter of the Firm Securities,
the Option Securities and the Underwriter's Warrants from the Company, (iii) the
consummation by the Company of any of its obligations under this Agreement, or
(iv) resales of the Firm Securities and the Option Securities in connection with
the distribution contemplated hereby.
(j) There is no action, suit, proceeding, inquiry, arbitration,
mediation, investigation, litigation or governmental proceeding (including,
without limitation, any
<PAGE>
involving environmental or similar matters), domestic or foreign, pending or
threatened against (or circumstances that may give rise to the same), or
involving the properties or businesses of, the Company which (i) questions the
validity of the capital stock of the Company, this Agreement or the
Underwriter's Warrant Agreement, or of any action taken or to be taken by the
Company pursuant to or in connection with this Agreement or the Underwriter's
Warrant Agreement, (ii) is required to be disclosed in the Registration
Statement which is not so disclosed (and such proceedings as are summarized in
the Registration Statement are accurately summarized in all material respects),
or (iii) could reasonably be expected to materially and adversely affect the
Business.
(k) The Company has the corporate power and authority to authorize,
issue, deliver, and sell the Securities and to enter into this Agreement, the
Warrant Agreement, and the Underwriter's Warrant Agreement, and to consummate
the transactions provided for in such agreements; and this Agreement, the
Warrant Agreement and the Underwriter's Warrant Agreement have each been duly
and properly authorized, executed, and delivered by the Company. This
Agreement, the Warrant Agreement and the Underwriter's Warrant Agreement
constitutes a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its respective terms (except as the
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law), and none of the issue and
sale of the Securities, execution, delivery or performance by the Company of
this Agreement, the Warrant Agreement, and the Underwriter's Warrant Agreement,
the consummation by the Company of the transactions contemplated herein and
therein, or the conduct of the Company's businesses as described in the
Registration Statement, the Prospectus, and any amendments or supplements
thereto, conflicts with or will conflict with or results or will result in any
breach or violation of any of the terms or provisions of, or constitutes or will
constitute a default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or assets
(tangible or intangible) of the Company pursuant to the terms of (i) the
articles of incorporation or by-laws of the Company, as amended and restated,
(ii) any license, contract, indenture, mortgage, deed of trust, voting trust
agreement, stockholders agreement, note, loan or credit agreement or any other
agreement or instrument to which the Company is a party or by which it is or may
be bound or to which its properties or assets (tangible or intangible) is or may
be subject, or (iii) any statute, judgment, decree, order, rule or regulation
applicable to the Company of any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, having jurisdiction over the Company or any of its
activities or properties, in each of the above instances-in subparagraph (ii)
and (iii), which could reasonably be expected to materially and adversely affect
the Business.
<PAGE>
(l) No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance and sale of the Securities pursuant
hereto, and the Prospectus and the Registration Statement, the performance of
this Agreement, the Warrant Agreement, and the Underwriter's Warrant Agreement,
and the transactions contemplated hereby and thereby, including without
limitation, any waiver of any preemptive, first refusal or other rights that any
entity or person may have for the issue and/or sale of any of the Securities,
except such as have been or may be obtained under the Act or may be required
under state securities or Blue Sky laws in connection with the Underwriter's
purchase and distribution of the Firm Securities, the Option Securities, and the
Underwriter's Warrants to be sold by the Company hereunder.
(m) All executed agreements, contracts or other documents or copies
of executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company is a party or by which it may be
bound or to which its assets, properties or businesses may be subject have been
duly and validly authorized, executed and delivered by the Company and
constitute the legal, valid and binding agreements of the Company enforceable
against the Company in accordance with their respective terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law). The descriptions in the
Registration Statement of such agreements, contracts and other documents are
accurate in all material respects and fairly present the information required to
be shown with respect thereto by Form SB-2, and there are no contracts or other
documents which are required by the Act to be described in the Registration
Statement or filed as exhibits to the Registration Statement which are not-
described or filed as required, and the exhibits which have been filed are
complete and correct copies of the documents of which they purport to be copies.
(n) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) the Company has not incurred
any material liabilities or obligations, indirect, direct or contingent, or
entered into any material verbal or written agreement or other transaction which
is not in the ordinary course of business or which could reasonably be expected
to result in a material reduction in the future earnings of the Company; (ii)
the Company has not sustained any material loss or interference with its
business or properties from fire, flood, windstorm, accident or other calamity,
whether or not covered by insurance; (iii) the Company has not paid or declared
any dividends or other distributions with respect to its capital stock, and the
Company is not in default in the payment of principal or interest on any
outstanding debt obligations; (iv) there has not been any change in the capital
stock (other than upon the sale of the Firm Securities, the Option Securities
and the Underwriter's Warrants hereunder and upon the exercise of options and
warrants described in the Registration Statement) of, or indebtedness material
to, the Company (other than in the ordinary course of business); (v) the Company
has not
<PAGE>
issued any securities or incurred any liability or obligation, primary or
contingent, for borrowed money; and (vi) there has not been any material adverse
change in the Business.
(o) Except as disclosed in or specifically contemplated by the
Prospectus, and subject to the risks and uncertainties described in the
Prospectus under the headings entitled "Risk Factors -Protection of Intellectual
Property" and "Business -- Patents and Proprietary Rights:" (i) the Company has
sufficient trade names, licenses, approvals and governmental authorizations to
conduct its business as now conducted; (ii) the expiration of any trade names,
licenses, approvals or governmental authorizations would not have a material
adverse effect on the Business; (iii) the Company has no knowledge of any
infringement by it or its subsidiaries of trademark, trade name rights, patent
rights, copyrights, licenses, trade secret or other similar rights of others;
and (iv) there is no claim being made against the Company regarding trademark,
trade name, patent, copyright, license, trade secret or other infringement which
could reasonably be expected to have a material adverse effect on the Business.
(p) No default exists in the due performance and observance of any
term, covenant or condition of any material license, contract, indenture,
mortgage, installment sale agreement, lease, deed of trust, voting trust
agreement, stockholders agreement, note, loan or credit agreement, or any other
material agreement or instrument evidencing an obligation for borrowed money, or
any other material agreement or instrument to which the Company is a party or by
which the Company may be bound or to which the property or assets (tangible or
intangible) of the Company are subject or affected, except for such defaults, if
any, which individually and in the aggregate would not have a material adverse
effect on the Business.
(q) To the Company's knowledge, there are no investigations involving
the Company by any governmental agency. There are no unfair labor practice
charges or complaints against the Company pending before the National Labor
Relations Board or any strikes, pickets, boycotts, disputes, slowdowns or
stoppages pending or to its knowledge threatened against or involving the
Company. No representation question exists with respect to the employees of the
Company. No collective bargaining agreement, or modification thereof is
currently being negotiated by the Company. No grievance or arbitration
proceeding is pending under any expired or existing collective bargaining
agreements of the Company. No labor disputes with the employees of the Company
exist or to its knowledge are imminent.
(r) Except as described in the Prospectus, the Company does not
maintain, sponsor or contribute to any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan," or a
"multi-employer plan" as such terms are defined in Sections 3(2), 3(1) and
3(37), respectively, of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") ("ERISA Plans"). The Company does not maintain or contribute
to a defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan
(or any trust created thereunder) has engaged in a
<PAGE>
"prohibited transaction" within the meaning of Section 406 of ERISA or Section
4975 of the Code, which could subject the Company to any tax penalty on
prohibited transactions and which has not adequately been corrected. Each ERISA
Plan is in compliance with all material reporting, disclosure and other
requirements of the Code and ERISA as they relate to any such ERISA Plan.
Determination letters have been received from the Internal Revenue Service with
respect to each ERISA Plan which is intended to comply with Code Section 401(a),
stating that such ERISA Plan and the attendant trust are qualified thereunder.
The Company has never completely or partially withdrawn from a "multi employer
plan."
(s) Neither the Company nor any of its employees, directors,
stockholders, or affiliates (within the meaning of the Regulations) of any of
the foregoing has taken or will take, directly or indirectly, any action
designed to or which has constituted or which might be expected to cause or
result in unlawful stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Securities.
(t) Except for a security interest granted to Isoserve, Inc.,
pursuant to a Security Agreement between Isoserve and the Company, a security
interest granted to lenders in the bridge financing transaction as described in
the Prospectus, and a security interest granted to Wells Fargo Bank pursuant to
an SBA loan from such bank to the Company, the Company has good and marketable
title to, or valid and enforceable leasehold estates in, all items of real and
personal property stated in the Prospectus to be owned or leased by it, free and
clear of all liens, charges, claims, encumbrances, pledges, security interests,
or other restrictions or equities of any kind whatsoever, other than those
referred to in the Prospectus and liens for taxes not yet due and payable or for
such as do not materially affect the value of the Company's real and personal
property, taken as a whole.
(u) To the Company's knowledge, Grant Thornton LLP ("Grant
Thornton"), whose report is filed with the Commission as a part of the
Registration Statement, is an independent certified public accountant as
required by the Act and the Regulations.
(v) The Company has caused to be duly executed legally binding and
enforceable agreements pursuant to which all persons or entities, other than as
set forth in the Prospectus, that directly or beneficially own Common Stock, as
of the effective date of the Registration Statement, have agreed not to,
directly or indirectly, offer, offer to sell, sell, grant any option for the
sale of, transfer, assign, pledge, hypothecate or otherwise encumber or dispose
of any shares of Common Stock or securities convertible into Common Stock,
exercisable or exchangeable for or evidencing any right to purchase or subscribe
for any shares of Common Stock (either pursuant to Rule 144 of the Regulations
or otherwise) or dispose of any interest therein for a period from the date of
the Prospectus until and including the day of like number in the twelfth
consecutive month next following the date that the Registration Statement
becomes effective, without
<PAGE>
the prior written consent of Monroe (the "Lock-up Agreements"). The Company will
cause the Transfer Agent (as defined herein) to place "stop transfer" orders on
the Company's stock ledgers in order to effect the Lock-up Agreements.
(w) Except as disclosed to the Underwriter, there are no claims,
payments, arrangements or understandings, whether oral or written, for services
in the nature of a finder's or origination fee with respect to the sale of the
Securities hereunder or any other arrangements, agreements, understandings,
payments or issuance with respect to the Company or any of its officers,
directors, stockholders, employees or affiliates that may affect the
Underwriter's compensation as determined by the Commission and the National
Association of Securities Dealers, Inc. (the "NASD").
(x) Neither the Company nor any of its officers, employees, agents or
any other person acting on behalf of the Company have, directly or indirectly,
given or agreed to give any money, gift or similar benefit (other than legal
price concessions to customers in the ordinary course of business) to any
customer, supplier, employee or agent of a customer or supplier, or official or
employee of any governmental agency (domestic or foreign) or instrumentality of
any government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or other person who was, is, or may be in a
position to help or hinder the business of the Company (or assist the Company in
connection with any actual or proposed transaction) which might subject the
Company or any other such person to any damage or penalty in any civil, criminal
or governmental litigation or proceeding (domestic or foreign). The Company's
internal accounting controls are sufficient to cause the Company to comply with
the Foreign Corrupt Practices Act of 1977, as amended.
(y) Except as set forth in the Prospectus, no officer, director or
stockholder of the Company, or any "affiliate" or "associate" (as these terms
are defined in Rule 405 of the Regulations) of any of the foregoing persons or
entities has or has had, either directly or indirectly, (i) an interest in any
person or entity which (A) furnishes or sells services or products which are
furnished or sold or are proposed to be furnished or sold by the Company, or (B)
purchases from or sells or furnishes to the Company any goods or services, or
(ii) a beneficial interest in any contract or agreement to which the Company is
a party or by which it may be bound or affected. Except as set forth in the
Prospectus, there are no existing agreements, arrangements, understandings or
transactions, or proposed agreements, arrangements, understandings or
transactions, between or among the Company, and any officer, director, principal
shareholder (as such term is used in the Prospectus) of the Company, or any
affiliate or associate of any of the foregoing persons or entities which are
required to be disclosed in the Prospectus.
(z) The Company is not, and does not intend to conduct its business in
a manner in which it would become an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
<PAGE>
(aa) Any certificate signed by any officer of the Company and
delivered to the Underwriter or to the Underwriter's Counsel (as defined in
Section 4(d) herein) shall be deemed a representation and warranty by the
Company to the Underwriter as to the matters covered thereby.
(ab) The minute books of the Company have been made available to the
Underwriter and contain a complete summary of all meetings and actions of the
directors and stockholders of the Company since the time of its incorporation,
and reflect all transactions referred to in such minutes accurately in all
material respects.
(ac) The Company has not distributed and will not distribute any
offering material in connection with the offering and sale of the Firm
Securities in this offering other than the Prospectus, the Registration
Statement and the other materials permitted by the Act. Except as described in
the Prospectus, no holders of any securities of the Company or of any options,
warrants or other convertible or exchangeable securities of the Company have the
right to include any securities issued by the Company as part of the
Registration Statement or to require the Company to file a registration
statement under the Act and no person or entity holds any antidilution rights
with respect to any securities of the Company.
(ad) Except for policies the absence of which is disclosed in the
Prospectus, the Company maintains insurance by insurers of recognized financial
responsibility of the types and in the amounts as the Company believes are
prudent and adequate for the business in which it is engaged, including, but not
limited to, insurance covering real and personal property owned or leased by the
Company against theft, damage, destruction, acts of vandalism and all other
risks customarily insured against, all of which insurance is in full force and
effect. The Company has delivered to the Underwriter's Counsel satisfactory
summaries of these insurance policies. The Company has no reason to believe
that it will not be able to renew existing insurance coverage with respect to
the Company as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business, in either case,
at a cost that would not have a material adverse effect on the financial
condition, operations, business, assets or properties of the Company. The
Company has not failed to file any material claims, has no material disputes
with its insurance company regarding any claims submitted under its insurance
policies, and has complied in material respects with all material provisions
contained in its insurance policies, except where such failure or noncompliance
could not reasonably be expected to have a material adverse effect on the
Business.
2. Purchase, Sale and Delivery of the Securities.
---------------------------------------------
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriter, and the Underwriter agrees
to purchase from the Company, 800,000 Units, at a price equal to $5.31 per Unit.
<PAGE>
(b) In addition, on the basis of the representations, warranties,
covenants and agreements, herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriter to purchase all or any part of an additional 120,000 Units at a
price of $5.31 per Unit. The option granted hereby will expire 45 days after
(i) the date the Registration Statement becomes effective, if the Company has
elected not to rely on Rule 430A under the Regulations, or (ii) the date of this
Agreement if the Company has elected to rely upon Rule 430A under the
Regulations, and may be exercised in whole or in part from time to time (but not
on more than two (2) occasions) only for the purpose of covering over-allotments
which may be made in connection with the offering and distribution of the Firm
Securities upon notice by the Underwriter to the Company setting forth the
number of Option Securities as to which the Underwriter is then exercising the
option and the time and date of payment and delivery for any such Option
Securities. Any such time and date of delivery (an "Option Closing Date") shall
be determined by the Underwriter, but shall not be later than three full
business days after the exercise of said option, nor in any event prior to the
Closing Date, as hereinafter defined, unless otherwise agreed upon by the
Underwriter and the Company. Nothing herein contained shall obligate the
Underwriter to exercise the over-allotment option described above. No Option
Securities shall be delivered unless the Firm Securities shall be simultaneously
delivered or shall theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates
for, the Firm Securities shall be made at the offices of Singer Zamansky, LLP,
40 Exchange Place, 20/th/ Floor, New York, New York 10005, or at such other
place as shall be agreed upon by the Underwriter and the Company. Such delivery
and payment (the "Closing") shall be made at 9:00 a.m. (New York time) on ____
__, 1997, or at such other time and date as shall be agreed upon by the
Underwriter and the Company, but no more than four (4) business days after the
date hereof (such time and date of payment and delivery being herein called the
"Closing Date"). In addition, in the event that any or all of the Option
Securities are purchased by the Underwriter, payment of the purchase price for,
and delivery of certificates for, such Option Securities shall be made at the
above mentioned office of Monroe or at such other place as shall be agreed upon
by the Underwriter and the Company on each Option Closing Date as specified in
the notice from the Underwriter to the Company.
(d) On the Closing Date, the Company shall issue and sell the
Underwriter's Warrants to the Underwriter at an aggregate purchase price of
$80.00, which Warrants shall entitle the holders thereof to purchase an
aggregate of 80,000 shares of Common Stock and 80,000 Warrants. The
Underwriter's Warrants shall expire five (5) years after the effective date of
the Registration Statement, shall be exercisable for a period of four (4) years
commencing on the first anniversary of the effective date of the Registration
Statement, and each Underwriter's Warrant will entitle the holder to purchase
(i) one share of Common Stock at a price equaling one hundred sixty five percent
(165%) of the effective initial public offering price of the shares of Common
Stock which for the
<PAGE>
purposes of this paragraph shall be $5.80 per share and (ii) upon payment of one
hundred sixty five (165%) of the effective initial public offering price of the
Warrants which for purposes of this paragraph shall be $.10 per Warrant, one
Warrant, which is exercisable at $5.80 per share of Common Stock. The
Underwriter's Warrant Agreement and form of Warrant Certificate shall be
substantially in the form filed as Exhibit 4.02 to the Registration Statement.
Payment for the Underwriter's Warrants shall be made on the Closing Date.
3. Public Offering of the Units. As soon after the Registration
----------------------------
Statement becomes effective as the Underwriter deems advisable, the Underwriter
shall make a public offering of the Units (other than to residents of or in any
jurisdiction in which qualification of the Units is required and has not become
effective) at the price and upon the other terms set forth in the Prospectus.
The Underwriter may from time to time increase or decrease the public offering
price to such extent as the Underwriter, in its sole discretion, deems advisable
and as permitted by the Act and Regulations. The Underwriter may enter into one
or more agreements as the Underwriter, in its sole discretion, deems advisable
with one or more broker-dealers who shall act as dealers in connection with such
public offering. The Underwriter will cause the Units, the Warrants and the
Common Stock to be quoted on the Closing Date on the OTC Electronic Bulletin
Board.
4. Covenants of the Company. The Company covenants and agrees with the
------------------------
Underwriter as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Act or Exchange
Act before termination of the offering of the Units by the Underwriter of which
the Underwriter shall not previously have been advised and furnished with a
copy, or to which the Underwriter shall have objected or which is not in
compliance with the Act, the Exchange Act or the Regulations.
(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Underwriter and confirm the notice in writing, (i)
when the Registration Statement, as amended, becomes effective, if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any post-
effective amendment to the Registration Statement becomes effective, (ii) of the
issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding, suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of any preliminary
prospectus or the Prospectus, or any amendment or supplement thereto, or the
institution of proceedings for that purpose, (iii) of the issuance by the
Commission or by any state securities commission of any proceedings for the
suspension
<PAGE>
of the qualification of any of the Securities for offering or sale in any
jurisdiction or of the initiation, or the threatening, of any proceeding for
that purpose, (iv) of the receipt of any comments from the Commission; and (v)
of any request by the Commission for any amendment to the Registration Statement
or any amendment or supplement to the Prospectus or for additional information.
If the Commission or any state securities commission shall enter a stop order or
suspend such qualification at any time, the Company will use its best efforts to
obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Underwriter) in accordance with the requirements of the Act.
(d) The Company will give the Underwriter notice of its intention to
file or prepare any amendment to the Registration Statement (including any post-
effective amendment) or any amendment or supplement to the Prospectus (including
any revised prospectus which the Company proposes for use by the Underwriter in
connection with the offering of the Securities which differs from the
corresponding prospectus on file at the Commission at the time the Registration
Statement becomes effective, whether or not such revised prospectus is required
to be filed pursuant to Rule 424(b) of the Regulations), and will furnish the
Underwriter with copies of any such amendment or supplement a reasonable amount
of time prior to such proposed filing or use, as the case may be, and will not
file any such amendment or supplement to which the Underwriter or Singer
Zamansky, LLP ("Underwriter's Counsel") shall reasonably object.
(e) The Company shall endeavor in good faith, in cooperation with the
Underwriter, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Underwriter may reasonably designate to permit
the sales and dealings therein for as long as may be necessary to complete the
distribution, and shall make such applications, file such documents and furnish
such information as may be required for such purpose; provided, however, the
Company shall not be required to qualify as a foreign corporation or become
subject to service of process in any such jurisdiction. In each jurisdiction
where such qualification shall be effected, the Company will, unless the
Underwriter agrees that such action is not at the time necessary or advisable,
use all reasonable efforts to file and make such statements or reports at such
times as are required by the laws of such jurisdiction to continue such
qualification.
(f) During the time when a prospectus is required to be delivered
under the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act, as now and hereafter amended, and by
the Regulations, as from time to time in force, so far as necessary to permit
the continuance of sales of or dealings in the Securities in accordance with the
provisions hereof and the Prospectus, or any amendments or supplements thereto.
