<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 28, 2000
REGISTRATION NO. 333-37696
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--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
POST EFFECTIVE AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
ON FORM SB-2
UNDER
THE SECURITIES ACT OF 1933
----------------------------------
ISONICS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 77-0338561
(State or other jurisdiction) (I.R.S. Employer of incorporation or organization)
Identification Number)
</TABLE>
5906 MCINTYRE STREET
GOLDEN, COLORADO 80403
(303) 279-7900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------------------------
JAMES E. ALEXANDER
PRESIDENT, ISONICS CORPORATION
5906 MCINTYRE STREET
GOLDEN, COLORADO 80403
(303) 279-7900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------------------------
COPIES TO:
HERRICK K. LIDSTONE, JR.
NORTON LIDSTONE, P.C.
SUITE 850, THE QUADRANT
5445 DTC PARKWAY
ENGLEWOOD, CO 80111
TEL: 303-221-5552
FAX: 303-221-5553
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
----------------------------------
If securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
If this form is being 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 in the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number in the earlier effective registration statement
for the same offering. / /
----------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE(C)
<S> <C> <C> <C> <C>
Class B Common Stock Purchase Warrants.......... 810,000 $ 7.00(a) $ 5,670,000 $1,497
Shares of Common Stock underlying Class B
Common Stock Purchase Warrants................ 810,000 $ 5.80(b) $ 4,698,000 $1,240
Class C Common Stock Purchase Warrants.......... 810,000 $ 0.00 $ 0 $ 0
Shares of Common Stock underlying Class C Common
Stock Purchase Warrants....................... 810,000 $10.00(b) $ 8,100,000 $2,139
Class B Common Stock Purchase Warrants issuable
upon exchange of Warrants underlying
Underwriter Warrants.......................... 80,000 $ 7.00(a) $ 560,000 $ 148
Shares of Common Stock underlying Class B Common
Stock Purchase Warrants....................... 80,000 $ 5.80(b) $ 464,000 $ 123
Class C Redeemable Common Stock Purchase
Warrants...................................... 80,000 $ -0- $ -0- $ -0-
Shares of Common Stock underlying Class C
Redeemable Common Stock Purchase Warrants..... 80,000 $10.00(b) $ 800,000 $ 211
TOTAL........................................... $20,292,000 $5,358*
* previously paid
</TABLE>
(a) Based on the closing market price for the Class A Common Stock Purchase
Warrants on May 16, 2000, pursuant to Regulation C, Rule 457(f)(1) and
Rule 457(c) under the Securities Act of 1933, as amended.
(b) Based on the exercise price of the Class B and Class C Common Stock Purchase
Warrants, respectively, pursuant to Rule 457(g)(1) under the Securities Act
of 1933, as amended.
(c) The fee was calculated at $0.000264 per $1,000,000 offering price as set
forth in Rate Advisory No. 11 (January 5, 2000).
----------------------------------
In accordance with SEC Rule 429, of the 3,560,000 shares of our Common Stock
that are being registered, 890,000 shares are being carried forward from
post-effective amendment number 1 to our Registration Statement on Form SB-2
(SEC File No. 333-13289) and declared effective by the Securities and Exchange
Commission on May 12, 2000.
Pursuant to Rule 416 of the Securities Act of 1933, there are also being
registered hereunder such additional shares as may be issued to the Selling
Stockholder because of future dividends, stock distributions, stock splits or
similar capital adjustments.
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>
TABLE OF CONTENTS
[NEED TO UPDATE AFTER COMPLETION, IT MUST BE ON EITHER THE INSIDE FRONT OR
OUTSIDE BACK COVER]
<TABLE>
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PAGE
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<S> <C>
Summary..................................................... 4
Risk Factors................................................ 7
The Exchange Offer.......................................... 15
Procedure for Exercise of Warrants and Tax Aspects.......... 20
Use of Proceeds............................................. 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 31
Management.................................................. 52
Security Ownership of Certain Beneficial Holders and
Management................................................ 55
Section 16(a) Beneficial Ownership Reporting Compliance..... 58
Executive Compensation...................................... 60
Certain Relationships and Related Party Transactions........ 65
Isonics' Capital Stock...................................... 68
Market for Common Equity and Related Stockholder Matters.... 70
Shares Available for Future Sale............................ 71
Securities and Exchange Commission Position on
Indemnification for Securities Act Liabilities............ 71
Experts..................................................... 72
Legal Matters............................................... 72
How to Obtain Additional Information........................ 72
Financial Statements--April 30, 2000........................ F-1
Finanical Statements--July 31, 2000......................... F-21
</TABLE>
------------------------
Isonics has not authorized anyone to give any information or make any
representation about the offering that differs from, or adds to, the information
in this prospectus or in its documents that are publicly filed with the
Securities and Exchange Commission. Therefore, if anyone does give you different
or additional information, you should not rely on it. The delivery of this
prospectus and/or the exchange of warrants of Common Stock does not mean that
there have not been any changes in Isonics' condition since the date of this
prospectus. If you are in a jurisdiction where it is unlawful to offer to
exchange or exercise the securities offered by this prospectus, or if you are a
person to whom it is unlawful to direct such activities, then the offer
presented by this prospectus does not extend to you. This prospectus speaks only
as of its date except where it indicates that another date applies. Documents
that are incorporated by reference in this prospectus speak only as of their
date, except where they specify that other dates apply. The information in this
prospectus is not complete and may be changed. The holders may not exchange and
exercise these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to exchange or exercise these securities and it is not soliciting an offer to
exchange or exercise these securities in any state where the exchange or
exercise is not permitted.
------------------------
2
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER , 2000
PROSPECTUS DATED [XXX]
ISONICS CORPORATION
810,000 CLASS B WARRANTS
810,000 CLASS C WARRANTS
1,620,000 SHARES OF COMMON STOCK UNDERLYING
CLASS A WARRANTS, CLASS B WARRANTS AND CLASS C WARRANTS
Isonics Corporation ("Isonics" or "We") hereby offers holders of outstanding
Class A Redeemable Warrants and Class A Warrants that may be issued upon the
exercise of certain outstanding warrants ("Underwriter's Warrants") the
opportunity to exchange their Class A Redeemable Warrants ("Class A Warrants")
for Class B Warrants ("Class B Warrants"). The exercise price for the Class B
Warrants is $5.80 per share. If you exercise the Class B Warrants before their
expiration date, we will issue to you one share of Common Stock and one Class C
Redeemable Warrant ("Class C Warrants"). The Class B Warrants will expire on
April 30, 2001. The Class C Warrants (which we will issue only if you exercise
the Class B Warrants) expire June 15, 2003, will be exercisable for one share of
Common Stock at a price of $10.00 per share, and will be redeemable if our
Common Stock trades at or above $15.00 per share for any 20 of 30 consecutive
trading days provided a registration statement for the exercise continues to be
current and effective.
In addition, Isonics is offering up to a maximum of 1,620,000 shares of
Common Stock to holders of our Class A Warrants, Class B Warrants, and Class C
Warrants who may choose to exercise those Warrants in accordance with their
terms before their expiration dates (April 30, 2001 with respect to the Class B
Warrants; September 30, 2001 with respect to the Class A Warrants, and June 15,
2003 with respect to the Class C Warrants). In accordance with SEC Rule 429,
this prospectus will, upon the effectiveness of the Registration Statement on
Form SB-2 of which it is a part, also constitute the prospectus under
post-effective amendment number 1 to our Registration Statement on Form SB-2
(SEC File No. 333-13289), which became effective on May 12, 2000.
Should you choose to do so, you may also exercise your Class B Warrants when
you submit your Class A Warrants for exchange. You must exercise your Class A
Warrants or (if received upon exchange) your Class B Warrants before their
respective expiration dates or you will lose your right to exercise those
warrants.
Our Common Stock and Class A Warrants are traded in the over-the-counter
market and quoted on the Nasdaq SmallCap Stock Market under the symbols "ISON"
and "ISONW", respectively. On August 29, 2000, the reported closing price of our
Common Stock was $3.50 per share and of our Class A Warrants was $1.50 per
warrant. Our Class B Warrants and Class C Warrants are eligible for trading
under the symbols ISONX and ISONY, respectively, but no Class B Warrants or
Class C Warrants have been issued and no trading market has developed.
AN INVESTMENT IN OUR CLASS B WARRANTS AND OUR COMMON STOCK (SHOULD YOU
CHOOSE TO EXERCISE ANY OF OUR WARRANTS) INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD EXCHANGE YOUR CLASS A WARRANTS FOR CLASS B WARRANTS ONLY IF YOU ARE
PREPARED TO EXERCISE YOUR CLASS B WARRANTS PROMPTLY AND CAN THEN AFFORD A
COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 7. In
deciding whether to exchange the warrants offered, you should rely only on the
information contained in this document. We have not authorized anyone to provide
you with any information that is different from this information.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
ONLY RESIDENTS OF COLORADO, DELAWARE, GEORGIA, ILLINOIS, NEVADA, AND NEW
YORK, MAY EXCHANGE THEIR CLASS A WARRANTS, OR EXERCISE THEIR CLASS A WARRANTS,
CLASS B WARRANTS OR CLASS C WARRANTS. WE HAVE NOT QUALIFIED THE CLASS A
WARRANTS, CLASS B WARRANTS OR CLASS C WARRANTS UNDER THE LAWS OF ANY OTHER
STATE. WHEN YOU EXERCISE THE CLASS A WARRANTS, CLASS B WARRANTS OR CLASS C
WARRANTS, YOU WILL HAVE TO PROVIDE US INFORMATION AS TO YOUR STATE OF RESIDENCE.
WE MAY SEEK QUALIFICATION FROM TIME-TO-TIME IN OTHER STATES; YOU MAY CALL
ISONICS CORPORATION AT 303-279-7900 TO DETERMINE WHETHER YOUR STATE OF RESIDENCE
HAS BEEN INCLUDED.
3
<PAGE>
PART I
INFORMATION REQUIRED IN THE PROSPECTUS
SUMMARY
This summary presents selected information from this prospectus. You should
carefully read this entire document and the documents to which the prospectus
refers in order to understand this offering. SEE "HOW TO OBTAIN ADDITIONAL
INFORMATION" (PAGE 72).
ISONICS CORPORATION
Isonics is an advanced materials and technology company, which develops and
commercializes products based on enriched stable and radioactive isotopes. The
Common Stock of Isonics is traded on the Nasdaq SmallCap Market under the symbol
"ISON." The market for our stock has historically been characterized generally
by low volume and broad price and volume volatility. We cannot give any
assurance that a stable trading market will develop for our stock.
The address of our principal executive offices and our telephone and
facsimile numbers at that address are:
Isonics Corporation
5906 McIntyre Street
Golden, Colorado 80403
Telephone No.: (303) 279-7900
Facsimile No.: (303) 279-7300
TRADING SYMBOLS
<TABLE>
<S> <C>
Common Stock................................................ "ISON"
Class A Warrants............................................ "ISONW"
Class B Warrants............................................ "ISONX"
Class C Warrants............................................ "ISONY"
</TABLE>
The Common Stock and the Class A Warrants are quoted on the Nasdaq SmallCap
Market. No market has developed for the Class B Warrants or the Class C
Warrants.
THE EXCHANGE OFFER
GENERAL. Isonics hereby offers holders of our outstanding Class A Warrants
the opportunity to exchange their Class A Warrants for an equal number of
Class B Warrants. The Class B Warrants are exercisable:
- for one share of Common Stock and one Class C Warrant,
- for a purchase price of $5.80 per share,
- through April 30, 2001.
When issued to holders who exercise their Class B Warrants, the Class C
Warrants will:
- expire June 15, 2003,
- be exercisable for one share of Common Stock at a price of $10.00 per
share, and
- be redeemable if our Common Stock trades at or above $15.00 per share for
any 20 of 30 consecutive trading days.
4
<PAGE>
Class A Warrants submitted for exchange will be cancelled.
Any person who has exercised a Class A Warrant prior to this exchange offer
will be given a Class C Warrant for no additional consideration, thus giving the
Class A Warrant holder who exercised prior to this exchange offer the same value
as the Class A Warrant holders who accept this exchange offer before exercise.
Isonics will not receive any cash proceeds from the exchange, however, Isonics
will receive proceeds upon exercise of the Class B Warrants or the Class C
Warrants, if any are exercised.
TERM OF THE EXCHANGE OFFER AND PROCEDURES FOR EXCHANGING WARRANTS. This
exchange offer will remain open until April 30, 2001, or such later date as the
Board of Directors may determine. To submit your Class A Warrants for exchange,
you should complete the Letter of Transmittal accompanying this prospectus and
deliver it to the exchange agent, prior to the expiration of the exchange offer,
all as described in the section commencing on page 15 entitled "THE EXCHANGE
OFFER." YOU SHOULD ONLY EXCHANGE YOUR CLASS A WARRANTS FOR CLASS B WARRANTS IF
YOU INTEND TO EXERCISE YOUR CLASS B WARRANTS BEFORE THEIR EXPIRATION, APRIL 30,
2001. SEE "RISK FACTORS."
The method of delivery of Letters of Transmittal and certificates to the
exchange agent will be at the election and risk of each holder of the Class A
Warrants. The Letters of Transmittal and certificates can be sent to the
exchange agent by hand delivery, courier service, or by mail. If you send the
Letters of Transmittal and certificates by mail, we recommended that you send
them by registered mail with return receipt requested; we also recommend that
you allow a sufficient number of days to ensure that your Letter of Transmittal
and certificates are delivered to the exchange agent prior to the expiration
time.
Isonics will determine all questions concerning the timeliness, validity,
form and eligibility of submissions. Our determination on these matters will be
binding. We may, in our sole discretion, waive any defect or irregularity, or
permit a defect or irregularity to be corrected within such time as we may
establish; alternatively, we may reject any purported submission. Letters of
Transmittal will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as we may determine in
our sole discretion.
NO WITHDRAWAL RIGHTS. Any tender of the Class A Warrants to the exchange
agent will be irrevocable. A holder who has submitted his or her Class A
Warrants for exchange may not withdraw them. Isonics has the right, in its sole
discretion, to extend the expiration date of the exchange offer or offer
withdrawal rights on a case-by-case basis in the future.
CONSEQUENCES OF FAILURE TO EXCHANGE. There are no consequences if you fail
to exchange your Class A Warrants before the expiration date of the exchange
offer. You will continue to own your Class A Warrants, which will be subject to
the same terms and conditions as prior to the exchange offer. After the
expiration of the exchange offer, however, you will no longer have a right to
exchange your Class A Warrants for Class B Warrants.
Any person exercising their Class A Warrants after the expiration of the
exchange offer will not have the right to receive a Class C Warrant.
NO PROCEEDS FROM EXCHANGE OFFER. Isonics will not receive any proceeds from
any person in connection with the exchange offer. Isonics will only receive
proceeds from persons who choose, in their discretion, to exercise the Class A
Warrants, the Class B Warrants, and/or the Class C Warrants. Any proceeds that
Isonics may receive from the exercise of warrants will be added to our working
capital and used for corporate purposes.
5
<PAGE>
THE OFFERING
We are offering a total of 810,000 shares of Common Stock to persons who
exercise either the outstanding Class A Warrants or the Class B Warrants, which
may be issued in exchange for the outstanding Class A Warrants to the extent any
holder decides to accept the Exchange Offer. (This does not include up to 80,000
Class A warrants, which may be issued to holders of warrants issued in
September 1997 to the underwriter of our initial public offering. If the holder
exercises these warrants, referred to as the "Underwriters' Warrants," a total
of 890,000 shares of Common Stock may be issued upon full exercise of the
outstanding Class A Warrants or the Class B Warrants.) The total number of
810,000 may consist of shares issued to persons exercising Class A Warrants,
Class B Warrants, or a combination of Class A Warrants and Class B Warrants. As
of the date of this Prospectus, no Class B Warrants have been issued.
We are also offering a total of 810,000 shares of Common Stock to persons
who receive Class C Warrants and exercise their Class C Warrants. We will issue
Class C Warrants to any person who exercises a Class A Warrant on or before
April 30, 2001 or who exercises a Class B Warrant received in exchange for a
Class A Warrant. As of the date of this Prospectus, no Class C Warrants have
been issued.
USE OF PROCEEDS
We will receive from $0.00 (if no Warrants are exercised) to a maximum of
$4,698,000.00 (if all of the Class A Warrants and Class B Warrants are
exercised). We expect to use any proceeds received for research and development
and working capital.
If any Class C Warrants are issued and exercised (of which there can be no
assurance), we will receive from $0.00 to a maximum of $8,100,000.00.
RISK FACTORS
THE PURCHASE OF ISONICS COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD EXCHANGE YOUR CLASS A WARRANTS OR EXERCISE YOUR CLASS A WARRANTS,
CLASS B WARRANTS OR CLASS C WARRANTS ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF
YOUR INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 7. We have not authorized
anyone to give you information or to make any representation other than those
contained in this prospectus.
A NOTE ABOUT FORWARD-LOOKING STATEMENTS
In our effort to make the information in this prospectus more meaningful,
this prospectus contains both historical and forward-looking statements. All
statements other than statements of historical fact are forward-looking
statements within the meanings of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
in this prospectus are not based on historical facts, but rather reflect the
current expectations of our management concerning future results and events.
The forward-looking statements generally can be identified by the use of
terms such as "believe," "expect," "anticipate," "intend," "plan," "foresee,"
"likely," "will" or other similar words or phrases. Similarly, statements that
describe our objectives, plans or goals are, or may be, forward-looking
statements.
Forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of Isonics to be different from any future results, performance and achievements
expressed or implied by these statements. You should review carefully all
information, including the financial statements and the notes to the financial
statements included in this prospectus. In addition to the factors discussed
under "Risk Factors," the following
6
<PAGE>
important factors could affect future results, causing the results to differ
materially from those expressed in the forward-looking statements in this
prospectus:
- demand for, and acceptance of, our materials;
- changes in development, distribution and supply relationships;
- the impact of competitive products and technologies;
- the risk of operations in Russia, the Republic of Uzbekistan, and the
Republic of Georgia;
- dependence on future product development;
- the possibility of future customer concentration;
- our dependence on key personnel;
- the volatility of our stock price; and
- the impact of new technologies.
These factors are not necessarily all of the important factors that could
cause actual results to differ materially from those expressed in the
forward-looking statements in this prospectus. Other unknown or unpredictable
factors also could have material adverse effects on the future results of
Isonics. The forward-looking statements in this prospectus are made only as of
the date of this prospectus and Isonics does not have any obligation to publicly
update any forward-looking statements to reflect subsequent events or
circumstances. Isonics cannot assure you that projected results will be
achieved.
RISK FACTORS
An investment in Isonics Corporation Common Stock is one of high risk. You
should carefully consider the risks described below before deciding whether to
invest in Isonics Corporation. If any of the contingencies discussed in the
following paragraphs or other materially adverse events actually materialize,
the business, financial condition and results of operations could be materially
and adversely affected. In such a case, the trading price of our Common Stock
could decline, and you could lose all or part of your investment.
HISTORY OF LOSSES; ENGAGING IN NEW LINES OF BUSINESS
We have not operated profitably to date since inception. Through
October 31, 1999 (the end of our fiscal quarter immediately preceding the
Eagle-Picher transaction), we recognized accumulated losses of more than
$4,500,000 notwithstanding receiving substantial revenues from the sale of
depleted zinc and other products and we recognized operating losses for the year
ended April 30, 2000, of $2,401,000, and for the quarter ended July 31, 2000, of
$993,000. We recognized net income for the year ended April 30, 2000, only
because of the gain recognized on the sale of our depleted zinc assets to
Eagle-Picher.
The depleted zinc business had accounted for a significant portion of our
revenues during the past fiscal years. Following the sale of our depleted zinc
business, our primary risk is our reliance on products that have to date not
produced significant revenues. We have historically, and expect to continue to,
operate with little backlog and a significant portion of our net revenues have
been, and we believe will continue to be, derived from a limited number of
orders that are processed and shipped in the same quarter in which the orders
are received. These orders are primarily for radioisotopes. The timing of such
orders and their fulfillment has caused, and is likely to continue to cause,
material fluctuations in our operating results. Our expense levels are
relatively fixed, and prior quarters have indicated these factors will affect
our operating results for future periods.
7
<PAGE>
We are engaging in research and development to diversify our business and to
expand other lines of our business. We are now seeking to identify and evaluate
a variety of new stable isotope products and potential markets for economic and
technical feasibility. We will continue to fund research and development to
improve technologies for isotope separation and materials processing
technologies. During fiscal 2000, 1999, and 1998, research and development
expenses were $1,224,000, $1,155,000, and $811,000, respectively. We cannot
offer any assurance that our current or future lines of business and our
research and development efforts will be profitable. SEE "MANAGEMENT'S
DISCUSSION AND ANALYSIS" and "BUSINESS."
RELATIONSHIP WITH CERTAIN SUPPLIERS AND AVAILABILITY OF RAW MATERIALS
Related to, but separate from, the sale of the depleted zinc business, we
contemporaneously signed a ten-year Supply Agreement by which we will have the
exclusive right to purchase quantities of isotopically pure silicon-28,
silicon-29, and silicon-30, and a non-exclusive right to purchase quantities of
isotopically pure carbon-12 and carbon-13 produced by Eagle-Picher from its
current and planned facilities in Oklahoma. The Supply Agreement locks-in what
we believe is a favorable purchase price for the aforementioned isotopes. As
partial consideration for the exclusivity provision, we agreed to pay
Eagle-Picher a fee equal to 3.0% of the net revenues from all sales made by us
of products incorporating enriched silicon isotopes supplied by Eagle-Picher. We
can offer no assurance that Eagle-Picher will be able to produce isotopes
meeting the specifications of the Supply Agreement for delivery to Isonics by
December 31, 2000. A delay in Eagle-Picher's ability to begin production could
force us to seek other suppliers. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS" and
"BUSINESS."
LIMITED SOURCES FOR RAW MATERIALS
Stable isotopes constitute the principal raw material required for the
manufacture of our products. The principal sources for enriched stable isotopes
are suppliers in Russia, the Republic of Uzbekistan, and the Republic of
Georgia. Oak Ridge National Laboratory in Oak Ridge, Tennessee, which relies on
government funding for continuing production, and certain foreign facilities in
the world including private and pseudo-governmental organizations in Great
Britain, Germany, The Netherlands and the Republic of South Africa, have the
potential to produce stable isotopes, and in certain cases, actually produce
isotopes. Although currently, enriched stable isotopes are also available from
additional foreign sources, there can be no assurance that there will continue
to be an adequate supply of enriched stable isotopes. Although we expect that
our current supply contracts will be sufficient to produce most isotopes, the
production processes require various proprietary separation techniques, which
although developed by our suppliers, may not have all been tested to date and as
to the success of which there can be no assurance. These limited sources of raw
materials may result in an inability to deliver radioisotopes or other isotopes
in accordance with our contractual requirements (whether or not the failure is
our fault) and possible resulting liability. SEE "MANAGEMENT'S DISCUSSION AND
ANALYSIS" and "BUSINESS."
OPERATIONS IN RUSSIA, THE REPUBLIC OF UZBEKISTAN, AND THE REPUBLIC OF GEORGIA
Operations in Russia, the Republic of Uzbekistan ("Uzbekistan"), and the
Republic of Georgia ("Georgia") entail certain risks. Recently, the former
republics of the Soviet Union including Uzbekistan and Georgia have experienced
political, social and economic change as they obtained independence from the
former central government in Moscow. Certain of the republics, including Russia,
Uzbekistan, and Georgia, have attempted to transition from a central-controlled
economy toward a market-based economy. These changes have involved, in certain
cases, armed conflict. The political or economic instability in these republics
may continue or even worsen. The supply of stable isotopes could be directly
affected by political, economic and military conditions in Russia, Uzbekistan,
and Georgia. Accordingly, our operations could be materially adversely affected
if hostilities in Russia,
8
<PAGE>
Uzbekistan, or Georgia should occur, if trade between Russia, Uzbekistan, or
Georgia and the United States were interrupted, if political conditions in
Russia, Uzbekistan, or Georgia disrupt transportation or processing concerning
our goods, if laws or government policies concerning foreign business operations
in Russia, Uzbekistan, or Georgia change substantially, or if tariffs are
introduced. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS" and "BUSINESS."
DEPENDENCE ON FUTURE PRODUCT DEVELOPMENT
On December 1, 1999, we sold our depleted zinc business, which provided 21%
and 35% of our revenues in fiscal 2000 and 1999, respectively. As a result our
future operations will be more heavily dependent upon our ability to develop new
products using stable and radioisotopes and to market and sell those products
profitably. While we have a high degree of confidence we can be successful, we
can expect to incur significant operating losses until we are able to do so. Our
ability to develop, market and sell these products will depend on our suppliers'
(including Eagle-Picher) ability to meet our demand for stable and
radioisotopes, as well as, other suppliers who modify the chemical and physical
forms of these isotopes. There can be no assurance that we will be able to
develop products that can be profitably marketed and sold. SEE "BUSINESS."
CUSTOMER CONCENTRATION
Prior to fiscal 1999, substantially all of our net revenues in any
particular period have been attributable to a limited number of customers,
primarily General Electric Corporation. Consistent with our historical
experience, our quarterly results during fiscal year 2000 were affected
materially by the level of orders received from a limited number of significant
depleted zinc users during such quarters and product shipments by us to our
depleted zinc customers during such period. Despite the sale of the depleted
zinc business, we continue to be subject to a certain degree of variability
based on the timing of sales of our stable and radioisotopes orders. We cannot
be assured that our principal customers will continue to purchase our products.
A decrease in or loss of orders from one or more major customers would have a
material and adverse effect on our financial condition and results of
operations. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS" AND "BUSINESS."
While our goal is to diversify our customer base, we expect to continue to
depend upon a relatively small number of customers for a significant percentage
of our revenues for the foreseeable future. Significant reductions in sales to
any of our large customers have had and may in the future have a material
adverse effect on us. We cannot guarantee that present or future customers will
not terminate their arrangements with us or significantly change, reduce or
delay the amount of manufacturing services ordered from us. A termination of a
manufacturing relationship or change, reduction or delay in orders could harm
us.
FACTORS AFFECTING OPERATING RESULTS; VARIABILITY OF ORDERS
We operate with little backlog. A significant portion of our net revenues
have been, and we believe will continue to be, derived from a limited number of
orders that are processed and shipped in the same quarter in which the orders
are received. The timing of such orders and their fulfillment has caused, and is
likely to continue to cause, material fluctuations in our operating results. Our
expense levels are relatively fixed, and as has been the case in prior quarters,
these factors will affect our operating results for future periods. SEE
"MANAGEMENT'S DISCUSSION AND ANALYSIS."
MANAGEMENT OF GROWTH
We have experienced periods of rapid growth that have placed a significant
strain on our financial and managerial resources. Our ability to manage growth
effectively, particularly given our increasing scope of operations, will require
us to continue to implement and improve our management,
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<PAGE>
operational, and financial information systems, as well as to develop the
management skills of our personnel and to train, motivate and manage our
employees. Our failure to effectively manage growth could have a material
adverse effect on our business, financial condition and results of operations.
SEE "BUSINESS."
DEPENDENCE ON KEY PERSONNEL
Our future success will depend in significant part upon the continued
service of our key technical, sales and senior management personnel, including
James E. Alexander, our President and Chief Executive Officer; Boris
Rubizhevsky, our Senior Vice President, Isotope Production and Supply; Robert
Cuttriss, President of Interpro; and Herbert Hegener, Managing Director of
Chemotrade. We maintain $1,000,000 of key man life insurance on the lives of
Messrs. Alexander, Rubizhevsky and Cuttriss and all are covered by employment
agreements extending through September 2001, 2002, and 2003, respectively
(although the individuals may terminate these agreements prematurely, in their
discretion). Mr. Hegener is covered by an employment agreement extending through
the year 2001. We believe that our future success will depend in large part upon
our ability to attract and retain qualified personnel for our operations. The
failure to attract or retain such persons could materially adversely affect our
business, financial condition and results of operations. SEE "MANAGEMENT."
POSSIBLE NEED FOR ADDITIONAL FINANCING
We anticipate no need for additional financing in the next twelve months,
but we do anticipate a need for a substantial amount of financing after our
current fiscal year ending April 30, 2001. Factors that may lead to a need for
additional financing include:
- delays in Eagle-Picher's production of silicon and carbon isotopes from
its plant in Oklahoma, and the resulting delays in their delivery of the
isotopes to us under the terms of the supply agreement;
- unanticipated expenses in developing our new products or in producing or
marketing our existing products;
- the necessity of having to protect and enforce our intellectual property
rights;
- technological and market developments; and
- a corporate decision to expand our production capacity through capital
investment or acquisition.
The exercise of the Class A Warrants, the Class B Warrants, or the Class C
Warrants will provide us with some additional financing, but we cannot offer any
assurance that any warrants will be exercised. The unavailability of additional
financing, when needed, could have a material adverse effect on our business.
SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS" AND "BUSINESS."
NO ASSURANCE AS TO VALIDITY OF INTELLECTUAL PROPERTY RIGHTS
We rely primarily on a combination of trade secrets, confidentiality
procedures and contractual provisions to protect our technology. Despite our
efforts to protect our rights, unauthorized parties may attempt to copy aspects
of our products or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our technology and products is difficult. In
addition, the laws of many countries do not protect our rights in information,
materials and intellectual property that we regard as proprietary and that are
protected under the laws of the United States. There can be no assurance that
our means of protecting our rights in proprietary information, materials and
technology will be adequate or that our competitors will not independently
develop similar information, technology, or intellectual property. SEE
"BUSINESS."
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<PAGE>
We currently have no patents in our own name and have not filed any patent
applications. We have rights to several isotopically engineered innovations
regarding electronic and optical materials that we believe may be patentable.
Ongoing work in the area of isotope separation by chemical means may also lead
to patentable inventions. In such cases, we intend to file patent applications
for some of these modifications, improvements, and inventions and to protect
others as trade secrets. There can be no assurance, however, that patents on
such modifications, improvements or inventions will be issued or, if issued,
that such patents or modifications and improvements protected as trade secrets
will provide meaningful protection.
Third parties may have filed applications for or have been issued patents
and may obtain additional patents and proprietary rights related to products or
processes competitive with or similar to those of Isonics. We may not be aware
of all patents potentially adverse to our interests that may have been issued to
others and there can be no assurance that such patents do not exist or have not
been filed or may not be filed or issued. If patents have been or are issued to
others containing preclusive or conflicting claims and such claims are
ultimately determined to be valid, we may be required to obtain licenses thereto
or to develop or obtain alternate technology. There can be no assurance that
such licenses, if required, would be available on commercially acceptable terms,
if at all, or that we would be able to develop or obtain alternate technology,
which would have a material adverse effect on our business.
There can be no assurance that the validity of any of the patents licensed
to, or that may in the future be owned by us would be upheld if challenged by
others in litigation or that our products or technologies, even if covered by
our patents, would not infringe patents owned by others. We could incur
substantial costs in defending suits brought against us, or any of our
licensors, for infringement, in suits by us against others for infringement, or
in suits contesting the validity of a patent. Any such proceedings may be
protracted. In any suit contesting the validity of a patent, the patent being
contested would be entitled to a presumption of validity and the contesting
party would be required to demonstrate invalidity of such patent by clear and
convincing evidence. If the outcome of any such litigation were adverse to our
interests, our business would be materially adversely affected.
In certain instances, we may choose not to seek patent protection and may
rely on trade secrets and other confidential know-how to protect our
innovations. There can be no assurance that protectable trade secrets or
know-how will be established, or if established, that they will remain protected
or that others will not independently and lawfully develop similar or superior
innovations. We require all employees to sign intellectual property assignment
and non-disclosure agreements. In certain instances, we will enter into
agreements with our employees pursuant to which the employee will be entitled to
a small royalty with respect to products developed by Isonics based upon the
employee's inventions. In addition, all directors, consultants and other parties
to whom confidential information has been or will be disclosed have or will
execute agreements containing confidentiality provisions. There can be no
assurance, however, that any such intellectual property assignment agreements
and confidentiality agreements will be complied with or will be enforceable.
COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE
Within the United States, we believe there currently is no producer of a
full range of stable enriched isotopes for commercial sale. The U.S. government
produces isotopes, but primarily for research purposes. There can be no
assurance that a third party will not contract with the U.S. government to
acquire isotopes for commercial sale. Outside the United States, many countries
and businesses produce stable and radioactive isotopes. Some of these businesses
have substantially greater capital and other resources than do we. SEE
"BUSINESS."
Further, it is possible that future technological developments may occur,
and these developments may render our radioisotopes and stable isotopes obsolete
or non-competitive.
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<PAGE>
Rapidly changing technology and continuing process development characterize
the market for our manufacturing services. We believe that our future success
will depend in large part upon our ability to develop and market manufacturing
services which meet changing customer needs, maintain technological leadership
and successfully anticipate or respond to technological changes in manufacturing
processes on a cost-effective and timely basis. We cannot guarantee that our
process development efforts will be successful.
In the future, we may face substantial competition, and we may not be able
to compete successfully against present or future competitors.
ENVIRONMENTAL COMPLIANCE
We are subject to a variety of federal, state, and local environmental
regulations relating to the use, storage, discharge and disposal of hazardous
chemicals used during the manufacturing process. While we believe that we are in
compliance with all environmental regulations, if we fail to comply with present
and future regulations we could be subject to future liabilities or the
suspension of production. In addition, these regulations could restrict our
ability to expand our facilities or could require us to acquire costly equipment
or to incur other significant expenses to comply with governmental regulations.
Historically, our costs of compliance with environmental regulations have not
been material. SEE "BUSINESS."
CONTROL BY DIRECTORS AND OFFICERS
Even if all of the Class A Warrants are exercised (which we cannot assure),
our directors and officers will beneficially own 42.5% of the outstanding shares
of Common Stock as of September 22, 2000, the date of this prospectus, and,
accordingly, will have the ability to elect a majority of the directors of
Isonics and otherwise control the company. SEE "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT."
PRODUCT LIABILITY EXPOSURE AND INSURANCE
The use of our radioisotopes in radiopharmaceuticals and in clinical trials
may expose us to potential product liability risks that are inherent in the
testing, manufacture, marketing and sale of human diagnostic and therapeutic
products. We currently have product liability insurance; however, there can be
no assurance that a product liability or other claim would not materially and
adversely affect our business or financial condition. SEE "BUSINESS."
PRICE VOLATILITY
The trading price of our securities has been subject to wide fluctuations in
response to quarter-to-quarter variations in operating results, our
announcements of technological innovations or new products by us or our
competitors, and other events or factors. The securities markets have from time
to time experienced significant price and volume fluctuations that may be
unrelated to the operating performance of particular companies. Announcements of
delays in our testing and development schedules, technological innovations or
new products by Isonics or our competitors, developments or disputes concerning
patents or proprietary rights, regulatory developments in the United States and
foreign countries, public concern as to the safety of products containing
radioactive compounds and economic and other external factors, as well as
period-to-period fluctuations in our financial results, may have a significant
impact on the market price of our securities. In addition, the realization of
any of the risks described in these "Risk Factors" could have a significant and
adverse impact on such market prices. SEE "MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS."