If at any time when a prospectus relating to the Securities is required to be
delivered under the Act, any event shall have occurred as a result of which, in
the opinion of counsel for the Company or Underwriter's Counsel, the Prospectus,
as then amended or supplemented, includes an untrue statement
<PAGE>
of a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is necessary
at any time to amend or supplement the Prospectus to comply with the Act, the
Company will notify the Underwriter promptly and prepare and file with the
Commission an appropriate amendment or supplement in accordance with Section 10
of the Act, each such amendment or supplement to be satisfactory to
Underwriter's Counsel, and the Company will furnish to the Underwriter copies of
such amendment or supplement as soon as available and in such quantities as the
Underwriter may request.
(g) As soon as practicable, but in any event not later than 45 days
after the end of the 12-month period beginning on the day after the end of the
fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) of the Regulations, and to the Underwriter, an earnings statement which
will be in the detail required by, and will otherwise comply with, the
provisions of Section 11(a) of the Act and Rule 158(a) of the Regulations, which
statement need not be audited unless required by the Act, covering a period of
at least twelve (12) consecutive months after the effective date of the
Registration Statement.
(h) During a period of five (5) years after the date hereof, until
and including the like day and month in 2002, the Company will furnish to its
stockholders, as soon as practicable, annual reports (including consolidated
financial statements of the Company and its consolidated subsidiaries audited by
independent public accountants) and will make available to its stockholders
consolidated unaudited quarterly reports (except for the last quarter of each
fiscal year) of earnings of the Company and its consolidated subsidiaries, and
will deliver to the Underwriter:
(i) concurrently with furnishing such quarterly reports to its
stockholders, a consolidated statement of income of the Company and its
consolidated subsidiaries for each quarter in the form furnished to the
Company's stockholders;
(ii) concurrently with furnishing such annual reports to its
stockholders, a consolidated balance sheet of the Company and its consolidated
subsidiaries as at the end of the preceding fiscal year, together with
statements of consolidated operations, stockholders' equity, and cash flows of
the Company and its consolidated subsidiaries for such fiscal year, accompanied
by a copy of the report thereon of independent certified public accountants;
(iii) as soon as they are available, copies of all other reports
(financial or other) mailed to stockholders;
<PAGE>
(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission or, if at all,
with Nasdaq or any securities exchange;
(v) every press release and every material news item or article
of interest to the financial community in respect of the Company or its affairs
which was released or prepared by or on behalf of the Company; and
(vi) any additional information of a public nature concerning the
Company and its businesses which the Underwriter may reasonably request.
During such five-year period, the foregoing financial statements will be
accompanied by similar financial statements for any significant subsidiary which
is not consolidated.
(i) The Company will maintain a transfer agent (the "Transfer Agent")
and, if necessary under the jurisdiction of incorporation of the Company, a
registrar (which may be the same entity as the transfer agent) for the
Securities and the Underwriter's Warrants.
(j) The Company will furnish to the Underwriter, without charge, at
such place as the Underwriter may designate, copies of each preliminary
prospectus, the Registration Statement, the Prospectus and any pre-effective or
post-effective amendments thereto (two of which copies will be signed and will
include all financial statements and exhibits), in each case as soon as
available and in such quantities as the Underwriter may reasonably request.
(k) On or before the effective date of the Registration Statement,
the Company shall provide the Underwriter with true copies of duly executed
Lock-up Agreements. On or before the Closing Date, the Company shall deliver
instructions to the Transfer Agent authorizing it to place appropriate stop
transfer orders on the Company's ledgers.
(l) The Company shall use its best efforts to cause its officers,
directors, stockholders or affiliates (within the meaning of the Regulations)
not to take, directly or indirectly, any action designed to, or which might in
the future reasonably be expected to cause or result in, unlawful stabilization
or manipulation of the price of any securities of the Company.
(m) The Company shall apply the net proceeds from the sale of the
Securities substantially in the manner, and subject to the conditions, set forth
under "Use of Proceeds" in the Prospectus.
(n) After the effective date of the Registration Statement, the
Company shall timely file all such reports, forms or other documents as may be
required
<PAGE>
(including, but not limited to, a Form SR as may be required pursuant to Rule
463 under the Act) from time to time, under the Act, the Exchange Act, and the
Regulations, and all such reports, forms and documents filed will comply as to
form and substance with the applicable requirements under the Act, the Exchange
Act, and the Regulations.
(o) For the first 30 days following the Closing Date, the Company
shall provide the Underwriter DTC transfer sheets as the Underwriter may
request. For a period of two (2) years from the Closing Date, the Company shall
furnish to the Underwriter, at the Company's sole expense, monthly DTC transfer
sheets relating to the Common Stock and Warrants.
(p) For a period of five (5) years after the effective date of the
Registration Statement, the Company shall, at the Company's sole expense, take
all reasonable and appropriate actions to qualify the Common Stock and Warrants
in all jurisdictions of the United States which do not require the Company to
qualify as a foreign corporation or to file a general consent to service of
process in order to permit secondary sales of such securities pursuant to the
Blue Sky laws of those jurisdictions.
(q) The Company (i) prior to the effective date of the Registration
Statement has filed a Form 8-A with the Commission providing for the
registration of the Common Stock and Warrants under the Exchange Act and (ii) as
soon as practicable but later than the Effective Date will use its best efforts
to take all necessary and appropriate actions to be included in Standard and
Poor's Corporation Descriptions or Moody's OTC Manual and to continue such
inclusion for a period of not less than five (5) years (or, if sooner, the date
on which the Common Stock and Warrants are listed on the New York Stock
Exchange, American Stock Exchange, or Nasdaq National Market).
(r) The Company agrees that for a period of twelve (12) months
following the effective date of the Registration Statement it will not, without
the prior written consent of Monroe, offer, issue, sell, contract to sell, grant
any option for the sale of or otherwise dispose of any Common Stock or
securities convertible into Common Stock, except for the issuance of shares of
Common Stock registered under the Act pursuant to the Registration Statement, or
except pursuant to incentive or benefit plans approved by the Board of Directors
of the Company, pursuant to options or warrants outstanding on the Closing Date,
or in connection with acquisitions of companies, products or technologies. The
Company also agrees for a period of twelve (12) months following the Effective
Date not to file any Registration Statement, including on Form S-8 or such
comparable form without the consent of the Underwriter.
(s) Until the completion of the distribution of the Securities in
connection with the initial public offering of the Securities, the Company shall
not without the prior written consent of Monroe or Underwriter's Counsel, issue,
directly or indirectly, any press release or other communication or hold any
press conference with respect to the Company or its activities or the offering
contemplated hereby, other than
<PAGE>
trade releases issued in the ordinary course of the Company's business
consistent with past practices.
(t) For a period equal to the lesser of (i) five (5) years from the
date hereof, and (ii) the sale to the public of the Underwriter's Securities (or
the shares of Common Stock issuable upon exercise of the Underwriter's
Securities), the Company will not take any action or actions which may prevent
or disqualify the Company's use of an appropriate form for the registration
under the Act of the Underwriter's Securities (or the shares of Common Stock
issuable upon exercise of the Underwriter's Securities).
(u) The Company agrees that it shall use its best efforts, which
shall include, but shall not be limited to, the solicitation of proxies, to
elect one (1) designee designated by Monroe to the Company's Board of Directors
for a period of three (3) years following the Closing Date, provided that such
designee is reasonably acceptable to the Company and that such director may be
excluded from consideration of certain confidential matters which, in the good
faith judgment of a majority of the other directors, make such director's
presence not appropriate.
(v) The Company agrees that within forty-five (45) days after the
Closing Date it shall retain a public relations firm which is reasonably
acceptable to Monroe. Provided that such public relations firm performs in a
commercially reasonable and satisfactory manner, the Company shall keep such
public relations firm and any replacement for a total period of two (2) years
from the Closing Date. Any replacement public relations firm shall be retained
only with the consent of Monroe, which shall not be unreasonably withheld.
(w) The Company agrees that any and all future transactions between
the Company and any of its officers, directors, principal stockholders and the
affiliates of the foregoing persons will be on terms no less favorable to the
Company than could reasonably be obtained in arm's length transactions with
independent third parties, and that any such transactions also be approved by a
majority of the Company's outside independent directors disinterested in the
transaction.
(x) The Company shall prepare and deliver, at the Company's sole
expense, to Monroe within the one hundred and twenty (120) day period after the
later of the effective date of the Registration Statement and the latest Option
Closing Date, as the case may be, one bound volume each containing all
correspondence with regulatory officials, agreements, documents and all other
materials in connection with the offering to which such Registration Statement
relates as requested by the Underwriter's Counsel.
5. Payment of Expenses.
-------------------
(a) The Company hereby agrees to pay on each of the Closing Date and
each Option Closing Date (to the extent not previously paid) all expenses and
fees (other than fees of Underwriter's Counsel, except as provided in (iv) below
of this
<PAGE>
Section 5) incident to the performance of the obligations of the Company
under this Agreement, the Warrant Agreement, and the Underwriter's Warrant
Agreement, including, without limitation: (i) the fees and expenses of
accountants and counsel for the Company; (ii) all costs and expenses incurred
in connection with the preparation, duplication, printing, filing, delivery and
mailing (including the payment of postage with respect thereto) of the
Registration Statement and the Prospectus and any amendments and supplements
thereto and the duplication, mailing (including the payment of postage with
respect thereto) and delivery of this Agreement, the Warrant Agreement, the
Selected Dealers Agreements, the Powers of Attorney, and related documents,
including the cost of all copies thereof and of the preliminary prospectuses and
of the Prospectus and any amendments thereof or supplements thereto supplied to
the Underwriter and such dealers as the Underwriter may request, in quantities
as hereinabove stated; (iii) the printing, engraving, issuance and delivery of
the certificates representing the Securities; (iv) the qualification of the
Securities under state or foreign securities or "Blue Sky" laws and
determination of the status of such securities under legal investment laws,
including the costs of word processing and mailing the "Preliminary Blue Sky
Memorandum," the "Supplemental Blue Sky Memorandum" and "Legal Investments
Survey," if any, and reasonable disbursements and fees of counsel in connection
therewith; (v) advertising costs and expenses, including but not limited to the
costs and expenses incurred by the Company and the Underwriter in connection
with the "road show," information meetings and presentations, bound volumes and
prospectus memorabilia and reasonable "tombstone" advertisement expenses; (vi)
experts; (vii) the fees and expenses of the transfer agent and registrar;
(viii) the fees payable to the Commission and the NASD; (ix) issue and transfer
taxes, if any; and (x) the fees and expenses incurred in connection with the
listing of the Securities, if at all, on the Nasdaq SmallCap Market and any
other market or exchange.
(b) If this Agreement is terminated by the Underwriter in accordance
with the provisions of Section 6, Section 10(a) or Section 11, the Company shall
reimburse and indemnify the Underwriter for all of its actual out-of-pocket
expenses on an accountable basis, including the fees and disbursements of
Underwriter's Counsel, less any amounts already paid pursuant to Section 5(c)
hereof provided that Monroe shall notify the Company of any single expense or
any series of similar expenses which in the aggregate exceed $5,000 (provided
further that such notice requirement shall not apply to Monroe's actual out-of-
pocket legal expenses).
(c) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 5, it will pay to the
Underwriter on the Closing Date by certified or bank cashier's check or, at the
election of the Underwriter, by deduction from the proceeds of the offering
contemplated herein a non-accountable expense allowance equal to three percent
(3%) of the gross proceeds received by the Company from the sale of the Firm
Securities, at least $50,000 of which has been paid to date. In the event the
Underwriter elects to exercise the over-allotment option described in Section
2(b) hereof, the Company further agrees to pay to the Underwriter on each Option
Closing Date (by certified or bank cashier's check or, at the Underwriter's
<PAGE>
election, by deduction from the proceeds of the offering) a non-accountable
expense allowance equal to three percent (3%) of the gross proceeds received by
the Company from the sale of the Option Securities.
6. Conditions of the Underwriter's Obligations. The obligations of the
-------------------------------------------
Underwriter hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, as if they had been
made on and as of the Closing Date or each Option Closing Date, as the case may
be; the accuracy on and as of the Closing Date or Option Closing Date, if any,
of the statements of officers of the Company made pursuant to the provisions
hereof; and the performance by the Company on and as of the Closing Date and
each Option Closing Date, if any, of its covenants and obligations hereunder and
to the following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 p.m., New York City time, on the date prior to the date of this
Agreement or such later date and time as shall be consented to in writing by the
Underwriter, and, at the Closing Date and each Option Closing Date, if any, no
stop order suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been instituted or
shall be pending or threatened by the Commission and any request on the part of
the Commission for additional information shall have been complied with to the
reasonable satisfaction of Underwriter's Counsel. If the Company has elected to
rely upon Rule 430A of the Regulations, the price of the Units and any price-
related information previously omitted from the effective Registration Statement
pursuant to such Rule 430A shall have been transmitted to the Commission for
filing pursuant to Rule 424(b) of the Regulations within the prescribed time
period, and prior to the Closing Date the Company shall have provided evidence
satisfactory to the Underwriter of such timely filing, or a post-effective
amendment providing such information shall have been promptly filed and declared
effective in accordance with the requirements of Rule 430A of the Regulations.
(b) The Underwriter shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Underwriter's reasonable opinion, is material, or omits to
state a fact which, in the Underwriter's reasonable opinion, is material and is
required to be stated therein or is necessary to make the statements therein not
misleading, or that the Prospectus, or any supplement thereto, contains an
untrue statement of fact which, in the Underwriter's reasonable opinion, is
material, or omits to state a fact which, in the Underwriter's reasonable
opinion, is material and is required to be stated therein or is necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
(c) On or prior to the Closing Date, the Underwriter shall have
received from Underwriter's Counsel such opinion or opinions with respect to the
organization of the Company, the validity of the Securities, the Registration
Statement,
<PAGE>
the Prospectus and other related matters as the Underwriter may reasonably
request and Underwriter's Counsel shall have received from the Company such
papers and information as they request to enable them to pass upon such matters.
(d) At the Closing Date, the Underwriter shall have received the
favorable opinion of Fenwick & West LLP ("Fenwick & West"), counsel to the
Company, dated the Closing Date, addressed to the Underwriter and in form and
substance satisfactory to Underwriter's Counsel, to the effect that:
(i) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of California, and is duly
qualified or licensed to do business and is in good standing as a foreign
corporation in all jurisdictions of the United States of America in which the
nature of the activities conducted by it or the character of the assets owned or
leased by it makes such license or qualification necessary, except to the extent
that the failure to so qualify would not have a material adverse effect on the
Company's business. To such counsel's knowledge, (a) the Company has full
corporate power and corporate authority to own or lease all the assets owned or
leased by it and to conduct its business as described in the Prospectus, and (b)
the Company has all governmental licenses, permits, consents, orders, approvals
and other authorizations ("Permits") necessary to carry on its business as set
-------
forth in the Prospectus, except for such Permits the absence of which would not
have a material adverse effect on the Company's business.
(ii) Except as described in the Prospectus and except for A&R
Technology, a subsidiary which to such counsel's knowledge is organized in the
former Soviet Union and which to such counsel's knowledge does not currently
engage in any substantial activities, to such counsel's knowledge, the Company
does not own an interest in any corporation, limited liability company,
partnership, joint venture, trust or other business entity.
(iii) To such counsel's knowledge, at the dates set forth in the
Prospectus, the Company had a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus (except for insignificant rounding
or other differences) under the captions "Capitalization" and "Description of
Capital Stock." To such counsel's knowledge, the Company is not a party to or
bound by any instrument, agreement or other arrangement providing for it to
issue any capital stock, rights, warrants, options or other securities, except
for this Agreement, the Warrant Agreement, the Underwriter's Warrant Agreement,
or as described in the Prospectus. The statements set forth in the Prospectus
under the captions "Description of Capital Stock" and "Shares Eligible for
Future Sale," insofar as they purport to constitute a summary of the terms of
the Common Stock and warrants (including without limitation the Warrants and the
Underwriter's Warrants) which will be outstanding after the Closing Date, are
accurate in all material respects. At the date set forth under "Capitalization"
in the Prospectus, all issued and outstanding securities of the Company have
been duly authorized and validly issued and are nonassessable and, to such
counsel's knowledge, are fully paid, and none of such
<PAGE>
securities were issued in violation of any preemptive or similar rights known to
such counsel of any holders of any security of the Company imposed by the
Company's Articles, Bylaws or any agreement known to such counsel to which the
Company is a party or by which to such counsel's knowledge it is bound. The
Securities to be sold by the Company under this Agreement, under the Warrant
Agreement, and under the Underwriter's Warrant Agreement are not and will not be
subject to any preemptive or other similar rights of any shareholder imposed by
the Company's Articles, Bylaws or any agreement known to such counsel to which
the Company is a party or by which to such counsel's knowledge it is bound, have
been duly authorized and, when issued, paid for and delivered in accordance with
their terms, will be validly issued and nonassessable; and, to such counsel's
knowledge, fully paid; all corporate approvals and consents of the Board of
Directors and shareholders of the Company required to be taken for the
authorization, issue and sale of the Securities has been duly and validly taken.
The certificates representing the Shares and Warrants to be delivered pursuant
to this Agreement are in due and proper form under California law. The
Underwriter's Warrants and the Warrants constitute valid, binding and
enforceable obligations of the Company to issue and sell, upon exercise thereof
and payment therefor and subject to the terms and conditions thereof and the
Warrant Agreement and the Underwriter's Warrant Agreement, the number and type
of securities of the Company called for thereby (subject to the limitations
regarding enforceability of obligations set forth elsewhere in this opinion).
Upon the issuance and delivery of and payment for the Units pursuant to this
Agreement, and upon registration of such securities in the name of the
Underwriter in the stock records of the Company, the Underwriter will be the
owners of such Units, free and clear of any adverse claim, assuming for purposes
of such opinion that the Underwriter is purchasing such securities in good faith
and without notice of any adverse claim.
(iv) Based solely upon the oral advice to such counsel from the Staff
of the Commission, (A) the Registration Statement is effective under the Act
and, if applicable, filing of all pricing information has been timely made in
the appropriate form under Rule 430A, (B) no stop order suspending the use of
any preliminary prospectus, the Registration Statement or Prospectus or any part
of any thereof or suspending the effectiveness of the Registration Statement has
been issued and (C) no proceedings for that purpose have been instituted or are
pending or, to such counsel's knowledge, threatened or contemplated under the
Act.
(v) Each of any preliminary prospectus, the Registration Statement,
and the Prospectus (other than the financial statements and other financial and
statistical data included therein as to which such counsel expresses no opinion)
comply as to form in all material respects with the requirements of the Act and
the Regulations.
(vi) To such counsel's knowledge: (A) there are no agreements,
contracts or other documents required by the Act to be described in the
Registration Statement and the Prospectus and filed as exhibits to the
Registration Statement other than those described in the Registration Statement
and the Prospectus and filed as exhibits thereto; (B) the descriptions in the
Registration Statement and the Prospectus of
<PAGE>
contracts and other agreements to which the Company is a party that are
expressly referred to in the Registration Statement and the Prospectus, are
accurate in all material respects; (C) there is not pending or overtly
threatened against the Company any action, arbitration, proceeding, litigation,
governmental or other proceeding, domestic or foreign (an "Action") which (x) is
------
required by the Regulations to be disclosed in the Registration Statement which
is not so disclosed (and such proceedings as are summarized in the Registration
Statement are to our knowledge accurately summarized in all material respects),
(y) questions the validity of the capital stock of the Company or this
Agreement, the Warrant Agreement, or the Underwriter's Warrant Agreement, or of
any action taken or to be taken by the Company pursuant to or in connection with
any of the foregoing or (z) in which there is a reasonable possibility of an
adverse decision which could reasonably be expected to result in a material
adverse change in the business of the Company, or which could reasonably be
expected to materially adversely affect the present or prospective ability of
the Company to perform its obligations under this Agreement, the Warrant
Agreement or the Underwriter's Warrant Agreement.
(vii) The Company has the corporate power and corporate authority to
enter into each of this Agreement, the Warrant Agreement, and the Underwriter's
Warrant Agreement and to consummate the transactions provided for therein, and
each of this Agreement, the Warrant Agreement, and the Underwriter's Warrant
Agreement has been duly authorized, executed and delivered by the Company. Each
of this Agreement, the Warrant Agreement, and the Underwriter's Warrant
Agreement, assuming due authorization, execution and delivery by each other
party thereto, constitutes a legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms (subject to the
limitations regarding enforceability of obligations set forth elsewhere in such
counsel's opinion). To such counsel's knowledge, (A) none of the Company's
execution, delivery or performance of this Agreement, the Warrant Agreement, and
the Underwriter's Warrant Agreement, (B) the consummation by the Company of the
transactions contemplated therein, or (C) the conduct of the Company's business
as described in the Registration Statement and the Prospectus materially
conflicts with or results in any material breach or material violation of, or
constitutes a material default under, or result in the creation or imposition of
any material lien, charge, claim, encumbrance, pledge, security interest, defect
or other restriction of any kind whatsoever upon, any property or assets
(tangible or intangible) of the Company pursuant to the terms of (A) the
Restated Articles or Bylaws, (B) any Material Agreement, or (C) any federal,
state or local statute, rule or regulation known to us to be applicable to the
Company or any judgment, decree or order known to such counsel, of any
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body, having jurisdiction over the Company or any of its
activities or properties, in each case where such conflict, breach, violation or
default could reasonably be expected to have a material adverse effect on the
Company's business.
(viii) No consent, approval, authorization or order, and no filing
with, any court, regulatory body, government agency or other body (other than
such as
<PAGE>
may be required under Blue Sky laws, as to which such counsel expresses no
opinion or under federal securities laws, as to which such counsel expresses no
opinion pursuant to this paragraph (viii)) is required in connection with the
issuance of the Firm Securities and Underwriter's Warrants pursuant to the
Prospectus and the Registration Statement, the performance of this Agreement,
the Warrant Agreement, and the Underwriter's Warrant Agreement, and the
transactions contemplated thereby.
(ix) To such counsel's knowledge, the description of the real property
lease agreements to which the Company is a party that are expressly referred to
in the Registration Statement and Prospectus under "Business -- Facilities," is
accurate in all material respects.
(x) To such counsel's knowledge, and except as disclosed in the
Registration Statement and the Prospectus, (A) the Company is not in material
breach of, or in material default under, any term or provision of any agreement
or instrument listed as an exhibit in Item 27 of the Registration Statement
(collectively, the "Material Agreements"), in each case where such breach or
default could reasonably be expected to have a material adverse effect on the
business of the Company, and (B) the Company is not in material violation of any
term or provision of its Restated Articles or Bylaws, or in material violation
of any franchise, license, permit, judgment, decree, order, statute, rule or
regulation known to us to be applicable to the Company, in each case where such
breach, default or violation could reasonably be expected to have a material
adverse effect on the Company's business.
(xi) The statements in the Prospectus under "Dividend Policy,"
"Description of Capital Stock," and "Shares Eligible for Future Sale," insofar
as such statements constitute a summary of law, descriptions of statutes,
licenses, rules or regulations or legal conclusions expressly referred to
therein, are correct in all material respects.
(xii) To such counsel's knowledge, except as disclosed in the
Registration Statement and Prospectus, no person, corporation, trust,
partnership, association or other entity has the right under any Material
Agreement or other agreement specifically identified in such counsel's opinion
to include and/or register any securities of the Company in the Registration
Statement, require the Company to file any registration statement or, if filed,
to include any security in such registration statement.
Such counsel shall also confirm that, although such counsel has not
verified the accuracy, completeness or fairness of the statements contained in
the Registration Statement or the Prospectus, nothing has come to such counsel's
attention that causes such counsel to believe that, as of its effective date,
the Registration Statement (other than financial statements and any financial or
statistical data derived therefrom as to which we express no opinion) contained
an untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading or that, as of its date, the
<PAGE>
Prospectus (other than the financial statements and any financial or statistical
data therein as to which such counsel expresses no opinion) contained an untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading or that, as of the date of such opinion, either the
Registration Statement or the Prospectus (other than the financial statements
and any financial or statistical data derived therefrom as to which we express
no opinion) contains an untrue statement of a material fact or omits to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
In rendering such opinion, such counsel (A) need not express any
opinion as to matters involving the application of laws other than the laws,
rules and regulations of the United States (with such exceptions and limitations
as are set forth in such counsel's opinion) and the laws, rules and regulations
of the State of California; and (B) as to matters of fact, to the extent they
deem proper, on certificates and written statements of responsible officers of
the Company and certificates or other written statements of officers of
departments of various jurisdictions having custody of documents respecting the
corporate existence or good standing of the Company, provided that copies of any
such statements or certificates shall be delivered to Underwriter's Counsel if
requested.
At each Option Closing Date, if any, the Underwriter shall have
received the favorable opinion of Fenwick & West, counsel to the Company, dated
the Option Closing Date, addressed to the Underwriter and in form and substance
satisfactory to Underwriter's Counsel confirming as of such Option Closing Date
the statements made by Fenwick & West in its opinion delivered on the Closing
Date.
(e) On or prior to each of the Closing Date and the Option Closing
Date, if any, Underwriter's Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company or herein contained.
(f) Prior to each of the Closing Date and each Option Closing Date,
if any: (i) there shall have been no material adverse change nor development
involving a prospective material adverse change in the condition, financial or
otherwise, prospects, stockholders' equity or the business activities of the
Company, whether or not in the ordinary course of business, from the latest
dates as of which such condition is set forth in the Registration Statement and
Prospectus; (ii) except as disclosed in the Registration Statement or the
Prospectus, there shall have been no transaction, not in the ordinary course of
business, entered into by the Company, from the latest date as of which the
financial condition of the Company is set forth in the Registration Statement
and Prospectus which is adverse to the Company; (iii) the Company shall not be
in default under any provision of any instrument relating to any outstanding
indebtedness which default has not been waived; (iv) except as disclosed in the
Registration Statement or the
<PAGE>
Prospectus, the Company shall not have issued any securities (other than the
Securities) or declared or paid any dividend or made any distribution in respect
of its capital stock of any class and there has not been any change in the
capital stock, or any material increase in the debt (long or short term) or
liabilities or obligations of the Company (contingent or otherwise) except for
the issuance of the Option Securities, the Underwriter's Warrants, and shares of
Common Stock issued upon the exercise of currently outstanding warrants or
options, or options and warrants granted in the ordinary course of business
consistent with prior practice; (v) no material amount of the assets of the
Company shall have been pledged or mortgaged, except as set forth in the
Registration Statement and Prospectus; (vi) there shall not have been pending
and the Company shall not have received oral or written notice of any action,
suit or proceeding, at law or in equity, (or circumstances giving rise to same)
against the Company, or affecting any of its respective properties or businesses
before or by any court or federal, state or foreign commission, board or other
administrative agency wherein an unfavorable decision, ruling or finding may
materially adversely affect the Business of the Company except as set forth in
the Registration Statement and Prospectus; and (vii) no stop order shall have
been issued under the Act and no proceedings therefore shall have been
initiated, threatened or contemplated by the Commission.
(g) At each of the Closing Date and each Option Closing Date, if any,
the Underwriter shall have received a certificate of the Company signed on
behalf of the Company by the principal executive officer of the Company, dated
the Closing Date or Option Closing Date, as the case may be, to the effect that
such executive has carefully examined the Registration Statement, the Prospectus
and this Agreement, and that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or the
Option Closing Date, as the case may be, and the Company has complied with all
agreements and covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior to such Closing
Date or Option Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no proceedings
for that purpose have been instituted or are pending or, to the best of such
person's knowledge after due inquiry, are contemplated or threatened under the
Act;
(iii) The Registration Statement and the Prospectus and, if any,
each amendment and each supplement thereto, contain all statements and
information required by the Act to be included therein, and none of the
Registration Statement, the Prospectus nor any amendment or supplement thereto
includes any untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading and neither the Preliminary Prospectus or any supplement, as of
their respective dates, thereto included any untrue statement of a material fact
or omitted to state any material fact required to be stated therein or
<PAGE>
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; and
(iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except as described
in or specifically contemplated by the Registration Statement and Prospectus:
(a) the Company has not incurred up to and including the Closing Date or the
Option Closing Date, as the case may be, other than in the ordinary course of
its business, any material liabilities or obligations, direct or contingent; (b)
the Company has not paid or declared any dividends or other distributions on its
capital stock; (c) the Company has not entered into any transactions not in the
ordinary course of business; (d) there has not been any change in the capital
stock as described in the Registration Statement and Prospectus or material
increase in long-term debt or any increase in the short-term borrowings (other
than any increase in the short term borrowings in the ordinary course of
business) of the Company; (e) the Company has not sustained any material loss or
damage to its property or assets, whether or not insured; (f) there is not
pending, and the Company has received no oral or written notice of, any
litigation (or circumstances giving rise to same) against the Company or any
affiliated party of any of the foregoing which is required to be set forth in an
amended or supplemented Prospectus which has not been set forth; and (g) there
has occurred no event required to be set forth in an amended or supplemented
Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in this subsection
(g) are to such documents as amended and supplemented at the date of such
certificate.
(h) By the Closing Date, the Underwriter will have received clearance
from the NASD as to the amount of compensation allowable or payable to the
Underwriter.
(i) At the time this Agreement is executed, the Underwriter shall
have received a letter, dated such date, addressed to the Underwriter in form
and substance satisfactory in all respects (including the non-material nature of
the changes or decreases, if any, referred to in clause (iii) below) to the
Underwriter and Underwriter's Counsel, from Grant Thornton:
(i) confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable Rules and Regulations;
(ii) stating that it is their opinion that the financial statements
of the Company included in the Registration Statement comply as to form in all
material respects with the applicable accounting requirements of the Act and the
Regulations thereunder and that the Underwriter may rely upon the opinion of
Grant Thornton with respect to the financial statements and supporting schedules
included in the Registration Statement;
<PAGE>
(iii) stating that, on the basis of a limited review which included a
reading of the latest available unaudited interim financial statements of the
Company (with an indication of the date of the latest available unaudited
interim financial statements), a reading of the latest available minutes of the
stockholders and board of directors and the various committees of the board of
directors of the Company, consultations with officers and other employees of the
Company responsible for financial and accounting matters and other specified
procedures and inquiries, nothing has come to their attention which would lead
them to believe that: (A) the unaudited financial statements of the Company
included in the Registration Statement, if any, do not comply as to form in all
material respects with the applicable accounting requirements of the Act and the
Regulations or are not fairly presented in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that of
the audited financial statements of the Company included in the Registration
Statement; or (B) at a specified date not more than five (5) days prior to the
effective date of the Registration Statement, there has been any change in the
capital stock or material increase in long-term debt of the Company, or any
material decrease in the stockholders' equity or net current assets or net
assets of the Company as compared with amounts shown in the most recent balance
sheet included in the Registration Statement, other than as set forth in or
contemplated by the Registration Statement, or, if there was any change or
decrease, setting forth the amount of such change or decrease.
(iv) stating that they have compared specific dollar amounts, numbers
of shares, percentages of revenues and earnings, statements and other financial
information pertaining to the Company set forth in the Prospectus in each case
to the extent that such amounts, numbers, percentages, statements and
information may be derived from the general accounting records, including work
sheets, of the Company and excluding any questions requiring an interpretation
by legal counsel, with the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted auditing
standards) set forth in the letter and found them to be in agreement; and
(v) statements as to such other material matters incident to the
transaction contemplated hereby as the Underwriter may reasonably request.
(j) At the Closing Date and each Option Closing Date, if any, the
Underwriter shall have received from Grant Thornton a letter, dated as of the
Closing Date or the Option Closing Date, as the case may be, to the effect that
they reaffirm that statements made in the letter furnished pursuant to
Subsection (i) of this Section 6, except that the specified date referred to
shall be a date not more than five (5) days prior to the Closing Date or the
Option Closing Date, as the case may be, and, if the Company has elected to rely
on Rule 430A of the Rules and Regulations, to the further effect that they have
carried out procedures as specified in clause (iv) of Subsection (i) of this
Section 6 with respect to certain amounts, percentages and financial information
as specified by the
<PAGE>
Underwriter and deemed to be a part of the Registration Statement pursuant to
Rule 430A(b) and have found such amounts, percentages and financial information
to be in agreement with the records specified in such clause (iv).
(k) On each of Closing Date and Option Closing Date, if any, there
shall have been duly tendered to the Underwriter for the several Underwriter's
accounts the appropriate number of Securities.
(l) No order suspending the sale of the Securities in any
jurisdiction designated by the Underwriter pursuant to subsection (e) of Section
4 hereof shall have been issued on either the Closing Date or the Option Closing
Date, if any, and no proceedings for that purpose shall have been instituted or
shall be contemplated.
(m) On or before the Closing Date, the Company shall have executed
and delivered to the Underwriter, (i) the Underwriter's Warrant Agreement,
substantially in the form filed as Exhibit 4.02, to the Registration Statement,
in final form and substance satisfactory to the Underwriter, and (ii) the
Underwriter's Warrants in such denominations and to such designees as shall have
been provided to the Company.
(n) On or before the Effective Date, the Company will be listed with
Standard and Poor's, Moody's or such other comparable services acceptable to
the Underwriter.
(o) On or before the Closing Date, there shall have been delivered to
the Underwriter all of the Lock-up Agreements in final form and substance
satisfactory to Underwriter's Counsel.
(p) At the Closing Date, the Underwriter shall have received the
opinion of Fenwick & West, dated the Closing Date, addressed to the Underwriter,
concerning certain intellectual property matters, in substantially the form
previously presented to the Underwriter.
If any condition to the Underwriter's obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Underwriter may terminate this
Agreement or, if the Underwriter so elects, it may waive any such conditions
which have not been fulfilled or extend the time for their fulfillment.
7. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless the Underwriter
(for purposes of this Section 7 "Underwriter" shall include the officers,
directors, partners, employees, agents and counsel of the Underwriter, including
specifically each person who may be substituted for an Underwriter as provided
in Section 11 hereof), and each person, if any, who controls the Underwriter
("controlling
<PAGE>
person") within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, from and against any and all loss, liability, claim, damage, and
expense whatsoever (including, but not limited to, reasonable attorneys' fees
and any and all reasonable expense whatsoever incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or any
claim whatsoever and any and all amounts paid in settlement of any claim or
litigation provided that the indemnified persons may not agree to any such
settlement without the prior written consent of the Company), as and when
incurred, arising out of, based upon or in connection with: (i) any untrue
statement or alleged untrue statement of a material fact contained (A) in any
preliminary prospectus, the Registration Statement or the Prospectus (as from
time to time amended and supplemented), or (B) in any application or other
document or communication (in this Section 7 collectively called "application")
executed by or on behalf of the Company or based upon written information
furnished by or on behalf of the Company in any jurisdiction in order to qualify
the Securities under the securities laws thereof or filed with the Commission,
any state securities commission or agency, The Nasdaq Stock Market, Inc. or any
securities exchange; or any omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading (in the case of the Prospectus, in the light of the circumstances
under which they were made), unless such statement or omission was made in
reliance upon and in conformity with written information furnished to the
Company with respect to the Underwriter by or on behalf of the Underwriter
expressly for use in any preliminary prospectus, the Registration Statement or
Prospectus, or any amendment thereof or supplement thereto, or in any
application, as the case may be; or (ii) any breach of any representation,
warranty, covenant or agreement of the Company contained in this Agreement. The
indemnity agreement in this subsection (a) shall be in addition to any liability
which the Company may have at common law or otherwise.
(b) The Underwriter agrees to indemnify and hold harmless the
Company, each of its directors, employees, agents, each of its officers who has
signed the Registration Statement, counsel to the Company, and each other
person, if any, who controls the Company, within the meaning of the Act, to the
same extent as the foregoing indemnity from the Company to the Underwriter but
only with respect to statements or omissions, if any, made in any preliminary
prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any application made in reliance upon, and in strict
conformity with, written information furnished to the Company with respect to
the Underwriter by the Underwriter expressly for use in such preliminary
prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any such application. The Company acknowledges that
the statements with respect to the public offering of the Securities set forth
under the heading "Underwriting" and the stabilization legend in the Prospectus
have been furnished by the Underwriter expressly for use therein and constitute
the only information furnished in writing by or on behalf of the Underwriter for
inclusion in the Prospectus.
(c) Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any action, suit or proceeding, such
indemnified party
<PAGE>
shall, if a claim in respect thereof is to be made against one or more
indemnifying parties under this Section 7, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure to so notify an indemnifying party shall not relieve it from any
liability which it may have otherwise or which it may have under this Section 7,
except to the extent that it has been prejudiced in any material respect by such
failure). In case any such action is brought against any indemnified party, and
it notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless: (i) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense of such action at the expense of the indemnifying party; (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action; or (iii) such
indemnified party or parties shall have been advised in writing by counsel that
a conflict of interest exists between the indemnifying party and the indemnified
parties making representation of such parties by the same counsel inappropriate
(in which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties) in any of
which events the reasonable fees and expenses of one additional counsel shall be
borne by the indemnifying parties. In no event shall the indemnifying parties be
liable for fees and expenses of more than one counsel (in addition to any local
counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
Anything in this Section 7 to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent provided, however, that such consent was not
unreasonably withheld.
(d) In order to provide for just and equitable contribution in any
case in which: (i) an indemnified party makes claim for indemnification
pursuant to this Section 7, but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
case; or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof), (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Securities, or (B) if the allocation
<PAGE>
provided by clause (A) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each of the contributing
parties, on the one hand, and the party to be indemnified on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. In any case where the Company is a contributing party
and the Underwriter is the indemnified party, the relative benefits received by
the Company on the one hand, and the Underwriter, on the other, shall be deemed
to be in the same proportion as the total net proceeds from the offering of the
Securities (before deducting expenses other than underwriting discounts and
commissions) bear to the total underwriting discounts received by the
Underwriter hereunder, in each case as set forth in the table on the Cover Page
of the Prospectus. Relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by the Underwriter, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, expenses or
liabilities (or actions in respect thereof) referred to above in this
subdivision (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subdivision (d) the Underwriter shall not be required to contribute any amount
in excess of the underwriting discount applicable to the Securities purchased by
the Underwriter hereunder. No person guilty of fraudulent misrepresentation
(within the meaning of Section 12(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 7, each person, if any, who
controls the Company within the meaning of the Act, each officer of the Company
who has signed the Registration Statement, and each director of the Company
shall have the same rights to contribution as the Company, subject in each case
to this subparagraph (d). Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or proceeding
against such party in respect to which a claim for contribution may be made
against another party or parties under this subparagraph (d), notify such party
or parties from whom contribution may be sought, but the omission so to notify
such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have hereunder or
otherwise than under this subparagraph (d), or to the extent that such party or
parties were not adversely affected by such omission. The contribution agreement
set forth above shall be in addition to any liabilities which any indemnifying
party may have at common law or otherwise.
8. Representations and Agreements to Survive Delivery. All
--------------------------------------------------
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations, warranties and agreements of the Company
at the Closing Date and the Option Closing Date, as the case may be, and such
representations, warranties and
<PAGE>
agreements of the Company and the respective indemnity and contribution
agreements contained in Section 7 hereof shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of the
Underwriter, the Company, any controlling person of either the Underwriter or
the Company, and shall survive termination of this Agreement or the issuance and
delivery of the Securities to the Underwriter, as the case may be.
9. Effective Date. This Agreement shall become effective at 5:00 p.m.,
--------------
New York City time, on the date hereof. For purposes of this Section 9, the
Securities to be purchased hereunder shall be deemed to have been so released
upon the earlier of dispatch by the Underwriter of telegrams to securities
dealers releasing such shares for offering or the release by the Underwriter for
publication of the first newspaper advertisement which is subsequently published
relating to the Securities.
10. Termination.
-----------
(a) Subject to subsection (b) of this Section 10, the Underwriter
shall have the right to terminate this Agreement, if between the date of this
Agreement and the Closing Date or the Option Closing Date, as the case may be:
(i) if any domestic or international event or act or occurrence has materially
disrupted, or in the Underwriter's reasonable opinion will in the immediate
future have a material and adverse effect on the securities markets generally;
or (ii) any material adverse change in the financial markets shall have
occurred; or (iii) if trading on the New York Stock Exchange, the American Stock
Exchange, or in the over-the-counter market shall have been suspended, or
minimum or maximum prices for trading shall have been fixed, or maximum ranges
for prices for securities shall have been required on the over-the-counter
market by the NASD or by order of the Commission or any other government
authority having jurisdiction; or (iv) if the United States shall have become
involved in a war or major hostilities, or if there shall have been an
escalation in an existing war or major hostilities or a national emergency shall
have been declared in the United States; or (v) if a banking moratorium has been
declared by a state or federal authority; or (vi) if the Company shall have
sustained a loss material to the Company by fire, flood, accident, hurricane,
earthquake, theft, sabotage or other calamity or malicious act which, whether or
not such loss shall have been insured, will, in the Underwriter's opinion, make
it inadvisable to proceed with the delivery of the Securities; or (viii) if
there shall have occurred either of the following which in the Underwriter's
good faith judgment would make it inadvisable to proceed with the offering, sale
and/or delivery of the Securities, (X) a material adverse change in the
prospects or conditions of the Company, or (Y) a material adverse change in the
general market, political or economic conditions, in the United States or
elsewhere, in each case in this clause (Y) having a material and adverse effect
on the securities markets generally.
(b) If this Agreement is terminated by the Underwriter in accordance
with any of the provisions of Section 6, Section l0(a) or Section 11, the
Company shall promptly reimburse and indemnify the Underwriter pursuant to
Section 5(b) hereof.
<PAGE>
Notwithstanding any contrary provision contained in this Agreement, any election
hereunder or any termination of this Agreement (including, without limitation,
pursuant to Sections 6, 10, 11 and 12 hereof), and whether or not this Agreement
is otherwise carried out, the provisions of Section 5 and Section 7 shall not be
in any way affected by such election or termination or failure to carry out the
terms of this Agreement or any part hereof.