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<PAGE>
PENNY STOCK REGULATIONS
Although our Common Stock is currently quoted on the Nasdaq SmallCap Market,
our Common Stock has in the past been subject to additional disclosure
requirements for penny stocks mandated by the Securities Enforcement Remedies
and Penny Stock Reform Act of 1990. The SEC Regulations generally define a penny
stock to be an equity security that has a market price of less than $5.00 per
share, not including shares quoted on the Nasdaq Stock Market such as our Common
Stock. We have, at times in the past, been included within the SEC Rule 3a-51
definition of a penny stock. When our Common Stock is considered to be a "penny
stock", trading is covered by Rule 15g-9 promulgated under the Securities
Exchange Act of 1934 for non-Nasdaq and non-national securities exchange listed
securities. Under such rule, broker-dealers who recommend such securities to
persons other than established customers and accredited investors must make a
special written disclosure to and suitability determination for the purchaser
and receive the purchaser's written agreement to a transaction prior to sale.
The regulations on penny stocks limit the ability of broker-dealers to sell our
Common Stock and thus the ability of purchasers of our Common Stock to sell
their securities in the secondary market. To the extent we are able to maintain
our listing on the Nasdaq SmallCap Market, we will not be subject to these penny
stock rules. SEE "MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS."
POTENTIAL ADVERSE MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Our stock price may be hurt by future sales of our shares or the perception
that such sales may occur. As of August 29, 2000, approximately 9,084,237 shares
of Common Stock held by existing stockholders constitute "restricted shares" as
defined in Rule 144 under the Securities Act. These shares may only be sold if
they are registered under the Securities Act or sold under Rule 144 or another
exemption from registration under the Securities Act. Sales under Rule 144 are
subject to the satisfaction of certain holding periods, volume limitations,
manner of sale requirements, and the availability of current public information
about us.
A substantial portion of all of our restricted shares of Common Stock are
either eligible for sale pursuant to Rule 144 or are being registered under the
Securities Act for resale by the holders. This will permit the sale of
registered shares of Common Stock in the open market or in privately negotiated
transactions without compliance with the requirements of Rule 144. We are unable
to estimate the amount, timing or nature of future sales of outstanding Common
Stock. Sales of substantial amounts of our Common Stock in the public market may
hurt the stock's market price. SEE "SHARES AVAILABLE FOR FUTURE SALE."
EFFECT OF OUTSTANDING SERIES A PREFERRED STOCK, OPTIONS, AND WARRANTS
As of September 22, 2000, we had outstanding preferred stock convertible
into and options and warrants to purchase an aggregate of 5,872,479 shares of
Common Stock. As long as these shares of convertible preferred stock ("Series A
Preferred Stock") remain outstanding and the options and warrants remain
unexercised, the terms under which we could obtain additional capital may be
adversely affected. Moreover, the holders of the Series A Preferred Stock,
options and warrants may be expected to exercise them at a time when we would,
in all likelihood, be able to obtain any needed capital by a new offering of our
securities on terms more favorable than those provided by these securities. SEE
"ISONICS' CAPITAL STOCK."
ANTI-TAKEOVER PROVISIONS
Our Articles of Incorporation authorize the issuance of "blank check"
preferred stock with such designations, rights, and preferences as may be
determined by our Board of Directors. Accordingly, the Board of Directors may,
without stockholder approval, issue shares of preferred stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other
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<PAGE>
rights of the holders of our Common Stock. Preferred stock could also be issued
to discourage, delay or prevent a change in our control, although we do not
currently intend to issue any additional series of our preferred stock. SEE
"ISONICS' CAPITAL STOCK."
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our Bylaws provide for indemnification of officers and directors to the full
extent permitted by California law. We may be required to pay certain judgments,
fines and expenses incurred by an officer or director, including reasonable
attorneys' fees, as a result of actions or proceedings in which such officers
and directors are involved by reason of being or having been an officer or
director. SEE "SECURITIES AND EXCHANGE COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES."
NO DIVIDENDS ANTICIPATED TO BE PAID
We have never paid any cash dividends on our Common Stock and we do not
anticipate paying cash dividends on our Common Stock in the future. The future
payment of dividends is directly dependent upon our future earnings, capital
requirements, financial requirements and other factors to be determined by our
Board of Directors. It is anticipated that future earnings if any, which may be
generated from our operations will be used to finance our growth, and that cash
dividends will not be paid to our stockholders. SEE "MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS."
RISK OF FORWARD-LOOKING INFORMATION
We have included a significant amount of forward-looking information in this
prospectus. Because it is not possible to predict the future, there is a
significant risk that the forward-looking information will prove to be
incorrect, and perhaps materially incorrect. SEE "SUMMARY--A NOTE ABOUT FORWARD-
LOOKING STATEMENTS."
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<PAGE>
THE EXCHANGE OFFER
BACKGROUND OF AND REASONS FOR THE EXCHANGE OFFER
In connection with Isonics' underwritten initial public offering completed
in September 1997, an underwriter sold 810,000 Units consisting of 810,000
shares of Common Stock, and 810,000 Class A Warrants. Each Class A Warrant
entitles the holder to purchase one share of Common Stock through September 21,
2001. The Class A Warrants expire after September 21, 2001, and the Class A
Warrants will then become valueless. As of August 29, 2000, no person has
exercised any Class A Warrants.
At the time we completed our initial public offering, we also sold 80,000
additional warrants to the underwriter (the "Underwriter Warrants"), all of
which remain outstanding. The holders of the Underwriter Warrants are entitled
to exercise these warrants by paying us $9.57 per warrant, and the holders will
then receive a single share of our Common Stock and a Class A Warrant. In order
for any person holding an Underwriter Warrant to participate in the exchange, he
or she will have to first exercise the Underwriter Warrant and then submit the
Class A Warrants received for exchange.
We are offering holders of outstanding Class A Warrants the opportunity to
exchange their Class A Warrants for Class B Warrants in order to encourage the
early exercise of our outstanding warrants. As an incentive to encourage
exercise, each Class B Warrant is exercisable for one share of Common Stock and
one additional Class C Warrant to purchase one share of Common Stock. Persons
who retain their Class A Warrants will be entitled to exercise their warrants
for a longer period of time than those who exchange their Class A Warrants for
Class B Warrants (since the Class A Warrants expire September 21, 2001), but
persons holding Class A Warrants after the exchange offer expires will not have
the right to obtain a Class C Warrant.
NO PERSON SHOULD EXCHANGE THEIR CLASS A WARRANTS FOR CLASS B WARRANTS UNLESS
THEY INTEND TO EXERCISE THEIR CLASS B WARRANTS PRIOR TO THEIR EXPIRATION ON
APRIL 30, 2001.
PURPOSE OF THE EXCHANGE OFFER
We are offering holders of our outstanding Class A Warrants the opportunity
to exchange their Class A Warrants for Class B Warrants. We are doing so to
encourage the earlier exercise of the outstanding warrants. As an incentive,
each Class B Warrant is exercisable for one share of Common Stock and one
Class C Warrant. Isonics also hopes that the exchange may have a positive effect
on the liquidity of and the public market for its Common Stock by increasing the
number of publicly-held shares of our Common Stock, although we cannot be sure
whether the exchange offer will have this or any other beneficial effect. The
following chart sets forth the principal differences between the Class A
Warrants, the Class B Warrants, and the Class C Warrants. This chart is only a
summary, and for further information you should review
- the Warrant Agreement dated September 22, 1997, between Isonics and
Continental Stock Transfer & Trust Company, Inc. for the Class A Warrants,
and
- the Warrant Agreement dated June 1, 2000, between Isonics and Continental
Stock Transfer & Trust Company, Inc. for the Class B Warrants and Class C
Warrants.
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<PAGE>
SUMMARY OF DIFFERENCES BETWEEN THE WARRANTS
<TABLE>
CLASS C WARRANTS
(issuable only upon the
exercise of
CLASS A WARRANTS CLASS B WARRANTS Class B Warrants)
<S> <C> <C> <C>
Expiration Date September 21, 2001 April 30, 2001 June 15, 2003
Exercise Price $5.80 $5.80 $10.00
Product of Exercise Each person exercising Each person exercising Each person exercising
a Class A Warrant will a Class B Warrant will a Class C Warrant will
receive one share of receive one share of receive one share of
Common Stock Common Stock and one Common Stock
Class C Warrant
Redemption Provisions We may redeem the The Class B Warrants We may redeem the
Class A Warrants at a will not be redeemable Class C Warrants at a
price of $0.10 per price of $0.10 per
Warrant on not less Warrant on not less
than 30 days' prior than 30 days' prior
written notice if the written notice if our
average price of the Common Stock trades at
Common Stock has been or above $15.00 per
at least $14.50 per share (subject to
share (subject to adjustment) for any 20
adjustment) for at of 30 consecutive
least 20 consecutive trading days ending not
trading days ending more than three days
within three days prior before the notice of
to the date on which redemption is deposited
notice of redemption is in the United States
given. mails.
Dilution Provisions The number of shares of The Class B Warrants The Class C Warrants
Common Stock issuable will be subject to will be subject to
upon exercise is similar dilution similar dilution
subject to adjustment adjustment provisions adjustment provisions
in a number of
circumstances
Ability to Trade The Class A Warrants A public market may A public market may
have historically develop for the Class B develop for the Class C
traded on the Over-The- Warrants. There can be Warrants. There can be
Counter Bulletin Board, no assurance that a no assurance that a
and on the Nasdaq market for the Class B market for the Class C
SmallCap Market since Warrants will develop Warrants will develop
July 2000. There can be or, if it develops, or, if it develops,
no assurance that the will continue. will continue
market will continue.
Registration The Class A Warrants The Class B Warrants The Class C Warrants
are registered under are also registered are also registered
the Securities Exchange under the 1934 Act. under the 1934 Act.
Act of 1934, as
amended.
Warrant Holders are not
shareholders Holders of Class A Holders of Class B Holders of Class C
Warrants are not Warrants are not Warrants are not
considered to be considered to be considered to be
Shareholders of Shareholders of Shareholders of
Isonics, and do not Isonics, and do not Isonics, and do not
have the right to vote have the right to vote have the right to vote
at shareholders' at shareholders' at shareholders'
meetings or to receive meetings or to receive meetings or to receive
dividends when and if dividends when and if dividends when and if
declared. declared. declared.
</TABLE>
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<PAGE>
If all Class A Warrants are exchanged, we will issue an aggregate of 810,000
Class B Warrants (890,000 if the holders exercise the Underwriter Warrants and
exchange the Class A Warrants received). All Class A Warrants submitted for
exchange will be cancelled.
If a holder exercised his or her Class A Warrant prior to this exchange
offer, we will issue a Class C Warrant to that person for no additional
consideration.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors believes that this exchange offer is in the best
interests of Isonics and holders of Class A Warrants, and recommends that
holders of Class A Warrants participate in the exchange offer, but only if such
holder intends to exercise the Class B Warrants to be issued in exchange before
April 30, 2001, the expiration date of the Class B Warrants.
CONSEQUENCES OF FAILURE TO EXCHANGE
There are no consequences if you fail to exchange your Class A Warrants
before the expiration date of the exchange offer. You will continue to own your
Class A Warrants, which will be subject to the same terms and conditions as
prior to the exchange offer. After the expiration of the exchange offer,
however, you will no longer have a right to exchange your Class A Warrants for
Class B Warrants or otherwise obtain a Class C Warrant.
EXPIRATION TIME, EXTENSION, AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York Time, on April 30,
2001, unless the expiration time is extended at the discretion of the Board of
Directors.
Notwithstanding the foregoing, Isonics expressly reserves the right in its
sole and absolute discretion, subject to applicable law, at any time and from
time to time,
- to delay the acceptance of the Class A Warrants for exchange;
- to terminate the exchange offer at any time (whether or not any Class A
Warrants have been accepted for exchange);
- to extend the expiration time of the exchange offer and retain all
Class A Warrants tendered, or to offer withdrawal rights on a case-by-case
basis; and
- to waive any condition or otherwise amend the terms of the exchange offer
in any respect.
If this exchange offer is amended in a manner determined by Isonics to
constitute a material change, or if Isonics waives a material condition of the
exchange offer, Isonics will promptly notify the exchange agent. We will also
make a public announcement of any extension no later than 9:00 a.m., New York
Time, on the business day immediately following the previously scheduled
expiration date. Without limiting the manner in which Isonics may choose to make
any public announcement and subject to applicable law, Isonics shall have no
obligation to publish, advertise or otherwise communicate any such public
announcement other than by issuing a release to an appropriate news agency. If
Isonics makes a material change to the exchange offer, we will extend the
exchange to the extent required by law.
TERMS OF THE EXCHANGE AND PROCEDURE FOR SUBMITTING CLASS A WARRANTS
For each Class A Warrant validly submitted for exchange, Isonics will issue
one Class B Warrant. The terms of the Class B Warrant are as follows:
- Isonics will issue to the holder who exercises a Class B Warrant one share
of Common Stock and one Class C Warrant;
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<PAGE>
- The exercise price of the Class B Warrants is $5.80 per Class B Warrant
(subject to adjustment);
- The Class B Warrants will expire on April 30, 2001; and
- Because of the applicability of state securities laws, only residents of
certain states as set forth on the cover page of this prospectus are
permitted to exchange their Class A Warrants or exercise their Class B
Warrants.
As set forth above, each person who exercises a Class B Warrant (or who has
previously exercised a Class A Warrant) will receive a Class C Warrant. The
terms of the Class C Warrants are as follows:
- Isonics will issue to the holder who exercises a Class C Warrant one share
of Common Stock;
- The exercise price of the Class C Warrants is $10.00 per Class C Warrant
(subject to adjustment);
- The Class C Warrants will expire on June 15, 2003;
- Because of the applicability of state securities laws, only residents of
certain states as set forth on the cover page of this prospectus will be
permitted to exercise their Class C Warrants; and
- The Class C Warrants will be redeemable if our Common Stock trades at or
above $15.00 per share (subject to adjustment) for any 20 of 30
consecutive trading days ending not more than three days before the notice
of redemption is deposited in the United States mails.
The Class B Warrants and Class C Warrants and the underlying shares of
Common Stock have been registered under the Securities Act. All share and
warrant certificates will be registered in the exact same name as the original
certificates.
The exchange offer is not conditioned upon any minimum number of Class A
Warrants being submitted for exchange. As of the date of this prospectus,
810,000 Class A Warrants were outstanding, and an additional 80,000 Class A
Warrants are issuable upon exercise of the outstanding Underwriter Warrants.
No person has any appraisal or dissenters' rights in connection with the
exchange offer. Class A Warrants, which are not submitted for exchange, or are
submitted but not accepted for exchange will remain outstanding. After this
exchange offer expires, holders of Class A Warrants will not have an opportunity
to exchange their Class A Warrants for Class B Warrants or any similar rights.
Isonics does not currently intend to make another exchange offer with respect to
any Class A Warrants outstanding after the expiration of this exchange offer.
If any Class A Warrants are not accepted for exchange because of an invalid
tender, the occurrence of certain other events set forth herein or otherwise,
certificates for any such unaccepted securities will be returned, without
expense, to the holder promptly after the expiration date. Holders who submit
Class A Warrants will not be required to pay brokerage commissions or fees or,
subject to the instructions in the Letter of Transmittal, transfer taxes with
respect to the exchange offer.
In order to make a valid delivery for exchange of Class A Warrants, a holder
must deliver the certificates representing such securities, together with a
properly completed and executed Letter of Transmittal (or copy thereof),
including all required signatures, signature guarantees, and other documents, to
the exchange agent by registered mail, return receipt requested, overnight
courier, or hand delivery as follows:
Continental Stock Transfer & Trust Co., Inc.
2 Broadway
New York, NY 10004
Attn: Compliance Department
Telephone number: 212-509-4000.
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<PAGE>
Delivery to an address and in a manner other than those indicated above does
not constitute good delivery to the exchange agent.
The method of delivery of the Letter of Transmittal and certificates to the
exchange agent will be at the election and risk of each holder of the Class A
Warrants. The Letters of Transmittal and certificates can be sent to the
exchange agent by hand delivery, courier service, or by mail. If you send the
Letters of Transmittal and certificates by mail, we recommended that you send
them by registered mail with return receipt requested; we also recommend that
you allow a sufficient number of days to ensure that the transmittal and
certificates are delivered to the exchange agent prior to the expiration time.
All questions concerning the timeliness, validity, form, and eligibility of
submissions will be determined by Isonics, and our determinations will be final
and binding. We, in our sole discretion, may waive any defect or irregularity,
or permit a defect or irregularity to be corrected within such time as it may
determine, or reject any purported submission. Letters of Transmittal will not
be deemed to have been received or accepted until all irregularities have been
waived or cured within such time as Isonics determines in its sole discretion.
Neither Isonics nor the exchange agent will be under any duty to give
notification of any defect or irregularity in connection with the submission of
Letters of Transmittal or incur any liability for failure to give such
notification.
NO WITHDRAWAL RIGHTS
Any tender of the Class A Warrants to the exchange agent will be
irrevocable. A holder who has submitted his or her Class A Warrants for exchange
may not withdraw them. Isonics has the right, in its sole discretion, to extend
the expiration date of the exchange offer or offer withdrawal rights on a
case-by-case basis in the future.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE
The exchange of Class A Warrants for Class B Warrants will be treated as an
"exchange" for federal income tax purposes under the applicable provisions of
the Internal Revenue Code. We do not expect that holders who exchange their
Class A Warrants for Class B Warrants or who receive Class C Warrants following
exercise of their Class A Warrants will recognize any gain or loss.