11. Default by the Company. If the Company shall fail at the Closing Date
----------------------
or any Option Closing Date, as applicable, to sell and deliver the number of
Securities which it is obligated to sell hereunder on such date, then this
Agreement shall terminate (or, if such default shall occur with respect to any
Option Securities to be purchased on an Option Closing Date, the Underwriter may
at the Underwriter's option, by notice from the Underwriter to the Company,
terminate the Underwriter's obligation to purchase Option Securities from the
Company on such date) without any liability on the part of any non-defaulting
party other than pursuant to Section 5, Section 7 and Section 10 hereof. No
action taken pursuant to this Section shall relieve the Company from liability,
if any, in respect of such default.
12. Notices. All notices and communications hereunder, except as herein
-------
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriter shall be directed to the
Underwriter, Monroe Parker Securities, Inc., 2500 Westchester Avenue, Purchase
NY 10577, Attention: Stephen Drescher, with a copy, which shall not constitute
notice, to Singer Zamansky, LLP, 40 Exchange Place, New York, NY 10005,
Attention: Gregory Sichenzia, Esq. Notices to the Company shall be directed to
Isonics Corporation, 4010 Moorpark Avenue, Suite 119, San Jose, California
95117, Attention: James E. Alexander, with a copy, which shall not constitute
notice, to Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California
94306, Attention: C. Kevin Kelso, Esq.
13. Parties. This Agreement shall inure solely to the benefit of and
-------
shall be binding upon the Underwriter, the Company and the controlling persons,
directors and officers referred to in Section 7 hereof and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained.
No purchaser of Securities from any Underwriter shall be deemed to be a
successor by reason merely of such purchase.
14. Construction. This Agreement shall be governed by and construed and
------------
enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.
15. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
<PAGE>
16. Entire Agreement; Amendments. This Agreement, the Warrant Agreement,
----------------------------
and the Underwriter's Warrant Agreement constitute the entire agreement of the
parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter hereof. This
Agreement may not be amended except in a writing, signed by the Underwriter and
the Company.
If the foregoing correctly sets forth the understanding between the
Underwriter and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
ISONICS CORPORATION
By:_________________________
Name: Boris Rubizhevsky
Title: Vice-Chairman
CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN:
MONROE PARKER SECURITIES, INC.
By:_________________________
Name: Stephen Drescher
Title: Director of Corporate Finance
<PAGE>
EXHIBIT 4.02
________________________________
ISONICS CORPORATION AND
MONROE PARKER SECURITIES, INC.
UNDERWRITER'S
WARRANT AGREEMENT
DATED AS OF_____________, 1997
________________________________
<PAGE>
UNDERWRITER'S WARRANT AGREEMENT dated as of _____________, 1997, between
ISONICS CORPORATION, a California corporation (the "Company"), and MONROE PARKER
SECURITIES, INC. and its assignees or designees (each hereinafter collectively
referred to variously as "Holders" or the "Underwriter").
W I T N E S S E T H :
-------------------
WHEREAS, the Underwriter has agreed pursuant to the underwriting agreement
(the "Underwriting Agreement") dated as of the date hereof and entered into
between the Company and the Underwriter (the "Underwriter") in connection with
the Company's proposed public offering of 800,000 units ("Units") at a public
offering price of $5.80 per Unit, consisting of 800,000 shares of Common Stock
which have been given a value for purposes of this Agreement of $5.90 per share
and 800,000 redeemable warrants (the "Redeemable Warrants") which have been
given a value for purposes of this Agreement of $.10 per warrant, each
exercisable to purchase one (1) share of Common Stock at an exercise price of
$5.80 per share (the "Public Offering").
WHEREAS, pursuant to the Underwriting Agreement, the Company proposes to
issue warrants (the "Underwriter's Warrants") to the Underwriter to purchase up
to an aggregate of 80,000 shares of Common Stock of the Company and/or 80,000
Redeemable Warrants.
WHEREAS, the Underwriter's Warrants to be issued pursuant to this Agreement
will be issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Underwriter in consideration for, and as part
of the Underwriters' compensation in connection with, the Underwriter acting as
the underwriter pursuant to the Underwriting Agreement.
NOW, THEREFORE, in consideration of the premises, the payment by the
Underwriter to the Company of an aggregate of eighty dollars ($80.00), the
agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Grant. The Underwriter is hereby granted the right to purchase, at
-----
any time one year after the Effective Date of the Registration Statement until
5:30 p.m., New York time, on September ___, 2002 (five years from the Effective
Date of the Registration Statement), at which time the Underwriter's Warrants
expire, up to an aggregate of 80,000 shares of Common Stock, no par value (the
"Common Stock"), and/or 80,000 Redeemable Warrants at an initial exercise price
(subject to adjustment as provided in Section 11 hereof) of $9.57 per share of
Common Stock (165% of the deemed initial public offering price per share) and
$.165 per Redeemable Warrant (165% of the deemed initial public offering price
per Redeemable Warrant), (collectively, the "Exercise Price"). The Redeemable
Warrant is exercisable to purchase one additional share of Common Stock at an
initial exercise price of $5.80 (from one year after the Effective Date of the
Registration Statement until 5:30 p.m. New York time on
<PAGE>
September __, 2001 (four years from the Effective Date of the Registration
Statement), at which time the Redeemable Warrants shall expire. The shares of
Common Stock and the Redeemable Warrants issuable upon exercise of the
Underwriter's Warrants are in all respects identical to the shares of Common
Stock and the Redeemable Warrants part of the Units being purchased by the
Underwriters for resale to the public pursuant to the terms and provisions of
the Underwriting Agreement. The shares of Common Stock and the Redeemable
Warrants issuable upon exercise of the Underwriter's Warrants are sometimes
hereinafter referred to collectively as the "Securities."
2. Underwriter's Warrant Certificates. The Underwriter's Warrant
----------------------------------
Certificates (the "Warrant Certificates") delivered and to be delivered pursuant
to this Agreement shall be in the form set forth in Exhibit A, attached hereto
and made a part hereof, with such appropriate insertions, omissions,
substitutions, and other variations as required or permitted by this Agreement.
3. Registration of Warrant. The Underwriter's Warrants shall be numbered
-----------------------
and shall be registered on the books of the Company when issued. The
Underwriter's Warrants and securities underlying such warrant shall be
registered on the Company's registration statement for the initial Public
Offering of its securities.
4. Exercise of Underwriter's Warrants. The Underwriter's Warrants
----------------------------------
initially are exercisable at an Exercise Price (subject to adjustment as
provided in Section 11 hereof) of $9.57 per share of Common Stock and $.165 per
Redeemable Warrant as set forth in Section 8 hereof payable by certified or
official bank check in New York Clearing House funds. Upon surrender of an
Underwriter's Warrant Certificate with the annexed Form of Election to Purchase
duly executed, together with payment of the Exercise Price for the shares of
Common Stock and/or Redeemable Warrants purchased at the Company's principal
offices in California presently located at 4010 Moorpark Avenue, Suite 119, San
Jose, California 95117, the registered holder of an Underwriter's Warrant
Certificate ("Holder" or "Holders") shall be entitled to receive a certificate
or certificates for the shares of Common Stock and/or Redeemable Warrants so
purchased. The purchase rights represented by each Underwriter's Warrant
Certificate are exercisable at the option of the Holder thereof, in whole or in
part (but not as to fractional shares of Common Stock and/or Redeemable Warrants
underlying the Underwriter's Warrants). Underwriter's Warrants may be exercised
to purchase all or part of the shares of Common Stock together with an equal or
unequal number of the Redeemable Warrants represented thereby. In the case of
the purchase of less than all of the shares of Common Stock and/or Redeemable
Warrants purchasable under any Underwriter's Warrant Certificate, the Company
shall cancel said Underwriter's Warrant Certificate upon the surrender thereof
and shall execute and deliver a new Underwriter's Warrant Certificate of like
tenor for the balance of the shares of Common Stock and/or Redeemable Warrants
purchasable thereunder.
5. Issuance of Certificates. Upon the exercise of the Underwriter's
------------------------
Warrant, the issuance of certificates for shares of Common Stock and/or
Redeemable Warrants or
2
<PAGE>
other securities, properties or rights underlying such Underwriter's Warrant
shall be made forthwith (and in any event within five (5) business days
thereafter) without charge to the holder thereof including, without limitation,
any tax which may be payable in respect of the issuance thereof, and such
certificates shall (subject to the provisions of Sections 7 and 9 hereof) be
issued in the name of, or in such names as may be directed by, the Holder
thereof; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance and
delivery of any such certificates in a name other than that of the Holder and
the Company shall not be required to issue or deliver such certificates unless
or until the person or persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
The Underwriter's Warrant Certificates and the certificates representing
the shares of Common Stock and/or Redeemable Warrants or other securities,
property or rights issued upon exercise of the Underwriter's Warrant shall be
executed on behalf of the Company by the manual or facsimile signature of the
then present President or any Vice President of the Company under its corporate
seal reproduced thereon, attested to by the manual or facsimile signature of the
then present Secretary or any Assistant Secretary of the Company. Underwriter's
Warrant Certificates shall be dated the date of execution by the Company upon
initial issuance, division, exchange, substitution or transfer.
6. Transfer of Underwriter's Warrant. The Underwriter's Warrant shall be
---------------------------------
transferable in the first year only to officers, directors and principals of the
Underwriter, only on the books of the Company maintained at its principal
office, where its principal office may then be located, upon delivery thereof
duly endorsed by the Holder or by its duly authorized attorney or representative
accompanied by proper evidence of succession, assignment or authority to
transfer. Upon any registration transfer, the Company shall execute and deliver
the new Underwriter's Warrant to the person entitled thereto.
7. Restriction On Transfer of Underwriter's Warrant. The Holder of a
------------------------------------------------
Underwriter's Warrant Certificate, by its acceptance thereof, covenants and
agrees that the Underwriter's Warrant is being acquired as an investment and not
with a view to the distribution thereof, and that the Underwriter's Warrant may
not be sold, transferred, assigned, hypothecated or otherwise disposed of, in
whole or in part, for the term of the Underwriter's Warrant, except to officers,
directors or principals of the Underwriter as set forth in Section 6 above, or
by operation of law.
8. Exercise Price.
--------------
8.1 Initial and Adjusted Exercise Price. Except as otherwise
-----------------------------------
provided in Section 11 hereof, the initial exercise price of each Underwriter's
Warrant shall be $9.57 per share of Common Stock (165% of the deemed initial
public offering price per share of Common Stock) and $.165 per Redeemable
Warrant (165% of the deemed initial public offering price per Redeemable
Warrant). The adjusted exercise price shall be the price which shall result from
time to time from any and all adjustments of the initial
3
<PAGE>
exercise price in accordance with the provisions of Section 11 hereof. Any
transfer of an Underwriter's Warrant shall constitute an automatic transfer and
assignment of the registration rights set forth in Section 9 hereof with respect
to the Securities or other securities, properties or rights underlying the
Underwriter's Warrants.
8.2 Exercise Price. The term "Exercise Price" herein shall mean the
--------------
initial exercise price or the adjusted exercise price, depending upon the
context or unless otherwise specified.
9. Registration Rights.
-------------------
9.1 Registration Under the Securities Act of 1933. Each
---------------------------------------------
Underwriter's Warrant Certificate and each certificate representing shares of
Common Stock and/or Redeemable Warrants and any of the other securities issuable
upon exercise of the Underwriter's Warrant (collectively, the "Warrant Shares")
shall bear the following legend unless (i) such Underwriter's Warrant or Warrant
Shares are distributed to the public or sold to the underwriters for
distribution to the public pursuant to Section 9 hereof or otherwise pursuant to
a registration statement filed under the Securities Act of 1933, as amended (the
"Act"), or (ii) the Company has received an opinion of counsel, in form and
substance reasonably satisfactory to counsel for the Company, that such legend
is unnecessary for any such certificate:
THE UNDERWRITER'S WARRANT REPRESENTED BY THIS CERTIFICATE AND THE
OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933, (ii) TO THE EXTENT APPLICABLE, RULE 144
UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE
DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH
OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER,
THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. THE
TRANSFER OR EXCHANGE OF THE UNDERWRITER'S WARRANT REPRESENTED BY THE
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE UNDERWRITER'S WARRANT
AGREEMENT REFERRED TO HEREIN.
9.2 Automatic and Piggyback Registration. The Underwriter's Warrant
------------------------------------
and all securities underlying the Underwriter's Warrant shall be registered on
the registration statement for the Company's initial Public Offering of
securities. In the event a new registration statement is required to effect
valid registration of the Underwriter's Warrant and the securities thereunder,
then if, at any time commencing one (1) year after the effective date of the
Registration Statement and expiring five (5) years thereafter, the Company
proposes to register any of its securities under the Act (other
4
<PAGE>
than in connection with a merger or pursuant to Form S-4 or Form S-8) it will
give written notice by registered mail, at least twenty (20) days prior to the
filing of each such registration statement, to the Holders of the Underwriter's
Warrants and/or the Warrant Shares of its intention to do so. If any of the
Holders of the Underwriter's Warrants and/or Warrant Shares notify the Company
within ten (10) days after mailing of any such notice of its or their desire to
include any such securities in such proposed registration statement, the Company
shall afford such Holders of the Underwriter's Warrants and/or Warrant Shares
the opportunity to have any such Underwriter's Warrants and/or Warrant Shares
registered under such registration statement. In the event that the managing
underwriter for said offering advises the Company in writing that in its opinion
the number of securities requested to be included in such registration exceeds
the number which can be sold in such offering without causing a diminution in
the offering price or otherwise adversely affecting the offering, the Company
will include in such registration (a) first, the securities the Company proposes
-----
to sell, (b) second, the securities held by the entities, if any, that made the
------
demand for registration, (c) third, the Underwriter's Warrants and/or Warrant
-----
Shares requested to be included in such registration which in the opinion of
such underwriter can be sold, pro rata, among all proposed selling shareholders.
Notwithstanding the provisions of this Section 9.2, the Company shall have
the right at any time after it shall have given written notice pursuant to this
Section 9.2 (irrespective of whether a written request for inclusion of any such
securities shall have been made) to elect not to file any such proposed
registration statement or to withdraw the same after the filing but prior to the
effective date thereof.
9.3 Demand Registration.
-------------------
(a) At any time commencing one (1) year after the effective date of
the Registration Statement and expiring five (5) years from the effective date
of the Registration Statement, the Holders of the Underwriter's Warrants and/or
Warrant Shares representing a "Majority" (as hereinafter defined) of the
Underwriter's Warrants and/or Warrant Shares shall have the right (which right
is in addition to the registration rights under Section 9.2 hereof), exercisable
by written notice to the Company, to have the Company prepare and file with the
Securities and Exchange Commission (the "Commission"), on one occasion, a
registration statement and such other documents, including a prospectus, as may
be necessary in the opinion of both counsel for the Company and counsel for the
Holders, in order to comply with the provisions of the Act, so as to permit a
public offering and sale by such Holders and any other Holders of the
Underwriter's Warrant and/or Warrant Shares who notify the Company within
fifteen (15) days after the Company mails notice of such request pursuant to
Section 9.3(b) hereof (collectively, the "Requesting Holders") of their
respective Warrant Shares for the earlier of (i) nine (9) consecutive months or
(ii) until the sale of all of the Warrant Shares requested to be registered by
the Requesting Holders.
5
<PAGE>
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 9.3 by any Holder or Holders
representing a Majority of the Underwriter's Warrants and/or Warrant Shares to
all other registered Holders of the Underwriter's Warrants and the Warrant
Shares within ten (10) days from the date of the receipt of any such
registration request.
(c) Intentionally omitted.
(d) Notwithstanding anything to the contrary contained herein, if the
Company shall not have filed a registration statement for the Warrant Shares
within the time period specified in Section 9.4(a) hereof pursuant to the
written notice specified in Section 9.3(a) of the Holders of a Majority of the
Underwriter's Warrants and/or Warrant Shares, the Company, at its option, may
repurchase (i) any and all Warrant Shares at the higher of the Market Price (as
defined in Section 9.3(e)) per share of Common Stock on (x) the date of the
notice sent pursuant to Section 9.3(a) or (y) the expiration of the period
specified in Section 9.4(a) and (ii) any and all Underwriter's Warrants at such
Market Price less the exercise price of such Underwriter's Warrant. Such
repurchase shall be in immediately available funds and shall close within two
(2) days after the later of (i) the expiration of the period specified in
Section 9.4(a) or (ii) the delivery of the written notice of election specified
in this Section 9.3(d).
(e) Definition of Market Price. As used herein, the phrase "Market
--------------------------
Price" at any date shall be deemed to be (i) if the Common Stock is listed, or
admitted to unlisted trading privileges, on a national securities exchange, or
traded on the Nasdaq National Market or Nasdaq SmallCap Market, the last
reported closing sale price on such date, or, in case no such reported closing
sale takes place on such day, the average of the last reported closing sale
prices for the last three (3) trading days before such date, in each case as
officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to unlisted trading privileges or by the Nasdaq
National Market or Nasdaq SmallCap Market, or (ii) if the Common Stock is not
listed or admitted to unlisted trading privileges on any national securities
exchange or traded on the Nasdaq National Market or Nasdaq SmallCap Market, but
is traded in the over-the-counter market, the average of the last reported bid
and asked prices as furnished by the NASD through the Nasdaq Stock Market, Inc.
("Nasdaq") or similar organization if Nasdaq is no longer reporting such
------
information, or if the shares of Common Stock and/or Redeemable Warrants or
Common Stock is not quoted on Nasdaq as determined in good faith by resolution
of the Board of Directors of the Company, based on the best information
available to it.
9.4 Covenants of the Company With Respect to Registration. In
-----------------------------------------------------
connection with any registration under Sections 9.2 or 9.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within ninety (90) days of receipt of any demand therefor, and to have
any
6
<PAGE>
registration statements declared effective at the earliest possible time,
and shall furnish each Holder desiring to sell Warrant Shares such number of
prospectuses as shall reasonably be requested. Commencing one (1) year after
the effective date of the Registration Statement, the Company shall keep its
registration statement for its initial Public Offering, or such other
registration statement covering the registration of the shares of Common Stock
issuable upon exercise of the then outstanding Warrants, effective for so long
as the Underwriter may reasonably request; provided however, this obligation of
the Company shall terminate upon the earlier of the expiration of the Warrants
or until such Warrants are fully exercised.
(b) The Company shall pay all costs, fees and expenses in connection
with all registration statements filed pursuant to Sections 9.2 and 9.3(a)
hereof including, without limitation, the Company's legal and accounting fees,
printing expenses, blue sky fees and expenses. The Holder(s) will pay all costs,
fees and expenses (including those of the Company) in connection with the
registration statement filed pursuant to Section 9.3(c).
(c) The Company will use its commercially reasonable efforts to take
all necessary action which may be required in qualifying or registering the
Warrant Shares included in a registration statement for offering and sale under
the securities or blue sky laws of such states as reasonably are requested by
the Holder(s), provided that the Company shall not be obligated to execute or
file any general consent to service of process or to qualify as a foreign
corporation to do business under the laws of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant Shares to
be sold pursuant to any registration statement and each person, if any, who
controls such Holders within the meaning of Section 15 of the Act or Section
20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
against all loss, claim, damage, expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the Act, the Exchange
Act or otherwise, arising from such registration statement but only to the same
extent and with the same effect as the provisions pursuant to which the Company
has agreed to indemnify each of the Underwriters contained in Section 7 of the
Underwriting Agreement.
(e) The Holder(s) of the Warrant Shares to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns, for
specific inclusion in such registration statement to the same
7
<PAGE>
extent and with the same effect as the provisions contained in Section 7 of the
Underwriting Agreement pursuant to which the Underwriters have agreed to
indemnify the Company.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Underwriter's Warrant prior to the
initial filing of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities other
than the Warrant Shares to be included in any registration statement filed
pursuant to Section 9.3 hereof, or permit any other registration statement
(other than a registration statement on Form S-4 or S-8) to be or remain
effective during a ninety (90) day period following the effectiveness of a
registration statement filed pursuant to Section 9.3 hereof, without the prior
written consent of the Underwriter or as otherwise required by the terms of any
existing registration rights granted prior to the date of this Agreement by the
Company to the holders of any of the Company's securities.
(h) The Company shall furnish to each Holder participating in the
offering and to each underwriter, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement), and (ii) a "cold comfort" letter
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, a letter dated the date
of the closing under the underwriting agreement) signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities.
(i) The Company shall as soon as practicable after the effective date
of the registration statement, and in any event within fifteen (15) months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the Act) an earnings statement (which need not be
audited) complying with Section 11(a) of the Act and covering a period of at
least twelve (12) consecutive months beginning after the effective date of the
registration statement.
(j) The Company shall enter into an underwriting agreement with the
managing underwriters selected for such underwriting by Holders holding a
Majority of the Warrant Shares requested to be included in such underwriting,
which may be the Underwriter. Such agreement shall be satisfactory in form and
substance to the Company, each Holder and such managing underwriters, and shall
contain such
8
<PAGE>
representations, warranties and covenants by the Company and such other terms as
are customarily contained in agreements of that type used by the managing
underwriter. The Holders shall be parties to any underwriting agreement relating
to an underwritten sale of their Warrant Shares and may, at their option,
require that any or all the representations, warranties and covenants of the
Company to or for the benefit of such underwriters shall also be made to and for
the benefit of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters except as they may relate to such Holders and their intended
methods of distribution.
(k) For purposes of this Agreement, the term "Majority" in reference
to the Underwriter's Warrants or Warrant Shares, shall mean in excess of fifty
percent (50%) of the then outstanding Underwriter's Warrants or Warrant Shares
that (i) are not held by the Company, an affiliate, officer, creditor, employee
or agent thereof or any of their respective affiliates, members of their family,
persons acting as nominees or in conjunction therewith or (ii) have not been
resold to the public pursuant to a registration statement filed with the
Commission under the Act.
10. Obligations of Holders. It shall be a condition precedent to the
----------------------
obligations of the Company to take any action pursuant to Section 9 hereof that
each of the selling Holders shall:
(a) Furnish to the Company such information regarding themselves, the
Warrant Shares held by them, the intended method of sale or other disposition of
such securities, the identity of and compensation to be paid to any underwriters
proposed to be employed in connection with such sale or other disposition, and
such other information as may reasonably be required to effect the registration
of their Warrant Shares.
(b) Notify the Company, at any time when a prospectus relating to the
Warrant Shares covered by a registration statement is required to be delivered
under the Act, of the happening of any event with respect to such selling Holder
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
11. Adjustments to Exercise Price and Number of Securities. The Exercise
------------------------------------------------------
Price in effect at any time and the number and kind of securities purchased upon
the exercise of the Underwriter's Warrant shall be subject to adjustment from
time to time only upon the happening of the following events:
11.1 Stock Dividend, Subdivision and Combination. In case the Company
-------------------------------------------
shall (i) declare a dividend or make a distribution on its outstanding shares of
Common Stock in shares of Common Stock, (ii) subdivide or reclassify its
outstanding
9
<PAGE>
shares of Common Stock into a greater number of shares, or (iii) combine or
reclassify its outstanding shares of Common Stock into a smaller number of
shares, the Exercise Price in effect at the time of the record date for such
dividend or distribution or of the effective date of such subdivision,
combination or reclassification shall be adjusted so that it shall equal the
price determined by multiplying the Exercise Price by a fraction, the
denominator of which shall be the number of shares of Common Stock outstanding
after giving effect to such action, and the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such action.
Such adjustment shall be made successively whenever any event listed above shall
occur.
11.2 Adjustment in Number of Securities. Upon each adjustment of the
----------------------------------
Exercise Price pursuant to the provisions of this Section 11, the number of
Warrant Shares issuable upon the exercise at the adjusted Exercise Price of each
Underwriter's Warrant shall be adjusted to the nearest number of whole shares of
Common Stock by multiplying a number equal to the Exercise Price in effect
immediately prior to such adjustment by the number of Warrant Shares issuable
upon exercise of the Underwriter's Warrant immediately prior to such adjustment
and dividing the product so obtained by the adjusted Exercise Price.
11.3 Definition of Common Stock. For the purpose of this Agreement,
--------------------------
the term "Common Stock" shall mean (i) the class of stock designated as Common
Stock in the Articles of Incorporation of the Company as amended as of the date
hereof, or (ii) any other class of stock resulting from successive changes or
reclassifications of such Common Stock consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value.
11.4 Merger or Consolidation. In case of any consolidation of the
-----------------------
Company with, or merger of the Company into, another corporation (other than a
consolidation or merger which does not result in any reclassification or change
of the outstanding Common Stock), the corporation formed by such consolidation
or merger shall execute and deliver to the Holder a supplemental warrant
agreement providing that the Holder of each Underwriter's Warrant then
outstanding or to be outstanding shall have the right thereafter (until the
expiration of such Underwriter's Warrant) to receive, upon exercise of such
Underwriter's Warrant, the kind and amount of shares of stock and other
securities and property receivable upon such consolidation or merger by a holder
of the number of shares of Common Stock for which such Underwriter's Warrant
might have been exercised immediately prior to such consolidation, merger, sale
or transfer. Such supplemental warrant agreement shall provide for adjustments
which shall be identical to the adjustments provided in Section 11. The above
provision of this subsection shall similarly apply to successive consolidations
or mergers.
11.5 No Adjustment of Exercise Price in Certain Cases. No adjustment
------------------------------------------------
of the Exercise Price shall be made:
10
<PAGE>
(a) Upon the issuance or sale of the Underwriter's Warrant or the
Warrant Shares:
(b) Upon the issuance or sale of Common Stock (or any other security
convertible, exercisable, or exchangeable into shares of Common Stock) upon the
direct or indirect conversion, exercise, or exchange of any options, rights,
warrants, or other securities or indebtedness of the Company outstanding as of
the date of this Agreement or granted pursuant to any stock option plan of the
Company in existence as of the date of this Agreement, pursuant to the terms
thereof; or
(c) If the amount of said adjustment shall be less than two cents
($.02) per share, provided, however, that in such case any adjustment that would
otherwise be required then to be made shall be carried forward and shall be made
at the time of and together with the next subsequent adjustment which, together
with any adjustment so carried forward, shall amount to at least two cents
($.02) per Underwriter's Warrant.
12. Exchange and Replacement of Underwriter's Warrant Certificates. Each
--------------------------------------------------------------
Underwriter's Warrant Certificate is exchangeable, without expense, upon the
surrender thereof by the registered Holder at the principal executive office of
the Company for a new Underwriter's Warrant Certificate of like tenor and date
representing in the aggregate the right to purchase the same number of Warrant
Shares in such denominations as shall be designated by the Holder thereof at the
time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of any Underwriter's Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Underwriter's Warrant, if mutilated, the Company will make and deliver a new
Warrant Certificate of like tenor, in lieu thereof.
13. Elimination of Fractional Interests. The Company shall not be
-----------------------------------
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Underwriter's Warrant, nor shall it be required to
issue scrip or pay cash in lieu of fractional interests, it being the intent of
the parties that all fractional interests shall be eliminated by rounding any
fraction up to the nearest whole number of shares of Common Stock or other
securities, properties or rights.
14. Reservation and Listing of Securities. The Company shall at all times
-------------------------------------
reserve and keep available out of its authorized shares of Common Stock, solely
for the purpose of issuance upon the exercise of the Underwriter's Warrant and
the Redeemable Warrant, such number of shares of Common Stock or other
securities, properties or rights as shall be issuable upon the exercise thereof.
Every transfer agent ("Transfer Agent") for the Common Stock and other
securities of the Company issuable upon the exercise of the Underwriter's
Warrant will be irrevocably authorized and directed at all times to reserve
11
<PAGE>
such number of authorized shares of Common Stock and other securities as shall
be requisite for such purpose. The Company will keep a copy of this Agreement on
file with every Transfer Agent for the Common Stock and other securities of the
Company issuable upon the exercise of the Underwriter's Warrant. The Company
will supply every such Transfer Agent with duly executed stock and other
certificates, as appropriate, for such purpose. The Company covenants and agrees
that, upon exercise of the Underwriter's Warrant and payment of the Exercise
Price therefor, all shares of Common Stock and other securities issuable upon
such exercise shall be duly and validly issued, fully paid, non-assessable and
not subject to the preemptive rights of any stockholder. As long as the
Underwriter's Warrant shall be outstanding, the Company shall use its best
efforts to cause all shares of Common Stock issuable upon the exercise of the
Underwriter's Warrant to be listed (subject to official notice of issuance) on
all securities exchanges on which the Common Stock issued to the public in
connection herewith may then be listed and/or quoted on Nasdaq SmallCap Market.
15. Notices to Underwriter's Warrant Holders. Nothing contained in this
----------------------------------------
Agreement shall be construed as conferring upon the Holders the right to vote or
to consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Underwriter's Warrants and their exercise, any of
the following events shall occur:
(a) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible into
or exchangeable for shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed; then in any one or more of said events, the Company shall give written
notice of such event at least fifteen (15) days prior to the date fixed as a
record date or the date of closing the transfer books for the determination of
the stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend, or the issuance of any
12
<PAGE>
convertible or exchangeable securities, or subscription rights, options or
warrants, or any proposed dissolution, liquidation, winding up or sale.
16. Redeemable Warrants. The form of the certificate representing the
-------------------
Redeemable Warrants (and the form of election to purchase shares of Common Stock
upon the exercise of the Redeemable Warrants and the form of assignment printed
on the reverse thereof) shall be substantially as set forth in Exhibit "A" to
the Warrant Agreement dated as of the date hereof by and among the Company, the
Underwriter and Continental Stock Transfer & Trust Company, as warrant agent
(the "Redeemable Warrant Agreement"). Each Redeemable Warrant issuable upon
exercise of the Underwriter's Warrants shall evidence the right to initially
purchase a fully paid and non-assessable share of Common Stock at an initial
purchase price of $9.57 from one year after the Effective Date of the
Registration Statement until 5:30 p.m. New York time on __________, 2001 (four
(4) years from the Effective Date of the Registration Statement) at which time
the Redeemable Warrants, unless the exercise period has been extended, shall
expire. The exercise price of the Redeemable Warrants and the number of shares
of Common Stock issuable upon the exercise of the Redeemable Warrants are
subject to adjustment, whether or not the Underwriter's Warrants have been
exercised and the Redeemable Warrants have been issued, in the manner and upon
the occurrence of the events set forth in Section 8 of the Redeemable Warrant
Agreement, which is hereby incorporated by reference and made a part hereof as
if set forth in its entirety herein. Subject to the provisions of this Agreement
and upon issuance of the Redeemable Warrants underlying the Underwriter's
Warrants, each registered holder of such Redeemable Warrant shall have the right
to purchase from the Company (and the Company shall issue to such registered
holders) up to the number of fully paid and non-assessable shares of Common
Stock (subject to adjustment as provided herein and in the Redeemable Warrant
Agreement), free and clear of all preemptive rights of stockholders, provided
that such registered holder complies with the terms governing exercise of the
Redeemable Warrant set forth in the Redeemable Warrant Agreement, and pays the
applicable exercise price, determined in accordance with the terms of the
Redeemable Warrant Agreement. Upon exercise of the Redeemable Warrants, the
Company shall forthwith issue to the registered holder of any such Redeemable
Warrant in his name or in such name as may be directed by him, certificates for
the number of shares of Common Stock so purchased. Except as otherwise provided
in this Agreement, the Redeemable Warrants underlying the Underwriter's Warrants
shall be governed in all respects by the terms of the Redeemable Warrant
Agreement. The Redeemable Warrants shall be transferable in the manner provided
in the Redeemable Warrant Agreement, and upon any such transfer, a new
Redeemable Warrant Certificate shall be issued promptly to the transferee. The
Company covenants to, and agrees with, the Holder(s) that without the prior
written consent of the Holder(s), which will not be unreasonably withheld, the
Redeemable Warrant Agreement will not be modified, amended, canceled, altered or
superseded, and that the Company will send to each Holder, irrespective of
whether or not the Underwriter's Warrants have been exercised, any and all
notices required by the Redeemable Warrant Agreement to be sent to holders of
the Redeemable Warrants.
13
<PAGE>
17. Notices. All notices, requests, consents and other communications
-------
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return receipt
requested:
(a) if to the registered Holder of the Underwriter's Warrant, to the
address of such Holder as shown on the books of the Company; or
(b) if to the Company, to the address set forth in Section 4 hereof or
to such other address as the Company may designate by notice to the Holders.
18. Supplements; Amendments; Entire Agreement. This Agreement (including
-----------------------------------------
the Underwriting Agreement to the extent portions thereof are referred to
herein) contains the entire understanding between the parties hereto with
respect to the subject matter hereof and may not be modified or amended except
by a writing duly signed by the party against whom enforcement of the
modification or amendment is sought. The Company and the Underwriter may from
time to time supplement or amend this Agreement without the approval of any
Holders of Underwriter's Warrant Certificates (other than the Underwriter) in
order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company and the Underwriter may deem necessary or desirable and which
the Company and the Underwriter deem shall not adversely affect the interests of
the Holders of Underwriter's Warrant Certificates.
19. Successors. All of the covenants and provisions of this Agreement
----------
shall be binding upon and inure to the benefit of the Company, the Holders and
their respective successors and assigns hereunder.
20. Survival of Representations and Warranties. All statements in any
------------------------------------------
schedule, exhibit or certificate or other instrument delivered by or on behalf
of the parties hereto, or in connection with the transactions contemplated by
this Agreement, shall be deemed to be representations and warranties hereunder.
Notwithstanding any investigations made by or on behalf of the parties to this
Agreement, all representations, warranties and agreements made by the parties to
this Agreement or pursuant hereto shall survive.
21. Governing Law. This Agreement and each Underwriter's Warrant
-------------
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of New York and for all purposes shall be construed in
accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
22. Severability. If any provision of this Agreement shall be held to be
------------
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
14
<PAGE>
23. Captions. The caption headings of the Sections of this Agreement are
--------
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
24. Benefits of this Agreement. Nothing in this Agreement shall be
--------------------------
construed to give to any person or corporation other than the Company and the
Underwriter and any other registered Holder(s) of the Underwriter's Warrant
Certificates or Warrant Shares any legal or equitable right, remedy or claim
under this Agreement; and this Agreement shall be for the sole and exclusive
benefit of the Company and the Underwriters and any other Holder(s) of the
Underwriter's Warrant Certificates or Warrant Shares.
25. Counterparts. This Agreement may be executed in any number of
------------
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
ATTEST: ISONICS CORPORATION
_________________ Name: _____________________
Secretary Title: ______________________
MONROE PARKER SECURITIES, INC.
By: ________________________
Name: Stephen Drescher
Title: Director of Corporate Finance
15
<PAGE>
EXHIBIT A
[FORM OF UNDERWRITER'S WARRANT CERTIFICATE]
THE UNDERWRITER'S WARRANT REPRESENTED BY THIS CERTIFICATE AND THE OTHER
SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL
FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE UNDERWRITER'S WARRANT REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO
HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, ___________, 2002
Underwriter's Warrant No.________
Shares of Common Stock and/or Redeemable Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that ________, or registered assigns, is
the registered holder of Warrants to purchase initially, at any time commencing
one year after ____________, 1997 until 5:30 p.m., New York time on
_____________, 2002 ("Expiration Date"), up to _______ shares of Common Stock
and/or ___________ Redeemable Warrants (each to acquire one share of the
Company's Common Stock at the initial exercise price, subject to adjustment of
$5.80 per share) of Isonics Corporation, a California corporation (the
"Company") at the initial exercise price, subject to adjustment in certain
events, of $9.57 per share of Common Stock (165% of the deemed initial offering
price per share of Common Stock) and $.165 per Redeemable Warrant (165% of the
deemed initial public offering price per Warrant) (the "Exercise Price") upon
surrender of this Underwriter's Warrant Certificate and payment of the Exercise
Price at an office or agency of the Company, but subject to the conditions set
forth herein and in the Underwriter's Warrant Agreement dated as of __________,
1997 among the Company, and Monroe Parker Securities, Inc. (the "Warrant
Agreement"). Payment of the Exercise Price shall be made by certified or
official bank check in New York Clearing House funds payable to the order of the
Company.
<PAGE>
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Underwriter's Warrants evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
The Underwriter's Warrants evidenced by this Warrant Certificate are part
of a duly authorized issue of Underwriter's Warrants issued pursuant to the
Warrant Agreement, which Warrant Agreement is hereby incorporated by reference
in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the
Underwriter's Warrant.
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Underwriter's
Warrants; provided, however, that the failure of the Company to issue such new
Warrant Certificates shall not in any way change, alter, or otherwise impair,
the rights of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Underwriter's Warrants shall be issued to the transferee(s) in exchange for
this Warrant Certificate, subject to the limitations provided herein and in the
Warrant Agreement, without any charge except for any tax or other governmental
charge imposed in connection with such transfer.
Upon the exercise of less than all of the Underwriter's Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Underwriter's
Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
EXH. A-2
2
<PAGE>
This Warrant Certificate does not entitle any holder thereof to any of the
rights of a shareholder of the Company.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.
Dated as of ____________, 1997.
ATTEST: ISONICS CORPORATION
_________________________ Name: _______________________
Secretary Title: ______________________
EXH. A-3
3
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 4]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase _____ shares of Common
Stock and/or _____ Redeemable Warrants and herewith tenders in payment for such
securities a certified or official bank check payable in New York Clearing House
Funds to the order of Isonics Corporation (the "Company") in the amount of
$______, all in accordance with the terms of Section 4 of the Underwriter's
Warrant Agreement dated as of _________, 1997 among the Company and Monroe
Parker Securities, Inc. The undersigned requests that a certificate for such
securities be registered in the name of ________________________, whose address
is ___________________________and that such certificate be delivered
to__________________________, whose address is __________________, and if said
number of shares shall not be all the shares purchasable hereunder, that a new
Warrant Certificate for the balance of the shares purchasable under the within
Warrant Certificate be registered in the name of the undersigned warrant holder
or his assignee as below indicated and delivered in the address stated below.
Dated: ______________________ ____________________________________________
(Signature must conform in all respects to
the name of the holder as specified on the
face of the Warrant Certificate.)
Address: ___________________________________
___________________________________
____________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
Signature
Guaranteed:_____________________________________________________________________
(Signature must be guaranteed by a bank savings and loan association,
stockbroker, or credit union with membership in an approved signature guaranty
Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15.)
EXH. A-4
4
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED, ______________________ hereby sells, assigns and
transfers unto [NAME OF TRANSFEREE] this Warrant Certificate, together with all
right, title and interest therein, and does hereby irrevocably constitute and
appoint _____________________ Attorney, to transfer the within Warrant
Certificate on the books of the within-named Company, with full power of
substitution.
Dated: ______________________ ____________________________________________
(Signature must conform in all respects to
the name of the holder as specified on the
face of the Warrant Certificate.)
Address: ___________________________________
___________________________________
____________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
Signature
Guaranteed:_____________________________________________________________________
(Signature must be guaranteed by a bank savings and loan association,
stockbroker, or credit union with membership in an approved signature guaranty
Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15.)
EXH. A-5
5
<PAGE>
EXHIBIT 4.03
ISONICS CORPORATION
AND
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
AND
MONROE PARKER SECURITIES, INC.
WARRANT AGREEMENT
Dated as of _______ __, 1997
<PAGE>
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (this "Agreement"), dated this day of _________
1997, by and among ISONICS CORPORATION, a California corporation (the
"Company"), CONTINENTAL STOCK TRANSFER & TRUST COMPANY, as Warrant Agent (the
"Warrant Agent"), and MONROE PARKER SECURITIES, INC. (the "Underwriter"), and
each of their successors and assigns.
W I T N E S S E T H:
WHEREAS, in connection with (i) the Company's underwritten initial public
offering pursuant to a registration statement on Form SB-2 of 800,000 Units
consisting of 800,000 shares of Common Stock (as defined in Section 1), and
800,000 redeemable common stock purchase warrants (the "Warrants"), each warrant
entitling the holder thereof to purchase one additional share of Common Stock;
(ii) the over-allotment option to purchase up to an additional 120,000 Units
(consisting of 120,000 shares of Common Stock and 120,000 Warrants) (the "Over-
allotment Option"); and (iii) the sale to the Underwriter of warrants (the
"Underwriter's Warrants") to purchase up to 80,000 shares of Common Stock and/or
80,000 Warrants, the Company will issue up to 1,000,000 Warrants (subject to
adjustment as provided herein and in the Underwriter's Warrant Agreement); and
WHEREAS, the Company desires to provide for the issuance of certificates
representing the Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the Warrants
and the rights of the holders thereof.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrants and the certificates representing the Warrants and the
respective rights and obligations thereunder of the Company, the Underwriter,
the holders of certificates representing the Warrants and the Warrant Agent, the
parties hereto agree as follows:
1. Definitions. As used herein, the following terms shall have the
-----------
following meanings, unless the context shall otherwise require:
(a) "Act" shall mean the Securities Act of 1933, as amended.
(b) "Common Stock" shall have the meaning assigned to it in Section
8(h) hereof.
<PAGE>
(c) "Commission" shall mean the Securities and Exchange Commission.
(d) "Corporate Office" shall mean the office of the Warrant Agent (or
its successor) at which at any particular time its business shall be
administered, which office is located on the date hereof c/o Continental Stock
Transfer & Trust Company, 2 Broadway, 19th Floor, New York, NY 10004.
(e) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(f) "Exercise Date" shall mean, subject to the provisions of Section
5(b) hereof, as to any Warrant, the date on which the Warrant Agent shall have
received both (i) the Warrant Certificate representing such Warrant, with the
exercise form thereon duly executed by the Registered Holder hereof or his
attorney duly authorized in writing; and (ii) payment in cash or by official
bank or certified check made payable to the Warrant Agent for the account of the
Company, of the amount in lawful money of the United States of America equal to
the applicable Purchase Price (as hereinafter defined) in good funds.
(g) "Exercise Price" shall mean, subject to modification and
adjustment as provided in Section 8, $5.80 per share and further subject to the
Company's right, in its sole discretion, to decrease the Exercise Price for a
period of not less than thirty (30) days on not less than thirty (30) days'
prior written notice to the Registered Holders and Monroe Parker Securities,
Inc.