The exchange of Class A Warrants for Class B Warrants with terms identical,
except for the expiration date, to those of the Class A Warrants and the filing
of a registration statement with respect to the resale of the Class B Warrants
and Class C Warrants will not be a taxable event to holders of the warrants.
After the exchange, a holder's basis in the Class B Warrants or Class C Warrants
received in the exchange will be the same as the basis the holder had in the
securities surrendered in the exchange.
The above discussion summarizes the expected tax effects of the exchange,
although there is no definitive guidance on point. The IRS could disagree with
the conclusions reached by Isonics. In the event of such disagreement, there is
no assurance that the IRS would not prevail in a judicial or administrative
proceeding. As a result of the complexity of the tax laws and the impact of each
holder's particular circumstances upon the tax consequences of the merger, the
information set forth above regarding the federal income tax consequences of the
merger is not intended to be individualized tax or legal advice to holders. Each
holder considering participation in the exchange offer should consult his or her
own tax or financial counsel as to the specific federal, state, and local tax
consequences of the exchange, if any, to such holder.
PARTICIPATION BY DIRECTORS AND OFFICERS IN THE EXCHANGE OFFER
No directors or officers of Isonics beneficially own any Class A Warrants.
19
<PAGE>
ISSUANCE OF NEW CERTIFICATES
Certificates representing Class B Warrants, and in some cases, Class C
Warrants will be delivered to participating holders as soon as practicable.
LOST CERTIFICATES
If you have lost or misplaced your certificates representing Class A
Warrants or if they have been destroyed, contact the transfer agent for
additional information on the replacement and exchange of your Class A Warrants.
You may be required to provide an indemnity bond in connection with the
replacement of lost or destroyed certificates.
REQUESTS FOR ADDITIONAL INFORMATION
If you have questions or require additional information concerning the
offering, please contact the following person at the address and telephone
number stated below:
Brantley J. Halstead, Vice President--Finance
Isonics Corporation
5906 McIntyre Street
Golden, CO 80403
Telephone No.: (303) 279-7900
Facsimile No.: (303) 279-7300
e-mail: [email protected]
PROCEDURE FOR EXERCISE OF THE WARRANTS AND TAX ASPECTS
PROCEDURE TO EXERCISE WARRANTS. The Class A Warrants were distributed to
the public in September 1997, and have been trading on the over-the-counter
market until July 2000. The Class A Warrants have been quoted on the Nasdaq
SmallCap Market since July 2000. Neither the Class B Warrants nor the Class C
Warrants have yet been issued but,
the Class B Warrants, will be issued to any person who accepts our Exchange
Offer and delivers his or her Class A Warrant certificate to our Exchange
Agent as described in the preceding section; and
the Class C Warrants, will be issued to any person who exercises a Class B
Warrant before its expiration date, or who exercises a Class A Warrant on or
before April 30, 2001.
Each registered holder of a Class A Warrant should have possession of a
certificate that represents that Class A Warrant. Persons who hold their
Class A Warrants in a brokerage account or otherwise in a "street name" account
may ask their brokers to deliver a Class A Warrant certificate to them.
Certificates will be issued to persons entitled to receive Class B Warrants or
Class C Warrants unless a person exchanging his or her Class A Warrant chooses
to exercise the Class B Warrant simultaneously.
REGISTERED HOLDERS. If you are a registered holder and if you have
possession of your Warrant certificate, in order to exercise a Warrant, you
must:
- Complete the subscription form which is included as a part of the Warrant
Certificate;
- Sign the subscription form and have your signature medallion guaranteed by
a broker-dealer member of the STAMP program;
- Deliver the original warrant certificate with the completed, signed, and
medallion guaranteed subscription form to Continental Stock Transfer &
Trust Co., Inc., 2 Broadway, New York, NY 10004, Attn: Compliance
Department; and
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- Include your payment for the exercise price ($5.80 times the number of
warrants being exercised for the Class A Warrants and Class B Warrants;
$10.00 in the case of the Class C Warrants). You must pay for the exercise
by certified or bank cashiers' check payable in United States funds,
payable to the order of Isonics Corporation. If you prefer to wire
transfer funds, you should contact Continental Stock Transfer & Trust
Company by telephone and request wiring instructions. Continental Stock
Transfer can be reached by telephone at 212-509-4000.
We recommend that you do not send your Warrant certificate or funds through
the regular U.S. Mail. We recommend that you use registered or certified
U.S. Mail, or a courier service that will provide you a receipt indicating
that Continental Stock Transfer received your Warrant certificate and
payment. Neither Isonics nor Continental Stock Transfer is responsible for
your Warrant certificate or your payment until Continental Stock Transfer
actually receives delivery. DO NOT SEND WARRANT CERTIFICATES OR PAYMENT
DIRECTLY TO ISONICS CORPORATION.
WARRANTS HELD IN A BROKERAGE ACCOUNT OR OTHERWISE IN STREET-NAME. If you
hold your Class A Warrants, Class B Warrants, or Class C Warrants in a brokerage
account or otherwise in a "street name" account, you must follow the procedures
required by your broker, dealer, or other street-name holder.
LOST WARRANT CERTIFICATES. If you have lost your Warrant certificate, you
must contact Continental Stock Transfer & Trust Co., Inc. and follow the
procedures established by Continental Stock Transfer for your lost Warrant
certificate. If you have lost your certificate, please ensure that you leave a
sufficient amount of time before expiration of your Class A Warrant or
expiration of the Exchange Offer to follow the lost instrument procedures.
TAX ASPECTS. No gain or loss will be recognized by a holder of either the
Class B Warrant or Class C 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 Class B Warrant or Class C Warrant will begin on the date the
Warrant is exercised and the Common Stock is purchased.
USE OF PROCEEDS
Isonics will not receive any cash proceeds from the exchange of the Class A
Warrants, or the issuance of the Class B Warrants.
Isonics will receive from $0.00 to a maximum of $4,698,000 from the exercise
of the Class A Warrants and the Class B Warrants (not including any securities
issuable upon exercise of the Underwriter Warrants). We expect to use any
proceeds received for research and development and working capital.
If all of the Class A Warrants are exchanged or exercised before April 30,
2001, and if all resulting Class B Warrants are exercised (of which we can offer
no assurance), there will be 810,000 Class C Warrants outstanding. We will
receive from $0.00 to a maximum of $8,100,000 from the exercise of the Class C
Warrants. (The foregoing discussion does not include any Warrants that may be
issued upon exercise of the Underwriters' Warrants.) We expect to use any
proceeds received for research and development and working capital.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION OR PLAN OF OPERATION
THE STATEMENTS CONTAINED IN THIS PROSPECTUS THAT ARE NOT PURELY HISTORICAL
ARE FORWARD LOOKING STATEMENTS. "FORWARD LOOKING STATEMENTS" INCLUDE STATEMENTS
REGARDING OUR EXPECTATIONS, HOPES, INTENTIONS OR STRATEGIES REGARDING THE
FUTURE. FORWARD LOOKING STATEMENTS INCLUDE: STATEMENTS REGARDING FUTURE PRODUCTS
OR PRODUCT DEVELOPMENT; STATEMENTS REGARDING FUTURE SELLING, GENERAL AND
ADMINISTRATIVE COSTS AND RESEARCH AND DEVELOPMENT SPENDING AND OUR PRODUCT
DEVELOPMENT STRATEGY; STATEMENTS REGARDING FUTURE CAPITAL EXPENDITURES AND
FINANCING REQUIREMENTS; AND SIMILAR FORWARD LOOKING STATEMENTS. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION
AVAILABLE TO US ON THE DATE HEREOF, AND WE UNDERTAKE NO OBLIGATION TO UPDATE ANY
SUCH FORWARD-LOOKING STATEMENTS. IT IS IMPORTANT TO NOTE THAT OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS.
OVERVIEW
Founded in 1992, Isonics Corporation ("Isonics" or the "Company") is a
specialty chemical and advanced materials company, which develops and
commercializes products based on stable isotopes. Stable isotopes are ultra pure
materials engineered at the molecular level to provide enhanced performance
properties in semiconductors, lasers and high performance lighting, life
sciences, and energy production. Stable isotopes are also widely used in basic
research, pharmaceutical development and drug design, as well as in medical
diagnostics and imaging. By replacing materials traditionally used in these
industries with isotopically engineered versions of the same materials, product
performance, safety, and economics can be enhanced significantly. Using
state-of-the-art technology, we produce a wide range of enriched stable
isotopes, which are then converted into products, which meet the specialized
needs of our customers.
Originally, our core business was the production and supply of depleted
zinc, a non-radioactive stable isotope, to the energy industry. In fiscal 1996,
we expanded our business scope to include development of isotopically engineered
materials for the medical research, medical diagnostic and semiconductor
industries. The acquisition of Chemotrade GmbH ("Chemotrade") in 1998 added
radioactive isotopes (or radioisotopes) to our available products. As a result
of the sale of our depleted zinc business in December 1999, (as described in the
paragraph entitled "SALE OF DEPLETED ZINC BUSINESS.") our revenues in the future
will depend on our success in developing and selling products in the
semiconductor, and stable and radioactive isotope markets.
On May 1, 2000, we reorganized International Process Research Corporation
("Interpro", doing business as Colorado Minerals Research Institute). Previously
Interpro was a contract research and development and materials processing
company and developed new, lower cost technologies to better meet our historical
customers' needs. As a result of the reorganization, Interpro will focus on one
specific application-the recovery and recycling of zinc metal from various
sources.
Chemotrade is headquartered in Dusseldorf, Germany, and its subsidiary is
located in Leipzig, Germany. Chemotrade is a value-added re-seller of stable and
radioactive isotopes. It supplies radioactive isotopes for pharmaceutical and
industrial research as well as for industrial and medical imaging, calibration
sources and for brachytherapy applications.
Additionally, Chemotrade supplies various stable isotope labeled compounds
for pharmaceutical research and drug design, as well as oxygen-18 for use in
producing a radioisotope used in positron emission tomography. Chemotrade's
market is primarily Europe but sales are also made to North America and Asia.
Prior to June 1998, substantially all of our net revenues in any particular
period were attributable to a limited number of customers and sales of depleted
zinc and other stable isotopes. We have historically operated with little
backlog. With the acquisition of Chemotrade we added radioisotopes to
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our product mix, and consistent with our historical experience, our quarterly
results have been materially affected by the size, timing and quantity of orders
and product shipments during a given quarter.
On December 1, 1999, we sold our depleted zinc business to Eagle-Picher
Technologies, LLC ("Eagle-Picher") for approximately $8.2 million of which
$6.7 million was paid on December 1, 1999. Additionally, we signed a long-term
isotope supply agreement with Eagle-Picher, and Eagle-Picher will supply us with
200 kilograms of silicon-28 in 2000. Eagle-Picher has not supplied any portion
of its obligations to date. We also gave Eagle-Picher a warrant to obtain
4,000,000 shares of our common stock. Eagle-Picher exercised their warrant,
under a net exercise provision in the warrant agreement and received 3,130,435
shares of Common Stock. Eagle-Picher disputes our calculation and believes we
should issue to it an additional 155,279 shares of Common Stock. We believe
Eagle-Picher's calculation is in error and we are continuing discussions with
representatives of Eagle-Picher to resolve this matter.
As a result of the sale of the depleted zinc business, we have realized
significantly lower revenues in the period since the completion of the sale, and
we anticipate lower revenues in future periods. Consequently, a lost or delayed
sale of radioisotopes could have a significant impact on our operating results
for a particular period, and any fluctuations could materially and adversely
affect our business, financial condition and results of operations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statement
of operations data expressed as a percentage of net sales. The table and the
discussion below should be read in conjunction with the condensed consolidated
financial statements and the notes thereto appearing elsewhere in this report.
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED JULY 31, APRIL 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues............................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues......................................... 74.8 77.8 79.8 78.7
----- ----- ----- -----
Gross margin........................................... 25.2 22.2 20.2 21.3
Operating expenses:
Selling, general & Administrative...................... 59.1 28.7 29.1 21.4
Research & development................................. 14.9 4.1 9.6 6.8
Restructuring & office closure......................... -- 2.1 0.4 4.1
----- ----- ----- -----
Total operating expenses............................. 74.0 34.9 39.1 32.3
----- ----- ----- -----
Operating loss........................................... (48.8) (12.7) (18.9) (11.0)
----- ----- ----- -----
Other income (expense) net............................... 7.5 (2.6) 41.0 (2.8)
----- ----- ----- -----
Income (loss) before income taxes........................ (41.3) (15.3) 22.1 (13.8)
----- ----- ----- -----
Income tax expense (benefit)............................. -- -- (1.0) 1.0
----- ----- ----- -----
NET INCOME (LOSS)........................................ (41.3)% (15.3)% 21.1% (14.8)%
===== ===== ===== =====
</TABLE>
NET REVENUES
As a result of the sale of the depleted zinc business to Eagle-Picher on
December 1, 1999 revenues have decreased and we expect that the decrease
attributable to the sale of the depleted zinc business to be approximately
$6.0 million dollars on an annual basis.
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Net revenues for the three months ended July 31, 2000, were $2.036 million,
a decrease of approximately 34.0%, or $1.048 million, from $3.084 million for
the same period in the prior fiscal year. The decrease is principally due to the
reduction in net revenues from isotope product sales of approximately
$0.674 million for the three months ended July 31, 2000, to approximately
$2.036 million, from approximately $2.710 million in the comparable period of
the prior year. This reduction is due to the lack of depleted zinc revenues
after the sale of the depleted zinc business to Eagle-Picher, and the recent
acquisition of a major customer by one of our competitors. Net revenues from
contract research and development services decreased approximately $374,000 for
the three months ended July 31, 2000, to $0, because of our cessation of these
activities at our subsidiary Interpro. Net revenues from isotope sales varied
considerably from the same quarter in the prior fiscal year primarily because of
timing of large radioisotope sales orders and shipments.
We are engaging in research and development to diversify our business and to
expand other lines of our business. We have also expanded our sales and
marketing efforts. We are now seeking to identify and evaluate a variety of new
stable isotope products and potential markets for economic and technical
feasibility. We will continue to fund research and development to improve
technologies for isotope separation and materials processing technologies.
During fiscal 2000, 1999, and 1998, research and development expenses were
$1,224,000, $1,155,000, and $811,000, respectively. We cannot offer any
assurance that our current or future lines of business and our research and
development efforts will be profitable or generate significant revenues.
Net revenues decreased from $16,998,000 in fiscal 1999 to $12,733,000 in
fiscal 2000, a decrease of $4,265,000 or 25.1%. The decrease is primarily
because of the sale of our depleted zinc business to Eagle-Picher in
December 1999, and reduced revenue from our contract research and process
development operations. Depleted zinc revenues in fiscal 2000 were $2,645,000,
as compared to fiscal 1999 revenues of $5,959,000, a decrease of $3,314,000, or
55.6%. This decrease is attributable to only having approximately seven months
of sales in fiscal 2000, because of the Eagle-Picher transaction, versus
twelve months of sales in fiscal 1999. Interpro's fiscal 2000 revenues were
$1,156,000, as compared to fiscal 1999 revenues of $2,614,000, a decrease of
$1,458,000, or 55.8%. We will have no revenues from depleted zinc or Interpro in
fiscal 2001, because: we have sold our depleted zinc business; and have ceased
revenue-generating operations at our Interpro subsidiary to focus Interpro's
resources exclusively on developing a zinc recovery and recycling technology.
Both the depleted zinc sale and the zinc recovery and recycling process project
are described above. See "RECENT TRANSACTIONS."
International sales represented approximately 65% of revenues in fiscal
2000, and 60% of revenues in fiscal 1999. This increase is primarily
attributable to significantly lower domestic revenues from Interpro, which were
partially offset by increased domestic sales of stable isotopes (excluding
depleted zinc). Lower depleted zinc sales had a comparable effect on both
international and domestic sales.
We did not have significant revenues from sales of silicon-28 based products
in the fiscal year ended April 30, 2000. We do not anticipate significant
revenues from sales of silicon-28 based products in the fiscal year ended
April 30, 2001. We are collaborating with academia and industry to evaluate the
benefits of isotopically pure silicon-28. We believe that if evaluations
demonstrate the commercial feasibility of one or more products, demand could
emerge in certain segments of the semiconductor market. We can offer no
assurance, however, that these evaluations will demonstrate the commercial
feasibility of any products, that we will be able to commercialize any such
products, or that a market will emerge for any such products.
GROSS MARGIN
As a result of the sale of the depleted zinc business to Eagle-Picher on
December 1, 1999, we anticipate gross margin will be decreased on an annual
basis by approximately $1.0 million dollars.
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<PAGE>
Gross margin for the three months ended July 31, 2000, increased to
approximately 25.2% of net revenues from approximately 22.2% for the same period
in the prior fiscal year. The increase is primarily because of a change in
product mix sold during the quarter as discussed above, specifically no contract
research revenues. We expect that gross margins will continue to fluctuate, as
we are attempting to develop and market new products and increase the sales of
our existing products.
Gross margin decreased approximately $1,046,000, to approximately
$2,577,000, in fiscal 2000, from approximately $3,623,000, in fiscal 1999. On a
percentage of net revenues basis gross margin decreased 1.1 percentage points to
approximately 20.2% in fiscal 2000, from approximately 21.3% in fiscal 1999. The
dollar and percentage point decreases are primarily because of reduced sales of
depleted zinc, typically a higher margin product, and an increase in stable and
radioisotope revenues generated by both Isonics and Chemotrade. In general,
stable isotopes typically have lower margins because of more sales competition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
As a result of the sale of the depleted zinc business to Eagle-Picher on
December 1, 1999, our historical selling, general and administrative expenses
will be decreased on an annual basis by approximately $100,000. We anticipate
that our selling, general and administrative expenses will increase during the
current fiscal year as we increase our sales and marketing efforts. As a
percentage of revenues selling, general and administrative expenses should
increase, as revenues (current fiscal year quarter to prior fiscal year quarter)
will be significantly lower.
Selling, general and administrative expenses increased $318,000 or 35.9% to
approximately $1.203 million, or approximately 59.1% of net revenues for the
three months ended July 31, 2000, from $885,000, or 28.7% of net revenues in the
comparable period of the prior year. The dollar increase for the quarter ended
July 31, 2000, was primarily attributable to increased usage of professional
services including legal, business development and accounting services, and
increased salaries and headcount.
Selling, general and administrative expenses increased on a dollar basis by
approximately $55,000 to $3,698,000, in fiscal 2000 from $3,643,000 in fiscal
1999. Selling, general and administrative expenses increased on a percentage of
net revenues basis by 7.6 percentage points to 29.1% of net revenues in fiscal
2000, from 21.4% of net revenue in fiscal 1999. The dollar increase in selling,
general and administrative expenses is primarily attributable to increased
compensation expense and professional service fees at the corporate level. The
percentage of net revenues increase is primarily attributable to lower net
revenues ($12,733,000 in fiscal 2000, and $16,998,000 in fiscal 1999).
Professional service fees increased because of several corporate transactions
including: the private placement of equity in July 1999, and the Eagle-Picher
transaction in December 1999. See "LIQUIDITY AND CAPITAL RESOURCES" and
"BUSINESS THAT WE SOLD."
We expect that our selling, general and administrative expenses will
continue to fluctuate as we are attempting to develop and market new products
and increase the sales of our existing products. While we are attempting to keep
control over these expenses, we anticipate that we will not be able to reduce
selling, general and administrative expenses in the near future. Our goal is to
increase revenues so that selling, general and administrative expenses as a
percentage of revenues will decrease over time.
RESEARCH AND DEVELOPMENT
Research and development expenses will not be significantly affected by the
sale of the depleted zinc business to Eagle-Picher on December 1, 1999, because
we had not spent significant funds on depleted zinc research and development in
the last fiscal year, and did not have plans for any significant future research
and development expenditures. However, as a percentage of revenues research and
development expenses should increase, as revenues (current fiscal year quarter
to prior fiscal year quarter) will be significantly lower.
25
<PAGE>
Research and development expenses increased approximately $177 thousand, or
approximately 139.4%, to $304 thousand for the quarter ended July 31, 2000, from
$127 thousand for the comparable period in fiscal 2000, while increasing on a
percentage basis to approximately 14.9% of net revenues from approximately 4.1%.
The dollar increase during the quarter ended July 31, 2000, was primarily
because of research and development costs associated with the development of our
zinc recovery and recycling project.
Research and development expenses increased on a dollar basis by
approximately $69,000 to $1,224,000, in fiscal 2000 from $1,155,000 in fiscal
1999. Research and development expenses increased on a percentage of net
revenues basis by 2.8 percentage points to 9.6% of net revenues in fiscal 2000
from 6.8% of net revenue in fiscal 1999.
In fiscal 2000, we focused our efforts primarily on silicon-28 development
projects including the construction of a silane gas processing facility in
Golden, Colorado, and the zinc recovery and recycling project. We have ceased
our projects related to depleted zinc and carbon-13 recovery.
As described above, we signed a long-term isotope supply agreement with
Eagle-Picher, and Eagle-Picher will supply us with 200 kilograms of silicon-28
in 2000. The silicon-28 will be used to further development of our semiconductor
materials business. We also gave Eagle-Picher a warrant to obtain 4,000,000
shares of our common stock. The warrants are contingent upon the delivery of
silicon-28 by Eagle-Picher. The anticipated value of the 200 kilograms is
approximately $5,000,000. As we use the silicon-28 in our research and
development activities, we will recognize an expense of approximately $25.00 per
gram, as this is the price we most recently paid for silicon-28 from another
supplier.
We believe that the development and introduction of new product applications
are critical to our future success and we expect that research and development
expenses will increase (as measured in dollars), in the near term because of the
timing of material usage and outside services, but will likely continue to vary
as a percentage of revenues because of the timing and amount of future revenues.
On May 1, 2000, we substantially reorganized Interpro to focus on one
specific application, the recovery and recycling of zinc metal from various
sources including, galvanized steel scrap, electric arc furnace dust, and brass
scrap. We chose this course of action for two reasons. First, we believe the
market potential for this, and related processes, is significant. Second, the
profound and lengthy slump in the mineral processing and mining industries has
significantly eroded Interpro's historical customer base. We will continue to
meet the demands of a few remaining customers through various sub-contractor
relationships. We will also keep the physical infrastructure in place at our
Golden location if market conditions warrant a reentry into Interpro's
historical markets. Currently, we are using a significant portion of this
infrastructure in our zinc recovery and recycling project.
RESTRUCTURING AND OFFICE CLOSURE
On October 31, 1998, we announced a restructuring of our operations and
relocation of our headquarters to Golden, Colorado, the location of our
subsidiary, Interpro. We recorded a $691,000 charge in connection with the
restructuring.
As of July 31, 2000, the only significant restructuring cost remaining is
the lease payments on the former San Jose, California office, which has been
sublet for the remaining term of our lease. The net liability is estimated to be
approximately $44,000, and will be incurred over the next four years. The
$66,000 expense in the three months ending July 31, 1999, was primarily related
to moving costs incurred by two senior executives. The $56,000 expense, in
fiscal 2000, was primarily related to moving costs incurred by two senior
executives.
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OTHER INCOME (EXPENSE), NET
Other income (expense), net, includes interest income and expense,
amortization of debt issuance costs and the fair value of warrants issued in
connection with debt, foreign currency exchange gains and losses, and in fiscal
2000, the gain on the sale of the depleted zinc business to Eagle-Picher. The
gain on the sale of the depleted zinc line of business was approximately
$5,296,000. In fiscal 1999, other income (expense), net included interest income
and expense, amortization of debt issuance costs and the fair value of warrants
issued in connection with debt, and foreign currency gains and losses.
As a result of the Eagle-Picher transaction we retired a significant portion
of our outstanding debt such that we currently incur no material interest
expense. Other income (expense), net increased by approximately $231,000, to
$152,000, for the quarter ended July 31, 2000, from other (expense), net of
approximately $(79,000), for the comparable period of the previous fiscal year.
The increase is primarily attributable to foreign currency exchange gains of
$69,000, the realization of $125,000 of contingency gains associated with the
Eagle-Picher transaction, and interest income earned on our cash deposits. We
also incurred a $48,000 expense related to the resolution of legal claims.
Excluding gain on the sale of the depleted zinc line of business of
approximately $5,296,000, Other income (expense), net, in fiscal 2000 was
approximately ($77,000) a decrease in expense of approximately $407,000 from
($484,000) in fiscal 1999. The decrease in expense is primarily attributable to
lower interest expense (net of interest income) at the corporate level, as there
were no significant borrowings after November 1999, a period of five months.
INCOME TAXES
We currently operate at a loss and expect to operate at a loss until the
products currently under development begin to generate sufficient revenue. While
we recognized a taxable gain upon the sale of our depleted zinc product line,
the tax expense incurred was offset by the expected recovery of such taxes due
to the availability of net operating losses to offset the taxes paid. As a
result, for the fiscal year ended April 30, 2000, our reported tax expense was
limited to the taxes payable in Germany on the income of our Chemotrade
subsidiary.
The losses to be incurred in the current year are not expected to generate
an income tax benefit because of the uncertainty of the realization of the
deferred tax asset. As such we have provided a valuation allowance against the
deferred tax assets, which relate primarily to net operating loss and research
and development credit carryforwards, for the amount in excess of the taxes paid
in prior years that are subject to refund. We are exploring various tax
minimization strategies in an effort to conserve future cash flows.
The consolidated entity had income tax expense of $129,000 for fiscal year
2000, and income tax expense of $171,000 for fiscal year 1999. The income tax
expense in fiscal year 2000 is related to the sale of the depleted zinc
business. The income tax expense in fiscal year 1999 resulted from our
Chemotrade subsidiary, which had net income in fiscal year 1999, and paid income
taxes in Germany. However, both United States-based entities had net losses, in
fiscal year 1999, and did not have income tax expense.
We realized a gain on the sale of our depleted zinc business of
approximately $5,296,000. The tax effect of this sale, net of tax loss
carryforwards available is estimated to be approximately $435,000.
NET INCOME (LOSS)
We recognized net losses of $842,000 and $473,000, for the quarters ended
July 31, 2000 and 1999, respectively. We believe the quarter ended July 31,
2000, is reflective of our anticipated level of revenues and operating expenses.
Losses of this magnitude will likely continue until revenues increase from our
current operations or research and development projects.
27
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We recognized net income of $2,689,000 for the fiscal year ended April 30,
2000, as compared to a net loss of $2,521,000 for the fiscal year ended
April 30, 1999. Net income in fiscal 2000 was primarily because of the gain of
$5,296,000 on the sale of our depleted zinc business to Eagle-Picher in
December 1999, a transaction that will not recur. Without that one-time gain, we
would likely have recognized a net loss.
Net income in future years will be dependent on our ability to increase net
revenues while decreasing our selling, general and administrative expenses;
research and development expense; and other expenses as a percentage of net
revenues. Because of our continuing research and development efforts on new
products, we do not expect to generate any significant increase in net revenues
in fiscal 2001, and as a result, anticipate that the current (2001) fiscal
year's operations will result in a significant loss.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital and liquidity were significantly improved as a result of
the sale of the depleted zinc business to Eagle-Picher on December 1, 1999.
However, our liquidity has been decreasing since then as is shown by the
following table:
<TABLE>
<CAPTION>
DATE WORKING CAPITAL
---- ----------------
<S> <C>
January 31, 2000............................................ $4.067 million
April 30, 2000.............................................. $3.754 million
July 31, 2000............................................... $3.319 million
</TABLE>
We expect that our working capital will continue to decrease over time as we
continue to use our capital for operations, research and development, and
investing activities. We do not expect working capital to increase until, if
ever, we are able to increase our revenues to exceed our cash out-flow. We
cannot offer any assurance that we will be able to do so in the near term. We
believe we have sufficient working capital for the current fiscal year, ending
April 30, 2001, and into the next fiscal year.
Our principal sources of funding have been cash from sales of lines of
business, borrowed funds, and sales of both Common Stock and Convertible
Preferred Stock. We used cash in operating activities of approximately
$1.508 million and $884,000, during the three months ended July 31, 2000, and
1999, respectively. Cash used in operating activities during the three months
ended July 31, 2000 was principally the result of a net loss of approximately
$842,000 and tax payments of $675,000. Cash used by operating activities during
the three months ended July 31, 1999, was principally the result of a net loss
of $473,000, and increases in accounts receivable, and inventory, offset by
adjustments for non-cash items, primarily depreciation and amortization, and
increases in accounts payable and accrued liabilities.
We used cash in operating activities of approximately $4,327,000 during
fiscal 2000. We generated cash in operating activities of approximately $357,000
during fiscal 1999. The primary negative influence on fiscal 2000 cash flow from
operating activities was the gain on the sale of the depleted zinc business of
approximately $5,296,000.
Significant positive influences on our fiscal 2000 cash flow from operations
included:
- net income of approximately $2,689,000;
- an increase in taxes payable of $323,000;
- non-cash charges for depreciation and amortization expense of $567,000;
and
- non-cash charges related to debt restructuring of $160,000.
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Other negative influences on our fiscal 2000 cash flow included:
- an increase in accounts and notes receivable of $146,000;
- an increase in inventories prior to the Eagle-Picher transaction of
$1,066,000;
- an increase in prepaid expenses and other assets of $139,000;
- a deferred tax benefit of $640,000;
- a decrease in accounts payable of $522,000; and
- a decrease in accrued liabilities of $336,000.
Our investing activities used cash of $11,000, and $1,000 for the
three months ended July 31, 2000, and 1999, respectively, resulting from
leasehold improvements and purchases of property and equipment. Our investing
activities provided cash of approximately $6,715,000 in fiscal 2000 (primarily
resulting from the sale of our depleted zinc business to Eagle-Picher, which
provided cash of approximately $6,730,000). Our investing activities used cash
of approximately $705,000 in fiscal 1999 (including approximately $159,000 for
property and equipment, and $546,000 net cash used in the Chemotrade
acquisition).
Financing activities provided cash of $193,000 and $2.060 million for the
three months ended July 31, 2000, and 1999, respectively. Cash provided by
financing activities during the three months ended July 31, 2000, resulted
primarily from the exercise of employee stock options and proceeds from the sale
of shares under our employee stock purchase program. Cash provided by financing
activities during the three months ended July 31, 1999, resulted primarily from
the issuance of $2.230 million in convertible preferred stock for cash, proceeds
from net borrowings on the revolving line of credit of $370,000, and issuance of
debt of $75,000, that were offset by repayments of debt of $615,000.
Financing activities provided cash of $545,000 in fiscal 2000, and used cash
of $244,000 in fiscal 1999. In fiscal 2000, we had proceeds from the issuance of
preferred stock of approximately $2,250,000. We used approximately $1,931,000 to
pay our line of credit and other borrowings. In fiscal 1999, the primary use of
cash was the excess of repayments of debt, $1,000,000 over proceeds of debt,
$717,000.
At July 31, 2000, we had approximately $2,059,000 of cash and cash
equivalents, a decrease of approximately $1,326,000, compared to $3,385,000 as
of April 30, 2000. The April 30, 2000, cash and cash equivalents balance was an
increase of $2,933,000, compared to approximately $452,000 of cash and cash
equivalents at April 30, 1999. At July 31, 2000, we had positive working capital
of approximately $3,319,000, a decrease of approximately $435,000, from
April 30, 2000. At April 30, 2000, we had positive working capital of
approximately $3,754,000, an increase of $6,071,000, from negative working
capital of approximately $2,317,000, at April 30, 1999.
The decreases in the quarter ended July 31, 2000, are primarily the result
of net losses incurred during the quarter. The increases, in the fiscal year
ended April 30, 2000, are primarily the result of the sale of our depleted zinc
business to Eagle-Picher.
Factors resulting in our lower fiscal 1999 cash equivalents included our
cash payments for the acquisition of Chemotrade and the losses incurred in
fiscal 1999. During fiscal 1999, we paid the sellers of Chemotrade approximately
$1,686,000 in cash, and had one note for approximately $826,000 outstanding due
to the sellers on April 30, 1999. This note was repaid in fiscal 2000.
On July 29, 1999, we completed a $2,700,000 private placement financing to a
limited number of accredited investors (including some creditors who converted
debt). We issued 1,830,000 units, each consisting of one share of Series A
Convertible Preferred Stock and one warrant. We received $2,250,000 in cash
proceeds and converted $425,000 of long-term debt in connection with the private
placement. Each share of the Series A Convertible Preferred Stock is convertible
into one share of our
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<PAGE>
Common Stock at a conversion price of $1.50. The liquidation preference for the
Series A Convertible Preferred Stock is $1.50. Each warrant allows the investor
to purchase one share of Isonics Common Stock for $3.75 through July 29, 2002.
We granted certain registration rights to the holders of the shares of common
stock underlying the Class A Convertible Preferred Stock and the warrants.
In addition to converting $425,000 of existing debt into equity as part of
the private placement we:
- Issued 500,000 warrants to purchase shares of our Common Stock to an
investment banker as a commission on this placement. The warrants are
exercisable at $3.75 per share through July 29, 2002.
- Issued 46,667 units in satisfaction of all current and future obligations
under the Isoserve royalty agreement.
- Extended the payment due date for the remaining balance on the Chemotrade
acquisition note to July 2000.
- Extended the payment due date for certain unsecured promissory notes to
January 2000, which notes have been paid in full.
On July 24, 1998, we obtained a $3,000,000 asset based credit facility for
our U.S. operations, secured by our U.S. assets, with an unaffiliated lender.
This facility was repaid, in full, in December 1999 with funds made available by
our sale of assets to Eagle-Picher. The proceeds of that facility were used to
repay approximately $537,000 of debt outstanding and $742,000 of accounts
payable. Chemotrade has one unsecured revolving line of credit for 400,000 DM
(approximately $186,000), at April 30, 2000. We are evaluating alternative
secured credit facilities for Chemotrade.
At April 30, 1999, and subsequently until December 1, 1999, we were in
default of our borrowing agreements with Coast Business Credit ("Coast"), and on
December 1, 1999, we had approximately $215,000 of outstanding borrowings. We
have used some of the proceeds of the depleted zinc business sale described
above to pay off the Coast borrowings and our relationship with Coast has been
terminated. We believe that our current cash position, attributable to the
proceeds received from the sale of our depleted zinc business and the reduced
levels of debt associated therewith, will be sufficient to fund operations for
more than the next twelve months. However, our long-term capital requirements
will only be met if we are able to generate profits from operations and positive
cash flows, or develop new sources of financing of which there can be no
assurance.
We believe that the cash proceeds from the recent sale of our depleted zinc
business will be sufficient for us to meet our cash needs for the next
twelve months. However, our long-term capital requirements will only be met if
we are able to generate profits from operations and positive cash flows, or
develop new sources of financing of which there can be no assurance. We
currently have no borrowing agreements in place with any lenders or similar
organizations.