(h) "Initial Warrant Exercise Date" shall mean one year after the
Effective Date of the Prospectus.
(i) "Initial Warrant Redemption Date" shall mean eighteen (18) months
following the Effective Date of the Prospectus.
(j) "Market Price" shall mean (i) if the Common Stock is listed, or
admitted to unlisted trading privileges on a national securities exchange, or is
traded on the Nasdaq National Market or Nasdaq, the last reported closing sale
price on the date of the event to which such Market Price relates, or, if no
such reported closing sale takes place on such date, then the average of the
last reported closing sales prices for the last three (3) trading days before
such date, in each case as officially reported by the principal securities
exchange on which the Common Stock is listed or admitted to unlisted trading
privileges or by the Nasdaq National Market or Nasdaq, or (ii) if the Common
Stock is not listed or admitted to unlisted trading privileges, on any national
securities exchange, or traded on the Nasdaq National Market or Nasdaq, but is
traded in the over-the-counter market, then the average of the last reported bid
and asked prices of the Common Stock reported by the National Quotation Bureau,
Inc. or similar bureau if the National Quotation Bureau, Inc. is no longer
reporting such information on the date of the event to
<PAGE>
which such Market Price relates, and if no such prices are reported on such
date, then the average of the last so reported bid and asked prices on the last
three (3) trading days on which such prices are reported immediately preceding
such date; or (iii) if the Common Stock is neither listed, nor admitted to
unlisted trading privileges on a national securities exchange, nor traded on the
Nasdaq National Market or Nasdaq, nor traded in the over-the-counter market,
then the fair market value of the Common Stock, not less that the book value
thereof, as of the date of the event to which such Market Price relates, as
determined in good faith (using customary valuation methods) by the Board of
Directors of the Company, which determination shall be evidenced by a resolution
of the Board of Directors and based on the best information available to it.
(k) "NASD" shall mean the National Association of Securities Dealers,
Inc.
(l) "Nasdaq" shall mean the Nasdaq SmallCap Market.
(m) "Redemption Date" shall mean the date (which may not occur before
the Initial Warrant Redemption Date) fixed for the redemption of the Warrants in
accordance with the terms hereof.
(n) "Redemption Price" shall mean the price at which the Company may,
at its option, redeem the Warrants, in accordance with the terms hereof, which
price shall be $.10 per Warrant, subject to adjustment from time to time
pursuant to the provisions of Section 9 hereof.
(o) "Registered Holder" shall mean each person in whose name a Warrant
Certificate representing any of the Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6.
(p) "Underwriter's Warrant Agreement" shall mean the agreement dated
as of _________, 1997 between the Company and the Underwriter relating to and
governing the terms and provisions of the Underwriter's Warrants.
(q) "Transfer Agent" shall mean Continental Stock Transfer & Trust
Company, or its authorized successor.
(r) "Underwriting Agreement" shall mean the underwriting agreement
dated as of ________, 1997 between the Company and the Underwriter relating to
the Offering.
(s) "Warrant Certificate" shall mean a certificate representing one or
more of the Warrants substantially in the form annexed hereto as Exhibit A.
(t) "Warrant Expiration Date" shall mean, unless the Warrants are
redeemed as provided in Section 9 hereof prior to such date, 5:00 p.m. (New York
time),
<PAGE>
on _______ (four (4) years from the date of the Prospectus), or the Redemption
Date as defined herein, whichever date is earlier; provided that if such date
shall in the State of New York be a holiday or a day on which banks located in
the State of New York are authorized to close, then 5:00 p.m. (New York time) on
the next following day which, in the State of New York, is neither a holiday nor
a day on which such banks are authorized to close. Upon five business days'
prior written notice to the Registered Holders, the Company shall have the right
to extend the Warrant Expiration Date.
2. Warrants and Issuance of Warrant Certificates.
---------------------------------------------
(a) Each Warrant shall initially entitle the Registered Holder of the
Warrant Certificate representing such Warrant to purchase at the Exercise Price
therefor from the Initial Warrant Exercise Date until the Warrant Expiration
Date one share of Common Stock upon the exercise thereof in accordance with the
terms hereof, subject to modification and adjustment as provided in Section 8.
(b) Upon execution of this Agreement, Warrant Certificates
representing the number of Warrants sold pursuant to the Underwriting Agreement
(subject to modification and adjustment as provided in Section 8) shall be
executed by the Company and delivered to the Warrant Agent.
(c) Upon exercise of the Underwriter's Warrants as provided therein,
Warrant Certificates representing all or a portion of 80,000 Warrants to
purchase up to an aggregate of 80,000 shares of Common Stock (subject to
modification and adjustment as provided in Section 8 hereof and in the
Underwriter's Warrant Agreement), shall be countersigned, issued and delivered
by the Warrant Agent upon written order of the Company signed by its Chairman of
the Board, Chief Executive Officer, President or a Vice President and by its
Chief Financial Officer, Treasurer or an Assistant Treasurer or its Secretary or
an Assistant Secretary.
(d) From time to time, up to the Warrant Expiration Date, the Warrant
Agent shall countersign and deliver Warrant Certificates in required
denominations of one or whole number multiples thereof to the person entitled
thereto in connection with any transfer or exchange permitted under this
Agreement. Except as provided herein, no Warrant Certificates shall be issued
except Warrant Certificates initially issued hereunder and those issued on or
after the Initial Warrant Exercise Date, upon the exercise of fewer than all
Warrants held by the exercising Registered Holder, (ii) Warrant Certificates
issued upon any transfer or exchange of Warrants, (iii) Warrant Certificates
issued in replacement of lost, stolen, destroyed or mutilated Warrant
Certificates pursuant to Section 7, (iv) Warrant Certificates issued pursuant to
the Underwriter's Warrant Agreement; and (v) at the option of the Company,
Warrant Certificates in such form as may be approved by its Board of Directors,
to reflect any adjustment or change in the Exercise Price, the number of shares
of Common Stock purchasable upon exercise of the Warrants or the Redemption
Price therefor made pursuant to Section 8 hereof.
<PAGE>
3. Form and Execution of Warrant Certificates.
------------------------------------------
(a) The Warrant Certificates shall be substantially in the form
annexed hereto as Exhibit A (the provisions of which are hereby incorporated
herein) and may have such letters, numbers or other marks of identification or
designation and such legends, summaries or endorsements printed, lithographed or
engraved thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
law or with any rule or regulation made pursuant thereto or with any rule or
regulation of any stock exchange on which the Warrants may be listed, or to
conform to usage. The Warrant Certificates shall be dated the date of issuance
thereof (whether upon initial issuance, transfer, exchange or in lieu of
mutilated, lost, stolen or destroyed Warrant Certificates) and issued in
registered form. Warrants shall be numbered serially with the letter "W" on the
Warrants.
(b) Warrant Certificates shall be executed on behalf of the Company by
its Chairman of the Board, Chief Executive Officer, President or any Vice
President and by its Chief Financial Officer, Treasurer or an Assistant
Treasurer or its Secretary or an Assistant Secretary, by manual signatures or by
facsimile signatures printed thereon, and shall have imprinted thereon a
facsimile of the Company's seal. Warrant Certificates shall be manually
countersigned by the Warrant Agent and shall not be valid for any purpose unless
so countersigned. In case any officer of the Company who shall have signed any
of the Warrant Certificates shall cease to be such officer of the Company after
the date of signature but before the date of issuance of the Warrant
Certificates or before countersignature by the Warrant Agent and issuance and
delivery thereof, such Warrant Certificates, nevertheless, may be countersigned
by the Warrant Agent, issued and delivered with the same force and effect as
though the person who signed such Warrant Certificates had not ceased to be such
officer of the Company. After countersignature by the Warrant Agent, Warrant
Certificates shall be delivered by the Warrant Agent to the Registered Holder
promptly and without further action by the Company, except as otherwise provided
by Section 4(a) hereof.
4. Exercise.
--------
(a) Warrants in denominations of one or whole number multiples thereof
may be exercised by the Registered Holder thereof commencing at any time on or
after the Initial Warrant Exercise Date, but not after the Warrant Expiration
Date, upon the terms and subject to the conditions set forth herein and in the
applicable Warrant Certificate. Warrants may be exercised by their holders or
redeemed by the Company as follows: Exercise of Warrants shall be accomplished
upon surrender of the Warrant Certificate evidencing such Warrants, with the
Subscription Form on the reverse side thereof duly filled in and executed, to
the Warrant Agent at its business office, together with payment to the Warrant
Agent of the Exercise Price (as of the date of such surrender) of the Warrants
then being exercised and an amount equal to any applicable transfer tax and, if
requested by the Company, any other taxes or governmental charges which the
Company may be required by law to collect in respect of such exercise.
<PAGE>
Payment of the Exercise Price and other amounts may be made by wire transfer of
good funds, or by certified or bank cashier's check, payable in lawful money of
the United States of America to the order of the Warrant Agent, who shall in
turn make prompt payment to the Company. No adjustment shall be made for any
cash dividends, whether paid or declared, on any securities issuable upon
exercise of a Warrant. A Warrant shall be deemed to have been exercised
immediately prior to the close of business on the Exercise Date and upon
exercise thereof, the person entitled to receive the securities deliverable upon
such exercise shall be treated for all purposes as the holder of the securities
issuable thereby as of the close of business on the Exercise Date. If Warrants
in denominations other than whole number multiples thereof shall be exercised at
one time by the same Registered Holder, the number of full shares of Common
Stock which shall be issuable upon exercise thereof shall be computed on the
basis of the aggregate number of full shares of Common Stock issuable upon such
exercise. As soon as practicable on or after the Exercise Date and in any event
within five business days after such date, if one or more Warrants have been
exercised in the manner described in this subsection (a), the Warrant Agent on
behalf of the Company shall cause to be issued to the person or persons entitled
to receive the same a Common Stock certificate or certificates for the shares of
Common Stock deliverable upon such exercise, and the Warrant Agent shall deliver
the same to the person or persons entitled thereto. Upon the exercise of any one
or more Warrants, the Warrant Agent shall promptly notify the Company in writing
of such fact and of the number of securities delivered upon such exercise and,
subject to subsection (b) below, shall cause payment in cash or by check made
payable to the order of the Company, equal to the Exercise Price of such
Warrants, to be deposited promptly in the Company's bank account or paid
directly to the Company, as specified by the Company.
(b) The Company shall engage the Underwriter as a Warrant solicitation
agent, and, at any time upon the valid exercise of any Warrants after one year
from the date hereof, excluding any Warrant (i) exercised at a time when the
Exercise Price exceeds the Market Price, (ii) held in a discretionary account;
or (iii) exercised in an unsolicited transaction, the Company shall instruct the
Warrant Agent to, and the Warrant Agent shall, on a daily basis, within two (2)
business days after such exercise, notify the Underwriter of the exercise of any
such Warrants and shall, on a weekly basis (subject to collection of funds
constituting the tendered Exercise Price, but in no event later than five (5)
business days after the last day of the calendar week in which such funds were
tendered), remit to the Underwriter an amount equal to four percent (4%) of the
Exercise Price of such Warrants then being exercised unless the Underwriter
shall have notified the Warrant Agent that the payment of such amount with
respect to such Warrant is violative of the General Rules and Regulations
promulgated under the Exchange Act, or the rules and regulations of the Nasdaq
Stock Market, Inc. or any of its markets or quotation systems on which the
Company's securities are quoted or applicable state securities or "blue sky"
laws, or the Warrants are those underlying the Underwriter's Warrants in which
event, the Warrant Agent shall have to pay such amount to the Company; provided,
--------
that, the Warrant Agent shall not be obligated to pay any amounts pursuant to
this Section 4(b) during any week that such amounts payable are less than $1,000
and the Warrant Agent's obligation to make such payments shall be suspended
until the amount
<PAGE>
payable aggregates $1,000, and provided further, that, in any event, any such
payment (regardless of amount) shall be made not less frequently than monthly.
Notwithstanding the foregoing, the Underwriter shall be entitled to receive the
commission contemplated by this Section 4(b) as Warrant solicitation agent only
if: (i) the Underwriter has provided actual services in connection with the
solicitation of the exercise of a Warrant by a Registered Holder; and (ii) the
Registered Holder exercising a Warrant affirmatively designates in writing on
the Subscription Form on the reverse side of the Warrant Certificate that the
exercise of such Registered Holder's Warrant was solicited by the Underwriter.
(c) The Company shall not be required to issue fractional shares on
the exercise of Warrants. Warrants may be exercised only in such multiples as
are required to permit the issuance by the Company of one or more whole shares.
If one or more Warrants shall be presented for exercise in full at the same time
by the same Registered Holder, the number of whole shares which shall be
issuable upon such exercise thereof shall be computed on the basis of the
aggregate number of shares purchasable on exercise of the Warrants presented. If
any fraction of a share would, except for the provisions provided herein, be
issuable on the exercise of any Warrant (or specified portion thereof), the
Company shall pay an amount in cash equal to such fraction multiplied by the
then current Market Price of a share of Common Stock.
5. Reservation of Shares; Listing; Payment of Taxes; etc.
-----------------------------------------------------
(a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of issue
upon exercise of Warrants, such number of shares of Common Stock as shall then
be issuable upon the exercise of all outstanding Warrants. The Company covenants
that all shares of Common Stock which shall be issuable upon exercise of the
Warrants shall, at the time of delivery thereof, be validly issued, fully paid
and nonassessable and free from all preemptive or similar rights, taxes, liens
and charges with respect to the issue thereof, and that upon issuance such
shares shall be listed on each securities exchange, if any, on which the other
shares of outstanding Common Stock of the Company are then listed.
(b) The Company covenants that if any securities to be reserved for
the purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any federal securities law before
such securities may be validly issued or delivered upon such exercise, then the
Company will file a registration statement under the federal securities laws or
a post-effective amendment covering such securities, use its best efforts to
cause the same to become effective and to keep such registration statement
current on or after the Initial Warrant Exercise Date and while any of the
Warrants are outstanding and deliver a prospectus which complies with Section
10(a)(3) of the Act to the Registered Holder exercising the Warrant (except, if
in the opinion of counsel to the Company, such registration is not required
under the federal securities laws or if the Company receives a letter from the
staff of the Commission stating that it would not take any enforcement action if
such registration is not effected;
<PAGE>
provided, however, that (i) if at the time of exercise of any Warrants the
Company does not have in place an effective registration statement or is
otherwise, in the good faith determination of the Board of Directors of the
Company, precluded by applicable laws from issuing the underlying shares of
Common Stock, the Company may, in lieu of issuance of the shares of Common
Stock, elect to redeem the Warrants duly surrendered for exercise for a price
per Warrant equal to the difference between the Market Price of the securities
for which such Warrant is exercisable on the date of such submission and the
Exercise Price of such Warrants, and in the event of such redemption, the
Company will pay to the holder of such Warrants the above-described redemption
price in cash within ten (10) business days after receipt of notice from the
Warrant Agent that such Warrants have been submitted for exercise; and (ii) if
the Market Price of the Common Stock is less than the Exercise Price, then the
Company need not take such actions to file a registration statement (or a post-
effective amendment to a registration statement) with respect to the issuance of
Common Stock upon exercise of the Warrants until such time as the Company has
been subject to the requirements of Section 12 or 15(d) of the Exchange Act for
a period of at least twelve calendar months immediately preceding the filing of
the registration statement). The Company will use its best efforts to obtain
appropriate approvals or registrations under state "blue sky" securities laws
with respect to any such securities. However, Warrants may not be exercised by,
or shares of Common Stock issued to, any Registered Holder in any state in which
such exercise or issuance would be unlawful.
(c) The Company shall pay all documentary, stamp or similar taxes and
other governmental charges that may be imposed with respect to the issuance of
Warrants, or the issuance or delivery of any shares of Common Stock upon
exercise of the Warrants; provided, however, that if shares of Common Stock are
to be delivered in a name other than the name of the Registered Holder of the
Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if any;
provided, however, that the Company shall not be required (i) to pay any tax
which may be payable in respect of any transfer involved in the transfer and
delivery of Warrant Certificates; or (ii) to issue or deliver any certificate
for shares of Common Stock or other securities upon the exercise of any Warrant
Certificate until any such tax shall have been paid, all such tax being payable
by the holder of such Warrant Certificate at the time of surrender.
(d) The Warrant Agent is hereby irrevocably authorized as the Transfer
Agent to requisition from time to time certificates representing shares of
Common Stock or other securities required to be issued upon exercise of the
Warrants, and the Company will comply with all such requisitions.
6. Exchange and Registration of Transfer.
-------------------------------------
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may
<PAGE>
be transferred in whole or in part. Warrant Certificates to be exchanged shall
be surrendered to the Warrant Agent at its Corporate Office, and, promptly
following satisfaction of the terms and provisions hereof, the Company shall
execute and the Warrant Agent shall countersign, issue and deliver in exchange
therefor the Warrant Certificate or Certificates which the Registered Holder
making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep, at its office, books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof in accordance with customary
practice. Upon due presentment for registration of transfer of any Warrant
Certificate at such office, the Company shall execute and the Warrant Agent
shall issue and deliver to the transferee or transferees a new Warrant
Certificate or Certificates representing an equal aggregate number of Warrants
of the same class.
(c) With respect to all Warrant Certificates presented for
registration of transfer, or for exchange or exercise, the Subscription Form on
the reverse thereof shall be duly endorsed or be accompanied by a written
instrument or instruments of transfer and subscription, in form satisfactory to
the Company and the Warrant Agent, duly executed by the Registered Holder
thereof or his attorney-in-fact duly authorized in writing.
(d) A service charge may be imposed on the Registered Holder by the
Warrant Agent for any exchange or registration of transfer of Warrant
Certificates. In addition, the Company may require payment by such holder of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for exchange
in case of mutilated Warrant Certificates shall be promptly canceled by the
Warrant Agent and thereafter retained by the Warrant Agent until termination of
this Agreement.
(f) Prior to due presentment for registration of transfer thereof, the
Company and the Warrant Agent may deem and treat the Registered Holder of any
Warrant Certificate as the absolute owner thereof and of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than a duly authorized officer of the Company or
the Warrant Agent) for all purposes and shall not be affected by any notice to
the contrary.
7. Loss or Mutilation. Upon receipt by the Company and the Warrant Agent
------------------
of evidence satisfactory to them of the ownership of and the loss, theft,
destruction or mutilation of any Warrant Certificate and (in the case of loss,
theft or destruction) of indemnity satisfactory to them, and (in case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and the Warrant Agent shall (in the absence of notice to the Company and/or the
Warrant Agent that a new Warrant Certificate has been acquired by a bona fide
purchaser) countersign and deliver to the
<PAGE>
Registered Holder in lieu thereof a new Warrant Certificate of like tenor
representing an equal aggregate number of Warrants. Applicants for substitute
Warrant Certificates shall also comply with such other reasonable regulations
and pay such other reasonable charges as the Warrant Agent may prescribe.
8. Adjustments of Number and Kind of Shares Purchasable and Exercise
-----------------------------------------------------------------
Price. The number and kind of securities or other property purchasable upon
- -----
exercise of a Warrant shall be subject to adjustment from time to time upon the
occurrence, after the date hereof, of any of the following events:
(a) Dividends, Stock Splits, Reverse Splits, Etc. In case the Company
--------------------------------------------
shall (i) pay a dividend in, or make a distribution of, shares of Common Stock
or of capital stock convertible into Common Stock on its outstanding Common
Stock, (ii) subdivide its outstanding shares of Common Stock into a greater
number of such shares, or (iii) combine its outstanding shares of Common Stock
into a smaller number of such shares, the total number of shares of Common Stock
purchasable upon the exercise of each Warrant outstanding immediately prior
thereto shall be adjusted so that the Registered Holder of any Warrant
Certificate thereafter surrendered for exercise shall be entitled to receive, at
the same aggregate Exercise Price, the number of shares of Common Stock which
such holder would have owned or have been entitled to receive immediately
following the happening of any of the events described above had such Warrant
been exercised in full immediately prior to the occurrence of such event. Any
adjustment made pursuant to this subsection shall, in the case of a stock
dividend or distribution, become effective as of the record date therefor and,
in the case of a subdivision or combination, be made as of the effective date
thereof. If, as a result of an adjustment made pursuant to this subsection, the
Registered Holder of any Warrant Certificate thereafter surrendered for exercise
shall become entitled to receive shares of two or more classes of capital stock
of the Company, the Board of Directors of the Company (whose determination shall
be conclusive and shall be evidenced by a Board resolution filed with the
Warrant Agent) shall determine the allocation of the Exercise Price among shares
of such classes of capital stock.
(b) No Change in Aggregate Exercise Price. In the event of any
-------------------------------------
adjustment of the total number of shares of Common Stock purchasable upon the
exercise of Warrants pursuant to subsection (a) above, the aggregate Exercise
Price of each such Warrant shall remain unchanged, but the number of shares of
capital stock obtainable on exercise of each such Warrant shall be adjusted as
provided in subsection (a) above.