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<PAGE>
BUSINESS
We are an advanced materials and technology company, which develops and
commercializes products created from materials whose natural isotopic ratios
have been modified. An isotope is one of two or more species (or nuclides) of
the same chemical element, which differ from one another only in the number of
neutrons in the atom's nucleus. The different number of neutrons can create
significantly different nuclear properties; the most well known of these
properties is radioactivity. Radioactive isotopes (or radioisotopes) can be
found in nature; however, most of our radioisotopes are man-made. Stable
isotopes are not radioactive.
To take advantage of some of these different nuclear properties--and to
create our products--it is usually necessary to increase ("enrich") or decrease
("deplete") the concentration of a particular isotope or isotopes. There are
over 280 naturally occurring stable isotopes of 83 different elements. The
number of isotopes of any given element varies widely. Stable isotopes of a
given element typically do not differ significantly in their chemical behavior.
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 different effects have the potential for commercial application. Isotopes
are typically referred to by their atomic mass number, which essentially is the
sum of the number of protons and neutrons in the atom's nucleus. For example,
oxygen-18 has eight protons and ten neutrons in its nucleus, and silicon-28 has
fourteen protons and fourteen neutrons in its nucleus.
For example, in ultra chemically pure crystals, grown for electronics or
optical applications, isotopic impurities are the greatest contributor to
crystal disorder because of mass and diameter variations. Eliminating this
disorder by using a single enriched isotope (i.e. an isotopically pure
substance) results in increased thermal conductivity and optical transparency,
and thus in improved product performance. Similarly, enriching or depleting
isotopes based upon their nuclear cross-sections allows materials to be
engineered for applications in the nuclear power industry, for controlled doping
of some semiconductors in the computer industry, and for use as targets to
produce radioisotopes for the life sciences and other industries.
Another example is labeling or tagging of materials. By varying the natural
abundance of isotopes present in the material, the material acquires its own
unique mass and/or nuclear magnetic signature. This process "tags" the material,
and most importantly, does not change a given material's chemical properties.
Though chemically equivalent, the "tagged" material is discernible from
unlabeled materials through the use of several types of instruments including
mass spectrometers.
Enriched stable isotopes may be thought of as extremely pure materials. Not
only are they chemically pure, but also consist primarily of only one isotope
depending on the level of enrichment. This extra degree of purification,
accomplished on the sub-atomic level, provides enhanced performance properties
compared to normal (chemical only) purity materials. Depleted isotopes are
typically processed further, and the elimination (or reduction in level) of an
isotope, or isotopes, prevents the creation of undesirable byproducts in these
subsequent processing steps. In some instances the undesirable byproducts are
produced during the intended use of the non-depleted isotope material.
Stable isotopes have commercial uses in several areas, including: energy
generation; medical research, diagnostics, and drug development; product tagging
and stewardship; semiconductors; and optical materials. We have successfully
developed and commercialized several isotope products and intend to promote the
emergence and growth of new stable isotope applications. The radioactive
isotopes (or radioisotopes) we produce and sell are typically used in medical
diagnostic, treatment, and therapy applications. In most cases we first produce
an enriched or depleted stable isotope "target," which is then exposed to an
appropriate form of radiation to create a specific radioisotope.
A key property of a radioisotope is its half-life. The half-life is a
measure of how fast a radioisotope decays into either a stable isotope or
another radioisotope. Since most radioisotopes used
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<PAGE>
in life science applications have short half-lives, they are rarely found in
nature. Therefore these isotopes have to be made from a target material, usually
in a nuclear reactor or a cyclotron, and usually used immediately. A nuclear
reactor or a cyclotron generates the appropriate form of radiation required to
convert the target material into the desired radioisotope.
Today our isotope business addresses the material needs of two primary
markets: life sciences (including healthcare) and semiconductor materials. While
we currently are focusing on these two markets, we continually evaluate other
applications for both stable and radioisotopes. We also sell isotopes for use in
basic scientific research and certain specific industrial applications. We
believe our core competency is our ability to identify, develop, source, and
commercialize products and services based on isotopically engineered materials.
We were formed in March 1992, as a partnership, and were subsequently
incorporated in California in March 1993, as A&R Materials, Inc. In
September 1996, we changed our name to Isonics Corporation. Our principal
executive offices are located at 5906 McIntyre Street, Golden, Colorado 80403.
Our telephone number is (303) 279-7900, and our facsimile number is
(303) 279-7300. Our web site is isonics.com.
RECENT BUSINESS ACQUISITIONS
INTERNATIONAL PROCESS RESEARCH CORPORATION
Effective April 30, 1998, we purchased all of the outstanding capital stock
of International Process Research Corporation ("Interpro") from a previously
unaffiliated corporation (Metallurgy International, Inc.). Interpro, which does
business as Colorado Minerals Research Institute, is a materials processing and
contract research and development company. Interpro performed (through
December 1, 1999) key steps in our depleted zinc manufacturing process. The
acquisition was made to assure future availability of this critical
manufacturing technology, and to provide an infrastructure platform for
performing value-added processing of other isotopes. Interpro has also jointly
developed new, lower-cost technologies to enable its historical customers to
better meet the various metallurgical and mineral processing needs of their
customers. In connection with the acquisition, we issued 353,982 shares of our
Common Stock (valued at $708,000) in exchange for all of the outstanding shares
of Interpro. We accounted for the acquisition as a purchase.
On May 1, 2000, we substantially reorganized Interpro to focus on one
specific application: the recovery and recycling of zinc metal from various
sources including, galvanized steel scrap, electric arc furnace dust, and brass
scrap. We chose this course of action for two reasons. First, we believe the
market potential for this, and related processes, is significant. Second, the
profound and lengthy slump in the mineral processing and mining industries has
significantly eroded Interpro's historical customer base. However, we will
continue to meet the demands of a few remaining customers through various
sub-contractor relationships. We will also keep the physical infrastructure in
place at our Golden location to allow a reentry into Interpro's historical
markets, if market conditions warrant. Currently, we are using a significant
portion of this infrastructure in our zinc recovery and recycling project.
CHEMOTRADE GmbH
Effective June 1, 1998, we acquired all of the outstanding shares of
Chemotrade GmbH, 75 percent of the outstanding shares of Chemotrade Leipzig GmbH
and six (6) percent of the outstanding shares of IUT (collectively
"Chemotrade"). All three companies are located in Germany. Chemotrade GmbH is
located in Dusseldorf, Chemotrade Leipzig GmbH is located in Leipzig, and IUT is
located in Berlin. Two common shareholders owned all three companies' shares
that we purchased. All three companies continue to be engaged in the
distribution, development and manufacture, of stable and radioactive isotopes.
We paid the previously unaffiliated former owners of Chemotrade $855,000 in
cash, 357,730 restricted shares of our Common Stock valued at $894,000, and
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two interest bearing notes, one for $924,000 which was paid in September 1998,
and a second note for $826,000 which was partially paid in June 1999, and the
balance was paid in December 1999.
The purchase agreement provides for the selling shareholders to receive
additional consideration in the event pretax earnings of $467,000 (DM 1,000,000)
are achieved for the year ending April 30, 2001. The maximum additional
consideration that can be earned is $234,000 (DM 500,000). Any additional
consideration will be recorded as additional goodwill.
BUSINESS THAT WE SOLD
On December 1, 1999, we sold our depleted zinc business to Eagle-Picher
Technologies, LLC, Cincinnati, Ohio, ("Eagle-Picher") for $8.2 million,
including $1.5 million to be paid over a period of three years. Eagle-Picher's
obligation to pay the final $1.5 million is subject to certain contingencies. We
received cash of approximately $6.7 million from Eagle-Picher at the closing, of
which approximately $1.2 million was used to pay certain accrued liabilities.
The Agreement executed between us and Eagle-Picher also provides for
Eagle-Picher's sale to us of 200 kilograms of silicon-28 in consideration for a
forty-two (42) month Warrant grant to Eagle-Picher for the purchase of 4,000,000
shares of our Common Stock at a purchase price of $3.75 per share. The Warrant
is subject to a registration rights agreement. Eagle-Picher exercised the
Warrant in March 2000 under a "net-exercise' provision entitling it to receive
3,130,435 shares of Common Stock. These shares are subject to a prorated
reduction to the extent Eagle-Picher does not deliver the required 200 kilograms
of silicon-28 during calendar year 2000.
Related to, but separate from, the sale of the depleted zinc business, we
contemporaneously signed a ten-year Supply Agreement by which we will have the
exclusive right to purchase quantities of isotopically pure silicon-28,
silicon-29, and silicon-30, and a non-exclusive right to purchase quantities of
isotopically pure carbon-12 and carbon-13 produced by Eagle-Picher from its
Oklahoma-based facilities. As partial consideration for the exclusivity
provision, we agreed to pay Eagle-Picher a fee equal to 3.0% of the net revenues
from all sales made by us of products incorporating enriched silicon isotopes
supplied by Eagle-Picher. The ability of Eagle-Picher to produce isotopes
meeting the specifications of the Supply Agreement is contingent upon
Eagle-Picher successfully beginning production of silicon-28. As of June 30,
2000, Eagle-Picher has not delivered any silicon-28. Unanticipated problems in
bringing their production facility online are the reasons expressed by
Eagle-Picher for this delay. Eagle-Picher's management has assured us that they
will meet their production requirements.
COMPANY STRATEGY
We believe that our strength is our ability to bring the necessary resources
together to identify, evaluate, develop, engineer, and successfully
commercialize applications for stable and radioactive isotopes, and value-added
products manufactured from these isotopes. This is evidenced by management's
experience (at Isonics and in prior employment) in developing depleted zinc from
what was initially a cost prohibitive concept to a successful commercial
product. The worldwide market for depleted zinc is now one of the largest for a
stable isotope product, exceeding $10 million per year in sales worldwide.
We believe we have created a product development model that can serve as a
basis for our current and future expansion. To capitalize on the commercial
opportunities that have been identified for stable isotopes, we have adopted a
business strategy designed to maximize the value of our technologies, business
development and management resources, while attempting to minimize capital
costs. This strategy involves:
- focusing on development of high value-added products, which we expect to
have a competitive advantage in large or growing markets;
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<PAGE>
- leveraging research and development expenditures through collaborations,
government programs, and corporate and academic partnerships;
- minimizing early capital needs by obtaining stable and radioactive
isotopes through alliances and supply agreements with existing stable and
radioactive 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
Depleted zinc sales historically were our most significant source of
revenues. However, in fiscal 1999, our revenues were generated from a more broad
range of sources, including depleted zinc sales (approximately 35%),
radioisotopes sales (approximately 34%), and other stable isotopes sales
including our newly introduced silicon-28 isotope (approximately 15%). In fiscal
2000, this trend continued as our revenues were again generated from a broad
range of sources, including depleted zinc sales (approximately 21%),
radioisotopes sales (approximately 46%), and other stable isotopes sales
including oxygen-18 and silicon-28 (approximately 24%). The balance of our
revenues came from the operations of our subsidiary, Interpro (approximately 16%
in FY 1999 and 9% in FY 2000). Interpro performs metallurgical and mineral
processing contract research and process analysis test work.
Because we sold our depleted zinc business in December 1999, depleted zinc,
which was a significant source of revenues in both fiscal 2000 and fiscal 1999,
will cease to be a source of revenues in fiscal 2001, and subsequent fiscal
years. Additionally, effective May 1, 2000, we reorganized Interpro. Interpro
will now focus exclusively on developing a new technology to recover and recycle
zinc metal from various sources including galvanized scrap steel. We do not
anticipate any revenues from Interpro in fiscal 2001. However, we believe the
revenue potential in subsequent years is significant.
ZINC RECOVERY AND RECYCLING BUSINESS OPPORTUNITY
We believe a business opportunity exists to develop an economic zinc
recovery and recycling technology, which can capture the full value of zinc in
waste products and sell high purity zinc metal in response to the increasing
demand for this metal. The recovery and recycling technology that we are
developing avoids most of the disadvantages of conventional processes; is
applicable to a wide range of zinc-bearing scrap, dust, and sludge; and may
generate additional revenue by enhancing the value of the associated materials
in other zinc-bearing waste streams.
Zinc metal is the fourth most widely used metal in the world today (after
iron, copper and aluminum). Zinc's primary use is galvanizing, a process where
zinc is used to form a protective coating on steel. Zinc along with copper, are
the two primary components in brass. Zinc is also used in die-casting alloys,
chemicals, and pharmaceuticals, and is used to make coins and batteries. Zinc is
an essential element for most living organisms: in mammals it promotes healthy
growth, and it is an important nutrient for many cultivated plants.
Because of these diverse applications zinc tends to be dispersed in usage,
and therefore, is probably the least recycled primary metal. However, the demand
for zinc has shown steady growth, and this demand has been principally met by
primary production (mining and refining). The world production of zinc metal is
currently seven million tons per year, which is sold for approximately $1,100
per ton--an annual market of approximately $7.7 billion. Between 15% and 30% of
this amount is produced by recycling, primarily from zinc die-castings. The
United States uses 660,000 tons per year ($726 million) of zinc metal for
galvanizing while the world consumption for galvanizing is estimated at
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1.65 million tons ($1.8 billion). Over the past twenty years the increase in
galvanizing consumption world-wide has been approximately 3.4% per year.
Corresponding increases in quantities of zinc associated with scrap are
apparent, particularly in materials being recycled to steel plants.
During the course of its contract research and development activities,
Interpro was introduced to a patented technology using chlorine gas to recover
and recycle zinc from galvanized steel scrap. At high temperatures (600 to 800
degrees Centigrade), chlorine reacts with the zinc coating (galvanizing) on
steel to form a zinc chloride vapor. The vapor is collected and processed to
produce pure metallic zinc for sale, and chlorine for sale or reuse in our
recovery process.
We believe that the new technology has a number of benefits compared to
conventional zinc scrap recycling processes:
- it can be applied to a variety of zinc-bearing waste materials in addition
to galvanized steel scrap;
- it enhances the value of the associated materials (zinc-free steel is much
easier and less costly to recycle);
- it can use waste plastic (as a source of chlorine and heat) that would
otherwise be sent to a landfill;
- it recovers chlorine for sale (to make more plastic, for example) or reuse
within our process; and
- the final product is high purity metallic zinc which can be sold to any of
the current zinc markets identified above.
In addition, our preliminary economic evaluations indicate that zinc can be
recovered and recycled by this technology at a lower unit cost than current
primary production (mining and refining of zinc-bearing ores).
Current zinc recycling processes generally cannot produce high purity zinc
metal. One reason is that chlorine, which is detrimental to the commonly used
zinc refining process, is often present in zinc-bearing dusts and residues.
These materials require an alternative recovery and recycling process. In
addition, zinc has a low boiling temperature compared to other metals.
Therefore, in high temperature processing, zinc frequently concentrates as a
fume or dust along with other volatile impurities. Hence, recycled (secondary)
zinc is often used only to produce zinc chemicals, plant nutrients, and impure
zinc oxides. Impure zinc oxides are also sold to primary zinc refiners, but at a
considerable discount.
The original concepts for this new technology were devised and patented by
Professor Derek Fray of the Department of Materials Science and Metallurgy at
the University of Cambridge, Cambridge, England. We are conducting an intensive
program to confirm that the processes described in the patents can be performed
at a larger scale, in both batch and continuous modes, in our laboratories and
pilot plants. We are now negotiating with Professor Fray, and other parties, for
an exclusive license to develop and use this technology in North America and
Europe. As our development program progresses, we plan to file applications for
new patents, where appropriate, to protect our position in regard to this
technology.
It is our intention to develop this technology, using our current facilities
at the appropriate pilot plant level of operation, and then use the anticipated
results of the pilot plant program (if successful) to attract strategic
investors in this technology. It is our intention to sell, spin-off or otherwise
divest this business to one or more strategic investors. While we believe the
economic potential of this, and related technologies, is significant, this line
of business is not consistent with our core isotope business. We believe this
approach will maximize shareholder value both today and in the long-term.
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LIFE SCIENCES PRODUCTS
For the past several years, we have supplied stable isotopes in elemental
and simple compound forms for use in life science applications. With the
acquisition of Chemotrade in 1998, we expanded our product offerings to include
radioisotopes. We will continue selling our current stable and radioactive
isotope products, develop new products along similar lines, and expand our
product offerings by vertically integrating. We also intend to expand our own
isotope production capabilities. In addition, we intend to expand our
value-added manufacturing capabilities. A brief summary of existing and emerging
life sciences products follows:
STABLE ISOTOPE LABELED COMPOUNDS. Stable isotope labeled compounds
("SILCs") are created by incorporating known quantities of certain stable
isotopes of carbon, nitrogen, hydrogen (deuterium), oxygen and other elements,
into thousands of different chemical compounds. SILCs allow researchers to
investigate living systems, determine the chemical structure of important
biological compounds, design new drugs, and measure extremely low levels of
environmental toxins. We believe that greater availability and lower cost of
stable isotopes, and advances in instrumentation to detect stable isotopes will
continue to increase the demand for SILCs.
Our products are typically simple compound SILCs that are used by our
customers to synthesize more complex and higher-value SILCs. We primarily market
deuterium, carbon-13 and nitrogen-15 for this purpose. In the near term, this
strategy of supplying simple compound SILCs will continue. Examples of existing
and emerging applications for these products include:
METABOLIC STUDIES. Increasingly, studies of new drugs are performed with
isotope-labeled drugs to facilitate research on metabolism, distribution,
mode of action, and elimination. The FDA may eventually require the
isotope labeling of all new drugs for investigational use during some or
all phases of pre-clinical and clinical evaluations of these drugs.
However, there can be no assurance that the FDA will make this mandate in
the near future, if at all.