(c) Reorganization or Reclassification. In the event of a capital
----------------------------------
reorganization or a reclassification of the Common Stock (except as provided in
subsection (a) above or subsection (e) below), each Registered Holder of a
Warrant, upon exercise of such Warrant, shall be entitled to receive at the same
aggregate Exercise Price, in substitution for the Common Stock to which such
Registered Holder would have become entitled upon exercise immediately prior to
such reorganization or reclassification, the shares or other securities or
property of the Company (or cash) that he
<PAGE>
would have been entitled to receive upon such reorganization or reclassification
if such Warrant had been exercised immediately prior thereto; and in any such
case, appropriate provision (as determined by the Board of Directors of the
Company, whose determination shall be conclusive and shall be evidenced by a
certified Board resolution filed with the Warrant Agent) shall be made for the
application of this Section 8 with respect to the rights and interests
thereafter of the Registered Holders of all then outstanding Warrants (including
but not limited to the allocation of the Exercise Price among shares of classes
of capital stock), to the end that this Section 8 (including the adjustments of
the number of shares of Common Stock or other securities purchasable and the
Exercise Price thereof) shall thereafter be reflected, as nearly as reasonably
practicable, in all subsequent exercises of the Warrants for any shares or
securities or other property (or cash) thereafter deliverable upon the exercise
of the Warrants.
(d) Certificate of Adjustment. Whenever the number of shares of Common
-------------------------
Stock or other securities purchasable upon exercise of a Warrant is adjusted as
provided in this Section 8, the Company will promptly file with the Warrant
Agent a certificate signed by a Chairman or Vice-Chairman of the Board or the
President or a Vice President of the Company and by the Chief Financial Officer,
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary
of the Company setting forth the number and kind of securities or other property
purchasable upon exercise of a Warrant, as so adjusted, stating that such
adjustments in the number or kind of shares or other securities or property
conform to the requirements of this Section 8, and setting forth a brief
statement of the facts accounting for such adjustments. Promptly after receipt
of such certificate, the Company, or the Warrant Agent at the Company's request,
will deliver, by first-class mail, postage pre-paid, a brief summary thereof (to
be supplied by the Company) to all Registered Holders of the outstanding Warrant
Certificates; provided, however, that failure to file or to give any notice
required under this subsection, or any defect therein, shall not affect the
legality or validity of any such adjustments under this Section 8; and provided,
further, that, where appropriate, such notice may be given in advance and
included as part of the notice required to be given pursuant to Section 12
hereof.
(e) Merger or Consolidation. In case of any consolidation of the
-----------------------
Company with, or merger of the Company into another corporation (other than a
consolidation or merger which does not result in any reclassification or change
of the outstanding Common Stock) or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety in a transaction involving as an element thereof the distribution of
the consideration received by the Company therefrom, the corporation formed by
such consolidation or merger or the corporation which shall have acquired such
assets, as the case may be, shall execute and deliver to the Warrant Agent a
supplemental warrant agreement provided that the Registered Holder of each
Warrant then outstanding shall have the right thereafter (until the expiration
of such Warrant) to receive, upon exercise of such Warrant, solely the kind and
amount of shares of stock and other securities and property (or cash) receivable
upon such consolidation, merger, sale or transfer by a holder of the number of
shares of
<PAGE>
Common Stock of the Company for which such Warrant could have been exercised
immediately prior to such consolidation, merger, sale or transfer. Such
supplemental warrant agreement shall provide for adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided in this
Section 8. The above provision of this Subsection 8(f) shall similarly apply to
successive consolidations, mergers, sales or transfers.
(f) Effect of Adjustments on Warrant Certificates. Irrespective of
---------------------------------------------
any adjustments in the number or kind of shares issuable upon exercise of
Warrants, Warrant Certificates theretofore or thereafter issued may continue to
express the same price and number and kind of shares as are stated in the
Warrant Certificates initially issuable pursuant to this Warrant Agreement.
(g) Assistance of Accounting Firm in Making Computations. The Company
----------------------------------------------------
may retain a firm of independent public accountants of recognized standing,
which may be the accountants regularly retained by the Company, selected by the
Board of Directors of the Company or the Executive Committee of said Board, and
not disapproved by the Warrant Agent, to make any computation required under
this Section 8, and a certificate signed by such firm shall, in the absence of
fraud or gross negligence, be conclusive evidence of the correctness of any
computation made under this Section.
(h) "Common Stock". The term "Common Stock" shall mean (i) the class
-------------
of stock designated as Common Stock in the Certificate of Incorporation of the
Company, as amended, at the date of this Agreement; or (ii) any other class of
stock resulting from successive changes or reclassifications of such Common
Stock consisting solely of changes in par value, or from par value to no par
value, or from no par value to par value. In the event that at any time as a
result of an adjustment made pursuant to this Section 8, the Registered Holder
of any Warrant thereafter surrendered for exercise shall become entitled to
receive any shares of capital stock of the Company other than shares of Common
Stock, thereafter the number of such other shares obtainable upon exercise of
any Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in this Section 8, and all other provisions of this
Agreement, with respect to the Common Stock, shall apply on like terms to any
such other shares.
9. Redemption.
----------
(a) Commencing on the Initial Warrant Redemption Date, the Company
may, on thirty (30) days' prior written notice, redeem all, but not less than
all, the Warrants at ten cents ($.10) per Warrant, provided, however, that
before any such call for redemption of Warrants can take place, the last
reported closing sale price for the Common Stock as officially reported by
Nasdaq, if the Common Stock is then traded on Nasdaq (or the last reported
closing sale price on the Nasdaq National Market or a national securities
exchange, if the Common Stock is then traded on the Nasdaq National Market or on
a national securities exchange, in each case as officially reported by the
<PAGE>
Nasdaq National Market or such national securities exchange, or, if the Common
Stock is not then traded on Nasdaq, the Nasdaq National Market or a national
securities exchange, but is then traded in the over-the-counter market, then the
average of the last reported bid and asked prices of the Common Stock reported
by the National Quotation Bureau, Inc. or similar bureau if the National
Quotation Bureau, Inc. is no longer reporting such information) shall have
equaled or exceeded $14.50 per share (250% of the deemed initial public offering
price per share of Common Stock which assumes, for purposes of this Agreement
that the deemed initial public offering price per share of Common Stock is $5.80
per share) (subject to adjustment in the event of any stock splits or other
similar events as provided in Section 8 hereof) for at least twenty (20)
consecutive trading days ending on the third day prior to the date on which the
notice contemplated by (b) and (c) below is given.
(b) In case the Company shall exercise its right to redeem all of the
Warrants, it shall give or cause to be given notice to the Registered Holders of
the Warrants by mailing to such Registered Holders a notice of redemption,
first-class mail, postage pre-paid, at their last address as shall appear on the
records of the Warrant Agent. Any notice mailed in the manner provide herein
shall be conclusively presumed to have been duly given whether or not the
Registered Holder receives such notice. Not less than five (5) business days
prior to the mailing to the Registered Holders of the notice of redemption, the
Company shall deliver or cause to be delivered to the Underwriter a similar
notice telephonically and confirmed in writing, and if the Underwriter is
engaged as the Warrant solicitation agent, the Company shall also cause to be
delivered to the Underwriter a list of the Registered Holders (including their
respective addresses and number of Warrants beneficially owned) to whom such
notice of redemption has been or will be given.
(c) The notice of redemption shall specify (i) the redemption price,
(ii) the Redemption Date, which shall in no event be less than thirty (30) days
after the date of mailing of such notice, (iii) the place where the Warrant
Certificate shall be delivered and the redemption price shall be paid, (iv) that
the Underwriter shall receive the commission contemplated by Section 4(b)
hereof; and (v) that the right to exercise the Warrant shall terminate at 5:00
p.m. (New York time) on the business day immediately preceding the date fixed
for redemption. No failure to mail such notice nor any defect therein or in the
mailing thereof shall affect the validity of the proceedings for such redemption
except as to a holder (a) to whom notice was not mailed; or (b) whose notice was
defective. An affidavit of the Warrant Agent or the Secretary or Assistant
Secretary of the Company that notice of redemption has been mailed shall, in the
absence of fraud, be prima facie evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:00 p.m. (New
York time) on the business day immediately preceding the Redemption Date. The
redemption price payable to the Registered Holders shall be mailed to such
persons at their addresses of record.
<PAGE>
(e) If the Underwriter acts as the Warrant solicitation agent for the
Company, the Company shall indemnify the Underwriter and each person, if any,
who controls the Underwriter within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act against all loss, claim, damage, expense or
liability (including all expenses reasonably incurred in investigating preparing
or defending against any claim whatsoever) to which any of them may become
subject under the Act, the Exchange Act or otherwise, arising from the
registration statement or prospectus referred to in Section 5(b) hereof to the
same extent and with the same effect (including the provisions regarding
contribution) as the provisions pursuant to which the Company has agreed to
indemnify the Underwriter contained in Section 7 of the Underwriting Agreement.
(f) Five business days prior to the Redemption Date, the Company shall
furnish to the Underwriter, as the Warrant solicitation agent, (i) an opinion of
counsel to the Company, dated such date and addressed to the Underwriter; and
(ii) a "cold comfort" letter dated such date addressed to the Underwriter,
signed by the independent public accountants who have issued a report on the
Company's financial statements included in such registration statement, or if
different, the Company's regular outside accountants at such time, in each case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities.
(g) On and after the date fixed for redemption, the Registered Holders
shall have no rights with respect to the Warrants except to receive the $.10 per
Warrant upon surrender of their Warrant Certificates.
10. Concerning the Warrant Agent.
----------------------------
(a) The Warrant Agent acts hereunder as agent and in a ministerial
capacity for the Company and the Underwriter, and its duties shall be determined
solely by the provisions hereof. The Warrant Agent shall not, by issuing and
delivering Warrant Certificates or by any other act hereunder, be deemed to make
any representations as to the validity or value or authorization of the Warrant
Certificates (except its countersignature thereof) or the Warrants represented
thereby or of any securities or other property delivered upon exercise of any
Warrant or whether any stock issued upon exercise of any Warrant is fully paid
and nonassessable.
(b) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be made
any adjustment of the Exercise Price or the Redemption Price provided in this
Agreement, or to determine whether any fact exists which may require any such
adjustments, or with respect to the nature or extent of any such adjustments,
when made, or with respect to the method employed in making the same (except
with respect to the exercise of Warrant
<PAGE>
Certificates after actual notice of any adjustment of the Exercise Price). The
Warrant Agent shall not (i) be liable for any recital or statement of fact
contained herein or for any action taken, suffered or omitted by it in reliance
on any Warrant Certificate or other document or instrument believed by it in
good faith to be genuine and to have been signed or presented by the proper
party or parties (except its countersignature on the Warrant Certificates and
such statements or recitals as describe the Warrant Agent or action taken or to
be taken by it); (ii) be responsible for any failure on the part of the Company
to comply with any of its covenants and obligations contained in this Agreement
or in any Warrant Certificate; or (iii) be liable for any act or omission in
connection with this Agreement except for its own negligence, bad faith or
willful misconduct.
(c) The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company or for the Underwriter)
and shall incur no liability or responsibility for any action taken, suffered or
omitted by it in good faith in accordance with the opinion or advice of such
counsel.
(d) Any notice, statement, instruction, request, direction, order or
demand of the Company shall be sufficiently evidenced by an instrument signed by
the Chairman of the Board of Directors, Chief Executive Officer, Chief Financial
Officer, President or any Vice President (unless other evidence in respect
thereof is herein specifically prescribed). The Warrant Agent shall not be
liable for any action taken, suffered or omitted by it in accordance with such
notice, statement, instruction, request, direction, order or demand reasonably
believed by it to be genuine.
(e) The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; the Company further agrees to indemnify the Warrant Agent
and save it harmless from and against any and all losses, expenses and
liabilities, including judgments, costs and counsel fees, for anything done or
omitted by the Warrant Agent in the execution of its duties and powers hereunder
except losses, expenses and liabilities arising as a result of the Warrant
- -------
Agent's negligence, bad faith or willful conduct.
(f) The Warrant Agent may resign its duties and be discharged from all
further duties and liabilities hereunder (except liabilities resulting as a
result of the Warrant Agent's own gross negligence or willful misconduct), after
giving thirty (30) days' prior written notice to the Company. At least fifteen
(15) days prior to the date such resignation is to become effective, the Warrant
Agent shall cause a copy of such notice of resignation to be mailed to the
Registered Holder of each Warrant Certificate at the Company's expense. Upon
such resignation, or any inability of the Warrant Agent to act as such
hereunder, the Company shall appoint in writing a new warrant agent. If the
Company shall fail to make such appointment within a period of fifteen (15) days
after it has been notified in writing of such resignation by the resigning
Warrant Agent, then the Registered Holder of any Warrant Certificate may apply
to any court of competent jurisdiction for the appointment of a new warrant
agent. Any new warrant agent, whether
<PAGE>
appointed by the Company or by such a court, shall be a bank or trust company
having a capital and surplus, as shown by its last published report to its
stockholders, of not less than $10,000,000 or a stock transfer company. After
acceptance in writing of such appointment by the new warrant agent is received
by the Company, such new warrant agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named herein as
the Warrant Agent, without any further assurance, conveyance, act or deed; but
if for any reason it shall be necessary or expedient to execute and deliver any
further assurance, conveyance, act or deed, the same shall be done at the
expense of the Company and shall be legally and validly executed and delivered
by the resigning Warrant Agent. Not later than the effective date of any such
appointment the Company shall file notice thereof with the resigning Warrant
Agent and shall forthwith cause a copy of such notice to be mailed to the
Registered Holder of each Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any new warrant
agent may be converted or merged, any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party, or any corporation succeeding to the corporate trust business of the
Warrant Agent or any new warrant agent shall be a successor warrant agent under
this Agreement without any further act, provided that such corporation is
eligible for appointment as successor to the Warrant Agent under the provisions
of the preceding paragraph. Any such successor warrant agent shall promptly
cause notice of its succession as warrant agent to be mailed to the Company and
to the Registered Holders of each Warrant Certificate.
(h) The Warrant Agent, its subsidiaries and affiliates, and any of its
or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same manner
and to the same extent and with like effect as though it were not Warrant Agent.
Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.
(i) The Warrant Agent shall retain for a period of two (2) years from
the date of exercise, any Warrant Certificate received by it upon such exercise.
(j) The Warrant Agent shall account promptly to the Company with
respect to Warrants exercised and concurrently pay to the Company all moneys
received by the Warrant Agent for the purchase of securities or other property
through the exercise of such Warrants.
11. Modification of Agreement. The Warrant Agent and the Company may by
-------------------------
supplemental agreement make any changes or corrections in this Agreement (i)
that they shall deem appropriate to cure any ambiguity or to correct any
defective or inconsistent provision or manifest mistake or error herein
contained; or (ii) that they may deem necessary or desirable and which shall not
adversely affect the interests of the holders of Warrant Certificates; provided,
however, that this Agreement shall not
<PAGE>
otherwise be modified, supplemented or altered in any respect except with the
consent in writing of the Registered Holders representing not less than 66-2/3%
of the Warrants then outstanding; provided, further, that no change in the
number or nature of the securities purchasable upon the exercise of any Warrant,
or to increase the Exercise Price therefor or to accelerate the Warrant
Expiration Date shall be made without the consent in writing of the Registered
Holder of the Warrant Certificate representing such Warrant, other than such
changes as are presenting specifically prescribed by this Agreement as
originally executed. In addition, this Agreement may not be modified, amended or
supplemented without the prior written consent of the Underwriter, other than to
cure any ambiguity or to correct any provision which is inconsistent with any
other provision of this Agreement or to make any such change that is necessary
or desirable and which shall not adversely affect the interests of the
Underwriter and except as may be required by law.
12. Notices. All notices, requests, consents and other communications
-------
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first-class registered or certified mail, postage prepaid,
as follows: if to the Registered Holder of a Warrant Certificate, at the last
address of such holder as shown on the registry books maintained by the Warrant
Agent; if to the Company at 4010 Moorpark Ave., Suite 119, San Jose, California
95113 Attention: CEO, or at such other address as may have been furnished to the
Warrant Agent in writing by the Company; and if to the Warrant Agent, at 2
Broadway, 19th Floor, New York, NY 10004. Copies of any notice delivered
pursuant to this Agreement shall also be delivered to Monroe Parker Securities,
Inc., 2500 Westchester Avenue, Purchase, New York 10577, Attention: General
Counsel, or at such other address as any such party may have been furnished to
the Company and the Warrant Agent in writing.
13. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the state of New York without reference to conflicts
of laws or choice of law principles.
14. Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the Company, the Underwriter, the Warrant Agent and their respective
successors and assigns and the Registered Holders from time to time of Warrant
Certificates or any of them. Nothing in this Agreement is intended or shall be
construed to confer upon any other person any right, remedy or claim, in equity
or at law, or to impose upon any other person any duty, liability or obligation.
15. Termination. This Agreement shall terminate at the close of business
-----------
on the Expiration Date of all of the Warrants or such earlier date upon which
all Warrants have been exercised or redeemed, except that the Warrant Agent
shall account to the Company for all Warrants outstanding and all cash held by
it and the provisions of Section 10 hereof shall survive such termination.
<PAGE>
16. Counterparts. This Agreement may be executed in several
------------
counterparts each of which shall be an original, but all of which taken together
shall constitute a single instrument.
17. Holders of Warrants Not Deemed Shareholders. No holder of a Warrant,
-------------------------------------------
as such, shall be entitled to vote, receive dividends or be deemed the holder of
Common Stock or any other securities of the Company which may at any time be
issuable on the exercise of the Warrants represented thereby for any purpose
whatever, nor shall anything contained herein or in any Warrant Certificate be
construed to confer upon any holder of a Warrant, as such, any of the rights of
a shareholder of the Company or any right to vote for the election of directors
or upon any matter submitted to shareholders at any meeting thereof, or to give
or withhold consent to any corporate action (whether upon any recapitalization,
issuance of stock, reclassification of stock, change of par value or change of
stock to no par value, consolidation, merger, conveyance or otherwise), or to
receive notice of meetings or other actions affecting shareholders, or to
receive dividend or subscription rights, or otherwise, until such Warrant shall
have been exercised in accordance with the provisions hereof, including the
receipt by the Company of the Exercise Price and any other amounts payable upon
such exercise to the Warrant Agent.
18. Benefits of this Agreement. Nothing in this Agreement or in the
--------------------------
Warrant Certificates shall be construed to give to any person or corporation
other than the Company, the Underwriter, the Warrant Agent, and their respective
successors and assigns hereunder and the Registered Holders of the Warrant
Certificates any legal or equitable right, remedy or claim under this Agreement;
but this Agreement shall be for the sole and exclusive benefit of the Company,
the Underwriter, the Warrant Agent, their respective successors and assigns
hereunder and the Registered Holders of the Warrant Certificates.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the first date first above written.
ATTEST: ISONICS CORPORATION
By:__________________________ By:___________________________
Name: _______________________ Name: James E. Alexander
Title: ______________________ Title: President and Chief Executive
Officer
ATTEST: CONTINENTAL STOCK
TRANSFER & TRUST COMPANY,
as Warrant Agent
By:__________________________ By:___________________________
<PAGE>
Name: _______________________ Name: _________________________
Title: ______________________ Title: ________________________
MONROE PARKER SECURITIES, INC.
By:__________________________
Name: Stephen Drescher
Title: Director Corporate Finance
<PAGE>
Exhibit A
No. W______ VOID AFTER _________, 2001
WARRANTS
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
ISONICS CORPORATION
CUSIP # 464895 11 9
----------
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or its registered assigns (the "Registered Holder") is the owner of the number
of Redeemable Warrants (the "Warrants") specified above. Each Warrant initially
entitles the Registered Holder to purchase, subject to the terms and conditions
set forth in this Certificate and the Warrant Agreement (as hereinafter
defined), one fully paid and nonassessable share of Common Stock, no par value
per share, of Isonics Corporation, a California corporation (the "Company"), at
any time commencing one year after the date of the Prospectus (the "Initial
Warrant Exercise Date"), and the earlier to occur of the Expiration Date (as
hereinafter defined) and the Redemption Date (as hereinafter defined) upon the
presentation and surrender of this Warrant Certificate with the Subscription
Form on the reverse hereof duly executed, at the corporate office of Continental
Stock Transfer & Trust Company, as Warrant Agent, or its successor (the "Warrant
Agent"), accompanied by payment of $5.80 per share, subject to adjustment (the
"Exercise Price"), in lawful money of the United States of America in cash or by
check made payable to the Warrant Agent for the account of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated September __,
1997, by and between the Company, Monroe Parker Securities, Inc. (the
"Underwriter") and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant Agreement,
the Exercise Price and the number of shares of Common Stock subject to purchase
upon the exercise of each Warrant represented hereby are subject to modification
or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate
<PAGE>
upon the surrender hereof and shall execute and deliver a new Warrant
Certificate or Warrant Certificates of like tenor, which the Warrant Agent shall
countersign, for the balance of such Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on (i) the
date which is three (3) years after the Initial Warrant Exercise Date; or (ii)
the date fixed for redemption hereof, whichever date is earlier. If each such
date shall in the State of New York be a holiday or a day on which banks located
in the State of New York are authorized to close, then the Expiration Date shall
mean 5:00 p.m. (New York time) the next following day which in the State of New
York is neither a holiday nor a day on which such banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to the
exercise of this Warrant unless a registration statement under the Securities
Act of 1933, as amended (the "Act"), with respect to such securities is
effective or an exemption thereunder is available. The Company has covenanted
and agreed that it will file a registration statement under the Federal
securities laws, use its best efforts to cause the same to become effective, use
its best efforts to keep such registration statement current, if required under
the Act, following the Initial Warrant Exercise Date and while any of the
Warrants are outstanding, and deliver a prospectus which complies with Section
10(a)(3) of the Act to the Registered Holder exercising this Warrant; provided
however, that (i) if at the time of exercise of any of the Warrants, the Company
does not have in place an effective registration statement or is otherwise, in
the good faith determination of the Board of Directors of the Company, precluded
by applicable laws from issuing the shares of Common Stock issuable upon such
exercise, the Company may, in lieu of issuance of those shares, elect to redeem
the Warrants duly surrendered for exercise for a price per Warrant equal to the
difference between the Market Price (as defined below) of a share of Common
Stock on the date of such submission and the Exercise Price, and in the event of
such redemption, the Company will pay to the Registered Holder the above-
described redemption price in cash within ten (10) business days after receipt
of notice from the Warrant Agent that such Warrants have been submitted for
exercise; and (ii) if the Market Price of the Common Stock is less than the
Exercise Price, then the Company need not take such actions to file a
registration statement (or a post-effective amendment to a registration
statement) with respect to the issuance of Common Stock upon exercise of the
Warrants until such time as the Company has been subject to the requirements of
Section 12 or 15(d) of the Securities Exchange Act of 1934, as amended, for a
period of at least twelve calendar months immediately preceding the filing of
the registration statement. This Warrant shall not be exercisable by a
Registered Holder in any state where such exercise would be unlawful.
The term "Market Price" shall mean (i) if the Common Stock is listed, or
admitted to unlisted trading privileges on a national securities exchange, or is
traded on the Nasdaq National Market or Nasdaq SmallCap Market, the last
reported closing sale price on the date of the event to which such Market Price
relates, or, if no such reported closing sale takes place on such date, then the
average of the last reported closing sales prices for the
<PAGE>
last three (3) trading days before such date, in each case as officially
reported by the principal securities exchange on which the Common Stock is
listed or admitted to unlisted trading privileges or by the Nasdaq National
Market or Nasdaq SmallCap Market, or (ii) if the Common Stock is not listed or
admitted to unlisted trading privileges, on any national securities exchange, or
traded on the Nasdaq National Market or Nasdaq SmallCap Market, but is traded in
the over-the-counter market, then the average of the last reported bid and asked
prices of the Common Stock reported by the National Quotation Bureau, Inc. or
similar bureau if the National Quotation Bureau, Inc. is no longer reporting
such information on the date of the event to which such Market Price relates,
and if no such prices are reported on such date, then the average of the last so
reported bid and asked prices on the last three (3) trading days on which such
prices are reported immediately preceding such date; or (iii) if the Common
Stock is neither listed, nor admitted to unlisted trading privileges, on a
national securities exchange, nor traded on the Nasdaq National Market or Nasdaq
SmallCap Market, nor traded in the over-the-counter market, then the fair market
value of the Common Stock, not less than the book value thereof, as of the date
of the event to which such Market Price relates, as determined in good faith
(using customary valuation methods) by the Board of Directors of the Company,
which determination shall be evidenced by a resolution of the Board of Directors
and based on the best information available to it.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a shareholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may be
redeemed at the option of the Company, at a redemption price of $.10 per
Warrant, at any time eighteen (18) months after the date of the Prospectus,
provided that the last reported closing sale price for the Common Stock as
officially reported by the Nasdaq SmallCap Market, if the Common Stock is then
traded on the Nasdaq SmallCap Market (or the last reported closing sale price on
the Nasdaq National Market or a national securities exchange, if the Common
Stock is then traded on the Nasdaq National Market or a national securities
exchange, in each case as officially reported by the Nasdaq National
<PAGE>
Market or such national securities exchange, or, if the Common Stock is not then
traded on the Nasdaq SmallCap Market, the Nasdaq National Market or a national
securities exchange, but is then traded in the over-the-counter market, then the
average of the last reported bid and asked prices of the Common Stock reported
by the National Quotation Bureau, Inc. or similar bureau if the National
Quotation Bureau, Inc. is no longer reporting such information), shall have
equaled or exceeded $8.50 (250% of the deemed initial public offering price) per
share for at least twenty (20) consecutive trading days ending on the third day
prior to the date on which the Notice of Redemption, as defined below, is given
(subject to adjustment in the event of any stock splits or other similar
events). Notice of redemption (the "Notice of Redemption") shall be given not
later than the thirtieth (30th) day before the date fixed for redemption, or as
provided in the Warrant Agreement. On and after the date fixed for redemption,
the Registered Holder shall have no rights with respect to the Warrants except
to receive the $.10 per Warrant upon surrender of this Warrant Certificate.
Upon certain circumstances, the Underwriter may be entitled to receive an
aggregate of four percent (4%) of the Exercise Price of the Warrants represented
hereby.
Prior to due presentment for registration of transfer hereof, the Company and
the Warrant Agent may deem and treat the Registered Holder as the absolute owner
hereof and of each Warrant represented hereby (notwithstanding any notations of
ownership or writing hereon made by anyone other than a duly authorized officer
of the Company or the Warrant Agent) for all purposes and the Company's right so
to treat the Registered Holder shall not be affected by any notice to the
contrary, except as provided in the Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of California without reference to conflict of laws
or choice of law principles.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile, by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated:
[SEAL] ISONICS CORPORATION
By:___________________________
Name: James E. Alexander
Title: President and Chief Executive Officer
<PAGE>
By:___________________________
Name: Paul J. Catuna
Title: Secretary
COUNTERSIGNED:
__________________________
as Warrant Agent
By:________________________
Authorized Officer
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise
________ Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
_______________________________
_______________________________
_______________________________
(please print or type name and address)
and be delivered to
_______________________________
_______________________________
_______________________________
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
IMPORTANT: PLEASE COMPLETE THE FOLLOWING
1. The exercise of such Warrants was solicited by Monroe Parker Securities,
Inc. [ ]
2. The exercise of such Warrants was not solicited by Monroe Parker
Securities, Inc. [ ]
Dated: ____________________
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Warrants
FOR VALUE RECEIVED, __________________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER
_________________________________
_________________________________
_________________________________
_________________________________
(please print or type name and address)
________________________________________________________________ of the Warrants
represented by this Warrant Certificate, and hereby irrevocably constitutes and
appoints ____________________________________Attorney to transfer this Warrant
Certificate on the books of the Company, with full power of substitution in the
premises.
Dated: ____________________________
__________________________________
Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. THE SIGNATURE(S)
MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS,
SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 4.04
No. W ________ VOID AFTER _________, 2001
WARRANTS
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
ISONICS CORPORATION
CUSIP # 464895 11 9
----------
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or its registered assigns (the "Registered Holder") is the owner of the number
of Redeemable Warrants (the "Warrants") specified above. Each Warrant initially
entitles the Registered Holder to purchase, subject to the terms and conditions
set forth in this Certificate and the Warrant Agreement (as hereinafter
defined), one fully paid and nonassessable share of Common Stock, no par value
per share, of Isonics Corporation, a California corporation (the "Company"), at
any time commencing one year after the date of the Prospectus (the "Initial
Warrant Exercise Date"), and the earlier to occur of the Expiration Date (as
hereinafter defined) and the Redemption Date (as hereinafter defined) upon the
presentation and surrender of this Warrant Certificate with the Subscription
Form on the reverse hereof duly executed, at the corporate office of Continental
Stock Transfer & Trust Company, as Warrant Agent, or its successor (the "Warrant
Agent"), accompanied by payment of $5.80 per share, subject to adjustment (the
"Exercise Price"), in lawful money of the United States of America in cash or by
check made payable to the Warrant Agent for the account of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated September __,
1997, by and between the Company, Monroe Parker Securities, Inc. (the
"Underwriter") and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant Agreement,
the Exercise Price and the number of shares of Common Stock subject to purchase
upon the exercise of each Warrant represented hereby are subject to modification
or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and shall execute and
deliver a new Warrant Certificate or
<PAGE>
Warrant Certificates of like tenor, which the Warrant Agent shall countersign,
for the balance of such Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on (i) the
date which is three (3) years after the Initial Warrant Exercise Date; or (ii)
the date fixed for redemption hereof, whichever date is earlier. If each such
date shall in the State of New York be a holiday or a day on which banks located
in the State of New York are authorized to close, then the Expiration Date shall
mean 5:00 p.m. (New York time) the next following day which in the State of New
York is neither a holiday nor a day on which such banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to the
exercise of this Warrant unless a registration statement under the Securities
Act of 1933, as amended (the "Act"), with respect to such securities is
effective or an exemption thereunder is available. The Company has covenanted
and agreed that it will file a registration statement under the Federal
securities laws, use its best efforts to cause the same to become effective, use
its best efforts to keep such registration statement current, if required under
the Act, following the Initial Warrant Exercise Date and while any of the
Warrants are outstanding, and deliver a prospectus which complies with Section
10(a)(3) of the Act to the Registered Holder exercising this Warrant; provided
however, that (i) if at the time of exercise of any of the Warrants, the Company
does not have in place an effective registration statement or is otherwise, in
the good faith determination of the Board of Directors of the Company, precluded
by applicable laws from issuing the shares of Common Stock issuable upon such
exercise, the Company may, in lieu of issuance of those shares, elect to redeem
the Warrants duly surrendered for exercise for a price per Warrant equal to the
difference between the Market Price (as defined below) of a share of Common
Stock on the date of such submission and the Exercise Price, and in the event of
such redemption, the Company will pay to the Registered Holder the above-
described redemption price in cash within ten (10) business days after receipt
of notice from the Warrant Agent that such Warrants have been submitted for
exercise; and (ii) if the Market Price of the Common Stock is less than the
Exercise Price, then the Company need not take such actions to file a
registration statement (or a post-effective amendment to a registration
statement) with respect to the issuance of Common Stock upon exercise of the
Warrants until such time as the Company has been subject to the requirements of
Section 12 or 15(d) of the Securities Exchange Act of 1934, as amended, for a
period of at least twelve calendar months immediately preceding the filing of
the registration statement. This Warrant shall not be exercisable by a
Registered Holder in any state where such exercise would be unlawful.
The term "Market Price" shall mean (i) if the Common Stock is listed, or
admitted to unlisted trading privileges on a national securities exchange, or is
traded on the Nasdaq National Market or Nasdaq SmallCap Market, the last
reported closing sale price on the date of the event to which such Market Price
relates, or, if no such reported closing sale takes place on such date, then the
average of the last reported closing sales prices for the last three (3) trading
days before such date, in each case as officially reported by the
<PAGE>
principal securities exchange on which the Common Stock is listed or admitted to
unlisted trading privileges or by the Nasdaq National Market or Nasdaq SmallCap
Market, or (ii) if the Common Stock is not listed or admitted to unlisted
trading privileges, on any national securities exchange, or traded on the Nasdaq
National Market or Nasdaq SmallCap Market, but is traded in the over-the-counter
market, then the average of the last reported bid and asked prices of the Common
Stock reported by the National Quotation Bureau, Inc. or similar bureau if the
National Quotation Bureau, Inc. is no longer reporting such information on the
date of the event to which such Market Price relates, and if no such prices are
reported on such date, then the average of the last so reported bid and asked
prices on the last three (3) trading days on which such prices are reported
immediately preceding such date; or (iii) if the Common Stock is neither listed,
nor admitted to unlisted trading privileges, on a national securities exchange,
nor traded on the Nasdaq National Market or Nasdaq SmallCap Market, nor traded
in the over-the-counter market, then the fair market value of the Common Stock,
not less than the book value thereof, as of the date of the event to which such
Market Price relates, as determined in good faith (using customary valuation
methods) by the Board of Directors of the Company, which determination shall be
evidenced by a resolution of the Board of Directors and based on the best
information available to it.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a shareholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may be
redeemed at the option of the Company, at a redemption price of $.10 per
Warrant, at any time eighteen (18) months after the date of the Prospectus,
provided that the last reported closing sale price for the Common Stock as
officially reported by the Nasdaq SmallCap Market, if the Common Stock is then
traded on the Nasdaq SmallCap Market (or the last reported closing sale price on
the Nasdaq National Market or a national securities exchange, if the Common
Stock is then traded on the Nasdaq National Market or a national securities
exchange, in each case as officially reported by the Nasdaq National Market or
such national securities exchange, or, if the Common Stock is not then traded
<PAGE>
on the Nasdaq SmallCap Market, the Nasdaq National Market or a national
securities exchange, but is then traded in the over-the-counter market, then the
average of the last reported bid and asked prices of the Common Stock reported
by the National Quotation Bureau, Inc. or similar bureau if the National
Quotation Bureau, Inc. is no longer reporting such information), shall have
equaled or exceeded $8.50 (250% of the deemed initial public offering price) per
share for at least twenty (20) consecutive trading days ending on the third day
prior to the date on which the Notice of Redemption, as defined below, is given
(subject to adjustment in the event of any stock splits or other similar
events). Notice of redemption (the "Notice of Redemption") shall be given not
later than the thirtieth (30th) day before the date fixed for redemption, or as
provided in the Warrant Agreement. On and after the date fixed for redemption,
the Registered Holder shall have no rights with respect to the Warrants except
to receive the $.10 per Warrant upon surrender of this Warrant Certificate.
Upon certain circumstances, the Underwriter may be entitled to receive an
aggregate of four percent (4%) of the Exercise Price of the Warrants represented
hereby.
Prior to due presentment for registration of transfer hereof, the Company and
the Warrant Agent may deem and treat the Registered Holder as the absolute owner
hereof and of each Warrant represented hereby (notwithstanding any notations of
ownership or writing hereon made by anyone other than a duly authorized officer
of the Company or the Warrant Agent) for all purposes and the Company's right so
to treat the Registered Holder shall not be affected by any notice to the
contrary, except as provided in the Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of California without reference to conflict of laws
or choice of law principles.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile, by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated:
[SEAL] ISONICS CORPORATION
By:___________________________
Name: James E. Alexander
Title: President and Chief Executive Officer
By:___________________________
Name: Paul J. Catuna
Title: Secretary
COUNTERSIGNED:
__________________________
as Warrant Agent
By:________________________
Authorized Officer
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise
________ Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
_______________________________
_______________________________
_______________________________
(please print or type name and address)
and be delivered to
_______________________________
_______________________________
_______________________________
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
IMPORTANT: PLEASE COMPLETE THE FOLLOWING
1. The exercise of such Warrants was solicited by Monroe Parker Securities,
Inc. [ ]
2. The exercise of such Warrants was not solicited by Monroe Parker
Securities, Inc. [ ]
Dated: ____________________
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Warrants
FOR VALUE RECEIVED, __________________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER
_________________________________
_________________________________
_________________________________
_________________________________
(please print or type name and address)
________________________________________________________________ of the Warrants
represented by this Warrant Certificate, and hereby irrevocably constitutes and
appoints ____________________________________Attorney to transfer this Warrant
Certificate on the books of the Company, with full power of substitution in the
premises.
Dated: ____________________________
__________________________________
Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. THE SIGNATURE(S)
MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS,
SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
[LETTERHEAD OF FENWICK & WEST LLP]
EXHIBIT 5.01
September 5, 1997
Isonics Corporation
4010 Moorpark Avenue, Suite 119
San Jose, California 95117
Re: Isonics Corporation
-------------------
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form SB-2
filed with the Securities and Exchange Commission (the "SEC"), File no. 333-
13289, as amended (the "Registration Statement"), in connection with
registration under the Securities Act of 1993, as amended, of (1) up to 800,000
Units (the "Units"), each Unit consisting of one share of your Common Stock and
one Class A Redeemable Common Stock Purchase Warrant, (2) up to 800,000 shares
of your Common Stock (the "Firm Shares"), (3) up to 800,000 Class A Redeemable
Common Stock Purchase Warrants (the "Firm Warrants"), (4) up to 800,000 shares
issuable upon exercise of the Firm Warrants, (5) up to 120,000 Units issuable
upon exercise of the Underwriter's over-allotment option (the "Over-Allotment
Option"), (6) up to 120,000 shares of Common Stock issuable upon exercise of the
Over-Allotment Option, (7) up to 120,000 Class A Redeemable Common Stock
Purchase Warrants (the "Option Warrants"), issuable upon exercise of the Over-
Allotment Option, (8) up to 120,000 shares issuable upon exercise of the Option
Warrants, (9) up to 80,000 Underwriter's Warrants, each Underwriter's Warrant
exercisable to acquire one share of Common Stock and one Class A Redeemable
Common Stock Purchase Warrant (the "Underlying Warrant") to acquire one share of
Common Stock, (10) up to 80,000 shares of Common Stock issuable upon exercise of
the Underwriter's Warrants, (11) up to 80,000 Class A Redeemable Common Stock
Purchase Warrants issuable upon exercise of the Underwriter's Warrants, and (12)
up to 80,000 shares of Common Stock issuable upon exercise of the Underlying
Warrants. All of the foregoing securities will be referred to collectively as
the "Securities."
As your counsel, we have examined the proceedings taken by you in
connection with the issuance by you of the Securities that may be issued and
sold by you as described in the Registration Statement.
It is our opinion that the Securities to be issued and sold by you pursuant
to the Registration Statement, when issued, sold and paid for in the manner
referred to in the Registration Statement, will be legally issued, fully paid
and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and
<PAGE>
further consent to all references to us in the Registration Statement, and the
Prospectus constituting a part thereof and any amendments thereto which have
been approved by us.
Very truly yours,
/s/Fenwick & West LLP
-----------------------------
Fenwick & West LLP
<PAGE>
EXHIBIT 11.01
ISONICS CORPORATION
STATEMENTS REGARDING CALCULATION
OF NET INCOME (LOSS) PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
--------------------------
THREE MONTHS
YEAR ENDED ENDED JULY
APRIL 30, 31, YEAR ENDED THREE MONTHS
-------------- ------------- APRIL 30, ENDED JULY 31,
1996 1997 1996 1997 1997 1997
------ ------- ------ ------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net Income (Loss)....... $ 281 $(1,363) $ 43 $ (190) $(1,363) $ (190)
Interest on
nonconvertible
promissory notes....... -- -- -- -- 315 123
------ ------- ------ ------ ------- ------
Net Income (Loss)....... $ 281 $(1,363) $ 43 $ (190) $(1,048) $ 67
====== ======= ====== ====== ======= ======
Weighted Average Common
Stock Outstanding...... 3,570 4,113 3,570 4,550 4,113 4,550
Dilutive Effect of
Preferred Stock........ 235 -- 236 -- 141 --
Pro forma shares issued
for repayment of debt.. -- -- -- -- 241 241
Dilutive effect of stock
options and warrants
granted approximately
twelve months preceding
the offering,
calculated using the
treasury stock method
at $3.50 per share..... 2,499 2,101 2,499 1,811 2,482 1,810
------ ------- ------ ------ ------- ------
Shares Used in Computing
Per Share Information.. 6,304 6,213 6,305 6,361 6,595 6,601
====== ======= ====== ====== ======= ======
Net Income (Loss) Per
Share.................. $ .04 $ (.22) $ .01 $ (.01) $ (.16) $ (.01)
====== ======= ====== ====== ======= ======
</TABLE>
<PAGE>
EXHIBIT 23.02
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated August 13, 1997, accompanying the financial
statements of Isonics Corporation contained in this Registration Statement and
Prospectus. We consent to the use of the aforementioned report in this
Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts."
Grant Thornton LLP
San Jose, California
September 5, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> APR-30-1997 APR-30-1998
<PERIOD-START> MAY-01-1996 MAY-01-1997
<PERIOD-END> APR-30-1997 JUL-31-1997
<CASH> 28 87
<SECURITIES> 0 0
<RECEIVABLES> 4 47
<ALLOWANCES> 0 0
<INVENTORY> 1,539 1,226
<CURRENT-ASSETS> 1,585 1,411
<PP&E> 70 123
<DEPRECIATION> 27 31
<TOTAL-ASSETS> 2,684 2,521
<CURRENT-LIABILITIES> 2,026 2,366
<BONDS> 1,671 1,470
0 0
0 0
<COMMON> 1,129 1,129
<OTHER-SE> (343) (349)
<TOTAL-LIABILITY-AND-EQUITY> 2,684 2,521
<SALES> 4,539 1,535
<TOTAL-REVENUES> 4,539 1,535
<CGS> 3,616 1,179
<TOTAL-COSTS> 3,616 1,179
<OTHER-EXPENSES> 1,838 416
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 395 129
<INCOME-PRETAX> (1,310) (189)
<INCOME-TAX> 53 1
<INCOME-CONTINUING> (1,363) (190)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,363) (190)
<EPS-PRIMARY> (.22) (.03)
<EPS-DILUTED> (.22) (.03)
</TABLE>