RATIONAL DRUG DESIGN. Historically, drugs were designed using a screening
process in which prior experience was employed to determine what
chemicals might work to treat a certain condition, and then tests on
subjects were performed. Today specialized instrumentation is routinely
available to determine the chemical structure of large molecules,
including the human proteins and enzymes that a drug will be designed to
affect. This approach is known as rational drug design. We believe that
this new instrumentation, combined with sophisticated SILCs, will prove
beneficial in determining the chemical structure of human proteins and
enzymes. We believe rational drug design will require an increasing
supply of stable isotopes.
DIAGNOSTIC BREATH TESTS (DBTS). This new class of non-invasive diagnostic
testing is gaining worldwide acceptance. It uses stable isotope labeled
compounds to detect a wide range of human abnormalities, particularly digestive
disorders such as ulcers. The FDA has approved one test and similar approvals
exist in Europe. Reimbursement by health insurance providers for the test has
led to increased growth in demand that is expected to accelerate as regulatory
approval is awarded in other countries (such as Japan). Many other tests based
on the same principles are in various stages of development. We have supplied
stable isotope raw material to companies developing various DBT chemicals. While
this is not currently a large source of revenues, we continue our sales and
marketing efforts in order to monitor the development and direction of this
potentially very large market.
The DBT business is subject to extensive government regulation. The products
and instruments in which our products are 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 usage. We believe that the production and marketing of DBTs are
also subject to similar regulatory controls in the foreign countries where we
would possibly seek to market
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products. Consequently, new products cannot be commercially introduced until
after approval (usually several years), and there can be no assurance that the
products will be approved for use.
BIOMEDICAL RESEARCH. Traditionally, numerous aspects of the many phases of
drug development have been carried out using radioisotope-labeled versions of
promising compounds. Isonics supplies precursor compounds labeled with
radioisotopes, such as carbon-14 and phosphorous-33, to manufacturers who
incorporate them into more complex radioisotope labeled compounds for use in
basic research and pharmaceutical development. The carbon-14 precursors are
produced under contract by IUT, a company in which we hold a minority interest.
While rational drug design and stable isotope labeled compounds represent
competition for this more traditional approach to research and drug development,
we believe a combination of increasing drug development activity and the large
body of data and experience will ensure a strong market for these products. It
is important to note that we also supply some of the basic stable isotope
products used to make the compounds of these competing technologies.
MEDICAL IMAGING AND THERAPY. Radioisotopes have been used for years in the
diagnosis and treatment of many medical conditions in humans. The trend in these
two areas has been towards increasingly more specific chemicals, which, after
labeling with the radioisotope and injection into the patient, quickly
concentrate at the disease site(s). In theory, the appropriate choice of
chemical and radioisotope labels would allow disease detection and stage
determination; followed by therapy selection, administration, and monitoring.
Several classes of chemical compounds ranging from monoclonal antibodies to
peptides, most recently, are being developed, tested and approved for use in the
detection, and eventually, the treatment of many diseases.
We currently supply stable isotopes of thallium, zinc, cadmium, xenon,
strontium and many others that are routinely used in a variety of medical
imaging and therapy applications. These are used in their enriched stable form,
such as Xenon-129, or converted to a specific radioactive isotope in a cyclotron
or nuclear reactor. We believe that with the increased supply of new isotopes,
and the ongoing development of highly specific biochemical therapies, this
market segment represents a major growth opportunity.
POSITRON EMISSION TOMOGRAPHY ("PET"). This very powerful nuclear medicine
imaging technology has been available for over 25 years, but because of its
complexity and cost, had been limited primarily to a research role. Technology
and infrastructure improvements have reduced the cost and complexity of
performing PET studies. PET's unique ability to diagnose multiple metabolic
abnormalities, particularly cancer, has resulted in recent approvals by the FDA
and favorable reimbursement levels by Medicare, Medicaid, and third party
insurers. Similar approvals are now common in Europe and parts of Asia though
reimbursement levels vary. PET studies are growing at rates of approximately 20
to 50% annually worldwide.
Oxygen-18, a rare stable isotope of oxygen, is the enriched stable isotope
used to produce the radioisotope, fluorine-18, which is the source of the
positrons tracked by the PET imaging equipment. Currently demand for oxygen-18
is greater than the supply. To address the demand for oxygen-18, we announced in
May 1999, a multi-year joint cooperation agreement with Global Scientific
Technologies in Russia. We believe we are now the second largest producer of
oxygen-18 in the world. Our oxygen-18 production capacity continues to increase
as a result of production facility additions and a novel program we introduced
in fiscal 1999 that recycles "used" oxygen-18.
In August 2000, we announced that we signed a five-year agreement with the
Ukraine-based Concern Stirol and Medeleev Institute of Moscow, Russia, for the
production, marketing and sale of oxygen-18.
Although there is currently little FDA oversight affecting the raw material
suppliers, it is likely FDA oversight will increase in the next few years. It is
not immediately obvious what the implications may be for our production partner
and us.
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BRACHYTHERAPY. Cancer therapy continues to evolve to more effectively
target specific types of cancer. Radioisotope labeled compounds promise great
advances in focused treatment, but are still well in the future. Today, external
beam radiotherapy and chemotherapy are the predominant technologies used in
cancer treatment. However, another technology, brachytherapy, is emerging in the
treatment of specific cancers such as prostate cancer.
In brachytherapy, small sealed sources (seeds) are inserted directly into
the tumor using a variety of minimally invasive surgical methods. The
radioisotope, which is placed inside the seed, is selected and manufactured to
ensure that only the cancerous tissue immediately adjacent to the implanted seed
is irradiated. This minimizes the irradiation of nearby healthy tissue, a common
adverse side effect, which occurs with external beam radiotherapy. Three primary
criteria govern the selection of the radioisotope: half-life, type of radiation
emitted, and strength of the radiation emitted. The half-life and form of
radiation emitted is dictated by the radioisotope selected. Strength of the
radiation is determined during the manufacturing process.
Several companies (Nycomed-Amersham, Theragenics, North American Scientific,
International Isotopes, Inc., and others) already offer or have announced plans
to offer brachytherapy products for the treatment of certain forms of prostate
cancer. Studies continue in the applicability of this technique for other tumor
types, including some breast cancers. We currently supply several companies with
radioisotopes (or stable isotope targets to be made into radioisotopes) for this
application. We believe this market represents one of the largest growth
opportunities for radioisotopes. It also represents a significant opportunity to
provide value-added products/services in the form of manufactured subcomponents
such as the seeds.
CALIBRATION STANDARDS. There are many medical devices that measure levels
of radiation in patients. These devices all need to be calibrated using
standards of known radiation strength and type, in order to ensure their
accuracy. These standards are made from radioisotopes such as cobalt-57 and
gadolinium-153. We supply many of the stable isotope target materials, as well
as radioisotopes to many of the manufactures of these standards. We also
distribute the finished products of one of these manufacturers in certain
regions of Europe. Additionally, we distribute the source standards products of
a major manufacturer that recently announced the sale of its industrial source
business. It is not clear what the future implications of this transaction may
be on our revenues.
Medical equipment calibration standards is one of the largest markets for
radioactive source standards. These medical devices are found in the nuclear
medicine departments at thousands of hospitals around the world. The continued
growth in the numbers and complexity of nuclear medicine imaging equipment,
especially PET, ensure growth in the demand for these radioisotopes.
PRODUCT TAGGING AND STEWARDSHIP APPLICATIONS
Thousands of chemicals used everyday in our society are fungible. That is,
these chemicals cannot be differentiated from those produced by another
manufacturer, or even by the same manufacturer on a different day. These
chemicals, and the products made from them, may be identified and distinguished
from each other, by tagging with stable isotopes of carbon, nitrogen, oxygen,
hydrogen, and other elements.
Alternative tagging methodologies are in use today. These methods typically
involve the addition of extraneous materials such as dyes, exotic chemical
compounds, or radioactive compounds. We believe that adding these extraneous
materials can sometimes detract from the performance of the product, or create
undesirable side effects. Creating the product with chemicals made with specific
ratios of stable isotopes results in a unique, easily identified tag. A tag that
is also chemically identical--ensuring comparable performance with no
undesirable side effects.
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To date, we have not had significant demand for our stable isotopes for
these applications. We believe the opportunity exists for demand to develop in
many areas. One example is high-value, low-volume products such as perfumes.
Imitation perfumes, made by other manufacturers, but sold as the original to
unsuspecting consumers, are not uncommon. If the original perfume has been
tagged using stable isotopes, then imitations can be easily identified.
Another example is where information regarding the manufacture and
distribution of a chemical is important. Ammonium nitrate is a common
fertilizer. However, when combined with fuel oil, it becomes a powerful
explosive. Knowing by whom, when, and where the Ammonium nitrate was made, and
to which distributor it was sold, can be very useful information if authorities
need to investigate the unlawful use of such an explosive. Tagging the Ammonium
nitrate with stable isotopes would provide that information, even after the
explosive was used, as the isotopic ratios are unaffected by an explosive
reaction. These, and other product tagging and stewardship applications may also
develop over time.
INDUSTRIAL APPLICATIONS AND BASIC RESEARCH.
CALIBRATION STANDARDS (NON-LIFE SCIENCES). In addition to the life sciences
calibration standards market, numerous industrial applications also use
radiation, and/or measure radioactivity levels. As with life sciences standards,
we supply many of the stable isotope target materials and radioisotopes used in
these applications. As mentioned above, we also distribute the source standards
products of a major manufacturer that recently announced the sale of its
industrial source business. It is not clear what the future implications of this
transaction may be on our revenues.
BASIC RESEARCH. There is still much scientists do not know about
radioactive materials, and how to minimize the dangers associated with these
materials. We provide rare radioisotope standards to entities that study these
issues. To date this has been a significant source of revenues.
ISOTOPICALLY PURE SEMICONDUCTOR MATERIALS
The majority of semiconductor devices built today use natural silicon as the
starting material. Silicon has many desirable characteristics as compared to
other semiconductor materials, and the semiconductor industry has invested
billions of dollars to improve and optimize their manufacturing technologies for
silicon-based devices. Devices fabricated on single crystal silicon have
performance characteristics that are governed by the electrical and physical
characteristics of silicon including: carrier mobilities, effective mass of the
carriers, energy band-gap, electrical conductivity and thermal conductivity.
Carrier mobilities, for example, govern signal transit times and thus place a
limit on device speed. Thermal conductivity governs power dissipation, which, in
turn, places an upper limit on the packing densities achievable for devices on a
chip, or the amount of power that can safely be generated in the circuit without
significantly degrading circuit performance.
The semiconductor industry trend of adding more transistors on a chip to
increase performance, and shrinking the size of transistors to both increase
performance and decrease costs, has resulted in increased power requirements and
significantly higher operating temperatures. Nowhere is this trend more evident
than in microprocessors. Historically, the 80286, 80386, and 80486 generations
of microprocessors typically did not need external heat sinks to remove heat and
function properly. High operating temperatures and thermal management were not
issues outside of mainframe or workstation computers.
Beginning with the Pentium-Registered Trademark-,
Sparc-Registered Trademark-, and Alpha-Registered Trademark- microprocessors,
heat sinks and fans became necessary to control the higher operating
temperatures. According to the Semiconductor Industry Association (SIA), when
the microprocessor's power requirements exceed approximately 110 watts, heat
sinks and fans will no longer be adequate and active cooling (refrigeration)
will be required. Most of the major computer companies have already demonstrated
cryogenically cooled computers that operate
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up to one-third faster than their conventionally cooled counterparts. These
cryogenic cooling devices can cost upwards of $400 per microprocessor.
There is a significant body of research, generated over the last twenty
years, supporting the contention that isotopically pure semiconductor materials
have superior thermal conductivity properties when compared to natural,
multi-isotopic materials. Additionally, we believe this solution is compatible
with virtually every other heat management solution currently implemented, or
envisioned, to date, and it does not require changing a single device design or
manufacturing process because pure silicon-28 is essentially
identical--chemically and physically--to natural silicon. SEE "RESEARCH AND
DEVELOPMENT."
Silicon has three naturally occurring stable isotopes: silicon-28 (92%
natural abundance), silicon-29 (5%) and silicon-30 (3%). In 1997, we began a
program to introduce 99.9% pure silicon-28 as a superior substitute material, to
natural silicon, for the manufacture of semiconductor devices. Our first efforts
toward developing isotopically pure semiconductors involved securing the
intellectual property rights to commercialize silicon-28 and similar materials,
which culminated in our acquiring exclusive rights to two Yale University
patents. SEE "PATENTS AND PROPERTY RIGHTS."
We then began acquiring sufficient quantities of pure silicon-28 to make
epitaxial wafers. These wafers have been sold or given to numerous manufacturers
and academic institutions to perform additional tests to validate previous
findings, and to confirm the substitutability of pure silicon-28 for natural
silicon in their manufacturing processes. These tests have supported our belief
that pure silicon-28 is not only a viable substitute material, but that the
anticipated thermal conductivity property improvements are significant.
The next step in our development program is to make bulk wafers of pure
silicon-28. However, the manufacture of bulk wafers requires substantially more
material than we could economically acquire from our existing suppliers. Our
efforts to secure an unlimited, U.S.-based, economical supply of silicon-28
culminated with the December 1999 signing of an agreement with Eagle-Picher to
provide silicon-28 to us on an exclusive basis. The initial 200-kilogram
delivery is scheduled for shipment by December 2000. SEE "BUSINESS THAT WE SOLD"
AND "MANUFACTURING AND SUPPLY."
Converting silicon-28 from the chemical and physical form we receive from
our suppliers into epitaxial wafers required us to use several contract
manufacturers. We believe that we can perform many of these processes ourselves
at a lower cost and with greater quality assurance. Therefore, we are building a
processing facility in Golden, Colorado to perform many of these processes.
Equipment was ordered and construction was underway as of April 30, 2000, and
this facility is expected to be complete sometime before April 2001. We will
then be able to manufacture sufficient quantities of pure silicon-28 silane gas
to produce bulk wafers, in addition to more epitaxial wafers, to complete our
development efforts.
Our agreement with Eagle-Picher provides that they will supply to us all
quantities of silicon-28 that they produce from their pilot plant at previously
agreed upon prices. Their isotope separation process is such that, if
Eagle-Picher's production is successful, it is easily expanded at their facility
in Oklahoma. Additionally, we have worked with Silex Systems, Ltd., North Ryde,
Australia, ("Silex"), who is developing a different silicon isotope separation
process. We believe these companies, and others, will be able to supply all the
silicon-28 that we may require, although none of these facilities have yet
commenced commercial production.
We also believe that once sufficient orders have been placed for pure
silicon-28 bulk wafers, that one or more wafer manufacturers will convert one or
more of their facilities to produce such wafers. Therefore we intend to focus on
developing and expanding the production processing steps that precede wafer
manufacturing. The expertise that we expect to develop running our
developmental-scale facility should prove sufficient for this purpose.
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We anticipate very little revenue from silicon-28 based products in fiscal
2001, as we are still developing this business. However, we project significant
revenues in subsequent periods if we are able to successfully complete our
development efforts, and market silicon-28 based products. We have also begun
examining other semiconductor materials including gallium. As with silicon,
gallium has multiple, naturally occurring stable isotopes. Our development
program for gallium, which we began in April 2000, is similar to the one
outlined above for silicon-28. At this time we have begun identifying sources
and procuring small amounts of isotopically pure gallium-69 and gallium-71.
ISOTOPICALLY DEPLETED ZINC
The U.S. Nuclear Regulatory Commission requires that nuclear power plants
reduce the radiation exposure of the nuclear power plant workers to levels as
low as reasonably achievable. Also of significant concern is the cracking of
nuclear power plant structural materials because of 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 ensure that these safety margins are not compromised. However,
if not controlled, cracking can require extremely costly repairs or, if not
reparable, could result in the 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 showed that the
addition of a soluble form of zinc to the nuclear reactor coolant water reduces
plant radiation fields, and in some cases, substantially mitigates
environmentally induced cracking because zinc acts as a corrosion inhibitor for
the stainless steel and other metal components of the nuclear reactor systems.
Natural 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 corrosion-resistance benefits are still obtained while the detrimental
side effect is essentially eliminated. This product is known as isotopically
depleted zinc. In calendar year 1999 isotopically depleted zinc was used by 35
of the approximately 95 Boiling Water Reactors (or "BWRs") in the world
including 29 of the 35 BWRs in the United States.
Effective December 1, 1999, we sold our depleted zinc business to
Eagle-Picher. SEE "BUSINESS THAT WE SOLD."
RESEARCH AND DEVELOPMENT
Consistent with our product development strategy, we are seeking to identify
and evaluate a variety of new stable and radioactive isotope products and
potential markets for economic and technical feasibility. We will also continue
to fund research and development to improve technologies for isotope separation
and materials processing technologies. During fiscal 2000 and 1999, research and
development expenses were $1,224,000 and $1,155,000, respectively.
In fiscal 2000, we focused our efforts on two primary projects. The first
project is the production of high chemical-purity silicon-28 silane gas and
silicon-28 epitaxial wafers. The second project is the recovery and recycling of
zinc from various sources such as scrap metals, including galvanized steel and
brass, and electric arc furnace dust.
In fiscal 1999, we focused our efforts on three primary projects. The first
was procuring silicon-28 and producing silicon-28 epitaxial wafers. The second
was developing new, lower-cost carbon-13 separation methods. The third was
development work to enhance our depleted zinc processing capabilities. The
silicon-28 project was successful. Work in this area continued throughout fiscal
2000, and is continuing through the current (2001) fiscal year. The carbon-13
separation project did not produce the desired results and was ended in
February 1999. The depleted zinc project was completed in November 1998.
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SILICON-28. To expand our capacity and to ensure product quality, we have
begun building our own silane gas facility in Golden, Colorado. We believe this
facility will be capable of processing isotopically pure silicon-28, to meet our
requirements for the next few years as we continue our planned development
program for silicon-28 semiconductor materials. To date, unaffiliated
contractors have performed this work for us on a sub-contract basis. However, we
have attempted to retain, to the maximum extent possible, ownership of any
intellectual property resulting from such work.
In fiscal 2000, we funded two new university research programs and
participated in two others. The first funded program is at Southern Methodist
University, Dallas, Texas, which will measure the thermal conductivity of
silicon-28 thin films with various electrical dopants and model the effect of
epitaxial layer thickness on the temperature of silicon and gallium arsenide
transistors. The second funded program is at North Carolina State University,
Raleigh, North Carolina, which will model and build power semiconductor devices
and determine the effect of silicon-28 epitaxial layers on the device's
temperature distribution.
Additionally, we entered into a Cooperative Research & Development Agreement
("CRADA") with Lawrence Berkeley Laboratory, Berkeley, California, to study the
properties of various silicon isotopes. This CRADA is part of a U.S. Department
of Energy ("DOE") program to re-deploy Russian nuclear weapons technology to
commercial applications. Delays within the DOE have pushed the start of this
program to our fiscal year 2001.
We also supplied silicon-28 silane gas to ATMI, Inc., Danbury, CT, and will
be participating in their Office of Naval Research ("ONR") funded program to
investigate isotopically pure silicon carbide.
During fiscal 1999, we signed a joint research and development agreement
with Silex Systems, Ltd. The agreement calls for Silex to partially fund some of
our development activities and for Silex to assess the feasibility of building a
silicon isotope separation plant using Silex's patented laser isotope separation
process. These agreements represent the launch of our efforts to ensure a large
supply of silicon isotopes at a reasonable cost to support the large-scale
manufacture of isotopically pure silicon wafers.
Additionally, we signed an agreement with Voltaix, Inc., North Branch, New
Jersey, ("Voltaix") to be the distributor of our products for the ion
implantation industry. The first product being sold in accordance with the
Voltaix agreement is silicon tetrafluoride enriched in the silicon-29 isotope.
The isotopically enriched materials allow higher beam currents and higher
productivity than the natural silicon tetrafluoride currently used in the
industry today.
ZINC RECOVERY AND RECYCLING. During the course of its contract research and
development activities Interpro was introduced to a patented technology using
chlorine gas to recover and recycle zinc from galvanized steel scrap. We have
dedicated the staff and facilities of Interpro to focus primarily on this
project. The original concepts for this new technology were devised and patented
by Professor Derek Fray of the Department of Materials Science and Metallurgy at
the University of Cambridge, Cambridge, England.
We believe this new technology has numerous benefits compared to
conventional zinc scrap recycling processes including:
- it can be applied to a variety of waste materials in addition to
galvanized steel scrap;
- it enhances the value of the associated materials (for example zinc-free
steel is much easier and less costly to recycle);
- it can use associated waste plastic, as a source of chlorine and heat,
that would otherwise be sent to a landfill (for example recycling junked
automobiles which typically contain forty or more pounds of PVC, a
plastic, and several hundred pounds, or more, of galvanized steel);
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- it recovers chlorine for sale (for example to make more plastic) or reuse
within our process; and
- the final product is high purity metallic zinc, which can be sold to any
of the current zinc markets identified above.
It is our intention to develop this technology, using our current facilities
at the appropriate pilot plant level of operation, to attract strategic
investors in this particular technology. It is our intention to sell, spin-off
or otherwise divest this business to one or more strategic investors. While we
believe the economic potential of this, and related technologies, is
significant, this line of business is not consistent with our core isotope
business. We believe this approach will maximize shareholder value both today
and in the long-term.
As of June 30, 2000, we had completed numerous bench-top tests, and were
readying our facility and equipment to begin a series of pilot plant level,
multi-day test runs.
PATENTS AND PROPRIETARY RIGHTS
We rely primarily on a combination of trade secrets, confidentiality
procedures and contractual provisions to protect our technology. Despite our
efforts to protect our rights, unauthorized parties may attempt to copy aspects
of our products or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our technology and products is difficult. In
addition, the laws of many countries do not protect our rights in information,
materials and intellectual property that we regard as proprietary to which we
regard as great an extent as do the laws of the United States. There can be no
assurance that our means of protecting our rights in proprietary information,
materials and technology will be adequate or that our competitors will not
independently develop similar information, technology, or intellectual property.
We currently have no patents in our own name and have not filed any patent
applications. We have rights to several isotopically engineered innovations
regarding electronic and optical materials, which we believe may be patentable.
Ongoing work in the area of isotope separation by chemical means may also lead
to patentable inventions.
In April 1999, we announced that we had entered into an exclusive licensing
agreement with Yale University that entitles us to exclusive intellectual
property rights to patents covering semiconductor devices derived from
isotopically engineered materials. The license requires payment by us of a
royalty based on a percentage of our, or our sublicensees', net sales of
products derived from technology covered by the Yale patents (#5,144,409, dated
September 1, 1992, and #5,442,191, dated August 15, 1995).
COMPETITION
The markets for our products and proposed products are highly competitive,
and we expect that competition will continue and likely increase as markets grow
and new opportunities are realized. Some of our current competitors, and many of
our potential competitors, are larger and have significantly greater financial,
technical, marketing and other resources than we do. Some of our competitors may
form partnerships or alliances with large pharmaceutical or electronics
companies, with the resulting entity possessing more market strength than we
have. Our competition varies greatly depending on which product or industry is
considered.
SILCS AND DBT MATERIALS. We have several larger and numerous smaller
competitors in the markets for our SILC products. We will have additional
competitors if we offer breath test diagnostic products (DBTs), and additional
SILCs in the future. Two of these companies, Cambridge Isotope
Laboratories Inc., and Isotec, Inc., have their own isotope separation
facilities, while all of our competitors produce some combination of SILCs and
DBT substrates. We are aware of at least one company in the United States who
has received FDA approval for a carbon-13 Urea Breath Test
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("UBT"), a specific type of DBT. Several companies in Europe have also received
regulatory approval for DBTs. Our principal current competitors and potential
competitors also include: MassTrace, euriso-top, Aldrich Chemicals, Icon
Services, Omicron, C/D/N Isotopes, and Martek Biosciences. We have in the past,
and may in the future, sell products to, or purchase products from, these
companies.
SEMICONDUCTOR MATERIALS. Because of the early stage of the semiconductor
materials opportunities, we have not identified significant competitors in these
markets. Numerous companies in the United States and throughout the world are
currently manufacturing semiconductor materials and are known to be conducting
research and development to improve the thermal conductivity and other
beneficial characteristics of semiconductor materials. Many of these companies
are larger than Isonics and have significantly greater financial resources
available. Given the potential size and importance of these new potential
markets, we anticipate that substantial additional competition will emerge if
these markets develop. We believe one of the most important benefits
isotopically pure semiconductor materials are expected to provide is higher
thermal conductivity. This higher thermal conductivity helps alleviate the heat
dissipation problem in high-power density semiconductor devices. Many mechanical
methods have been employed to date including fans, heat sinks and refrigeration
units to dissipate heat. These alternative methods, as well as others which have
come to our attention, we believe without exception, will prove to be
complementary to our materials-based solution, and the benefits will be
additive.
ZINC RECOVERY AND RECYCLING. Over the last twenty years, many organizations
have attempted to recover and recycle zinc from galvanized steel and brass
scrap. Many of these organizations are larger than Isonics and have
significantly greater financial resources available. These methods have proven
either cost ineffective, or difficult to implement, because of the complex
metallurgy involved. Additionally, primary zinc from ore deposits around the
world continues to be relatively inexpensive and plentiful. These companies are
also larger than Isonics and also have significantly greater financial resources
available. We believe we will not only have to produce significant cost savings,
versus primary zinc, we will also have to demonstrate significant benefits of
our proposed technology to the steel industry. Our research and development
efforts in this area are in their preliminary stages and we can offer no
assurance that the will be successful.
DEPLETED ZINC. During fiscal 2000 (through November 1999), we were among
the leading producers of depleted zinc. We also believed that other entities or
persons were expected to begin producing depleted zinc in substantial quantities
in the near future. Several such possible producers have adequate technical and
financial resources to become viable competitors in the near future. In
particular, Siemens has indicated that it has a relationship with
Ultracentrifuge Netherlands ("UCN") and General Electric Corporation has
indicated that it may establish a second Russian supply source. UCN also
competes with us in the markets for medical target isotopes. This competitive
environment, along with many other factors, contributed to our decision to sell
our depleted zinc business to Eagle-Picher Technologies, LLC, in December 1999.
SUMMARY. Many of the areas in which we do, or intend to, compete are
rapidly evolving. There can be no assurance that an existing or potential
competitor has not already developed, or may develop, a patentable product or
process, which will substantially prevent us from competing in our intended
markets.
We expect to compete primarily on the basis of product performance,
proprietary position and price. Some of our 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.
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MANUFACTURING AND SUPPLY
Consistent with our strategy to effectively utilize capital expenditures and
production facilities, we obtain our isotopes through several multi-year supply
agreements with third parties. To a lesser extent, from time-to-time, we also
obtain stable isotopes from a variety of other isotope sources, primarily
located in Russia, on a spot market basis. We may invest in our own isotope
production facilities in the future upon determining, in our opinion, the
optimum production technology for a given isotope or family of isotopes.
Currently, we obtain substantially all of our isotopes from Russia, Georgia,
Uzbekistan, and other locations within the former Soviet Union. In
December 1999, we entered into a Supply Agreement with Eagle-Picher
Technologies, LLC, for the right to purchase enriched silicon and carbon
isotopes from its facilities in Oklahoma. In addition, Eagle-Picher has an
obligation to provide us 200 kilograms of isotopically pure silicon-28 during
calendar year 2000. According to Eagle-Picher, the first deliveries from the
Eagle-Picher silicon facility are scheduled to begin in the third calendar
quarter of 2000, having been delayed because of typical production start-up
problems.
We entered into a Supply Agreement, dated July 1996, with Techsnabexport, a
Russian government-based foreign trade organization, and an isotope enrichment
plant located in Siberia, Russia (the "Electro-Chemical Plant" or "ECP"). The
ECP is owned by the Ministry of Atomic Energy of the Russian Federation, which
is a cabinet post in the Russian Federation's government. The Supply Agreement
extends through 2001. Under the Supply Agreement, the ECP will produce depleted
zinc and other stable isotopes for us, will allocate its stable isotope
production capacity to us, and will produce other stable isotopes in response to
marketplace demand for those isotopes. Under the Supply Agreement, the specific
terms for each year's production, including pricing terms, are negotiated
between the parties by November 1st of the preceding year. The agreement
provides, among other provisions:
- that the ECP will not sell depleted zinc to third parties located in North
America or to other parties for resale in North America (this, and other
associated sections of the Supply Agreement have been assigned to
Eagle-Picher effective December 1, 1999);
- that as long as the ECP is able to meet all of our requirements for
depleted zinc at prices competitive with other potential suppliers we will
not buy depleted zinc from other third parties located in the Russian
Federation (this, and other associated sections of the Supply Agreement
have been assigned to Eagle-Picher effective December 1, 1999); and
- that disputes arising under the Supply Agreement will be resolved by
arbitration conducted in Sweden under the arbitration rules of the
Stockholm Chamber of Commerce.
The enforceability of the Supply Agreement might be subject to a greater
degree of uncertainty than if the Supply Agreement was with a United
States-based company, and the dispute(s), if any, were to be resolved in the
United States. Additionally, the supply of stable isotopes could be adversely
affected by changes in the political, economic, and military conditions in
Russia. Consequently, our operations could be materially and adversely affected
if: trade between Russia and the United States were interrupted or curtailed; or
we should fail to obtain and maintain all necessary Russian Federation
governmental approvals, and/or hostilities involving Russia should occur.
We have assigned the depleted zinc sections of this Supply Agreement to
Eagle-Picher and we no longer have any rights under those sections. We have
guaranteed performance by Techsnabexport and the ECP to Eagle-Picher. This
guarantee requires Eagle-Picher to pay us $500,000 each year, for three years,
if Techsnabexport and the ECP continue to honor the depleted zinc sections of
this Supply Agreement.
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There can be no assurance that our relationship with the ECP and other
isotope producers in Russia will be successfully maintained. Disruption or
termination of our supply sources could delay shipments by us and could have a
material adverse effect on our business, financial condition and results of
operations. We do not presently maintain political risk insurance but we will
evaluate the desirability and availability of such insurance in the future.
Operations in Russia entail certain other risks, including, among others, supply
disruptions as well as introduction of tariffs and fluctuations in freight
rates. SEE "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION--FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS--OPERATIONS IN
RUSSIA."
The ECP is one of four similar plants, which were designed to supply the
former Soviet Union, and certain other countries, with enriched uranium (low
enrichment for commercial nuclear power plant fuel, high enrichment for military
purposes). Following the accident at the nuclear power plant near Chernobyl,
Ukraine, in 1986, certain Russian nuclear power plants have been shut down
reducing the demand for uranium fuel. In the years since the breakup of the
former Soviet Union, beginning in 1989, the demand for uranium for military
purposes has also declined.
In response to these trends, these processing plants, including the ECP,
have converted, or are considering converting, a portion of their capacity to
processing certain stable isotopes. We believe that additional capacity could be
converted to stable isotope production, if the processing plants decided to do
so. We also believe that these plants have the potential capacity to meet all of
our foreseeable needs for the processing of certain stable isotopes. We believe
that one or more of the other similar enrichment plants may convert part of
their capacity to the production of stable isotopes should market demand
increase substantially. To our knowledge no other organization has a current
contract with these facilities to produce stable isotopes.
Certain facilities elsewhere in the world, including the Oak Ridge National
Laboratory in Oak Ridge, Tennessee, and private and pseudo-governmental
facilities in Great Britain, Germany, The Netherlands and the Republic of South
Africa, have the potential to produce stable isotopes and, in certain cases,
actually do produce these stable isotopes.
To increase capacity, and to geographically diversify our production of
certain isotopes, on December 1, 1999, we entered into a Supply Agreement with
Eagle-Picher Technologies, LLC, for it to supply us with enriched stable
isotopes of silicon and carbon. We have already purchased 200 kilograms from
Eagle-Picher to be delivered during 2000. Eagle-Picher expects to produce these
isotopes from its facilities in Oklahoma. There can be no guarantee, however,
that the facility will be able to produce high-purity isotopes on commercially
reasonable terms. We believe that this relationship with Eagle-Picher may
improve our profitability, and will improve the security of our supply if the
facility performs as expected.
We have historically depended on a limited number of suppliers and
processors for certain manufacturing processes. Although we do have written
agreements with some of our suppliers and processors, we do not have any written
agreements with alternative suppliers and processors. We continue to attempt to
reduce our dependence on our suppliers, but disruption or termination of any of
the sources could occur, and such disruptions or terminations could have at
least a temporary, materially adverse, affect on our business, financial
condition and results of operations. Moreover, a prolonged inability to obtain
alternative sources for processing could have a materially adverse affect on our
relations with our customers. Although our relationship with Eagle-Picher should
provide greater security for our supply of silicon and carbon isotopes if the
facility performs as expected, there can be no assurance that it will in fact do
so.
46
<PAGE>
GOVERNMENT REGULATION
Regulation by government authorities in the United States and other
countries is a significant consideration in the development, production,
distribution, and marketing of our products; and in our 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 some
cases, specific approval to clinically test and commercially distribute such
products must be obtained from numerous governmental authorities. Furthermore,
we are subject to various laws, regulations and requirements relating to such
matters as the import and export of our products, ensuring safe working
conditions, laboratory and manufacturing practices, the use and disposal of
hazardous or potentially hazardous substances used in connection with our
research, development and manufacturing activities. Some of the regulations are
summarized below.
FDA REGULATION
We are not currently subject to any FDA regulation because we do not
currently manufacture any DBTs, drug products, or other medical devices. Our
customers may, in many cases, be subject to FDA regulation. If we, in the
future, test, manufacture, market, distribute, export, or sell diagnostic
products (such as any DBTs) or medical devices, we will also likely be subject
to extensive and rigorous regulation by the United States and other countries in
which we may choose to test, manufacture or market our proposed diagnostic
products. As of the date of this Form 10-KSB, we have not determined those
specific countries, other than the United States, where we might seek regulatory
approvals to market any such products it may develop, though we would likely
seek such approval in certain European countries and Japan. The products we
intend to develop are subject to rigorous pre-clinical and clinical testing and
other FDA approval requirements, and similar requirements in most other
countries.
There can be no assurance that any products developed by us, or other
entities to which we 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 our ability to commercialize our
products and our ability to generate 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.
DIAGNOSTIC MEDICAL DEVICE PRODUCTS
Certain of our contemplated diagnostic products may be 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.
Where there is no existing legally marketed product "substantially
equivalent" to a contemplated product, the sponsor is required to seek marketing
approval of the product by a different process. This process, 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 three-to-five years before
commercial marketing can occur, if the PMA is approved. There can be no
assurance that any future product we develop which is subject to FDA
47
<PAGE>
review will be found to have an intended use and characteristics that would
qualify the product for commercial distribution for clinical use under 510(k)
Pre-Market Notification. Thus, PMAs may be required for some or all of our
future contemplated and proposed products.
We have not developed any product that requires any clearance procedure with
the FDA, and no product is currently under active development. We believe that
any DBT instruments that we may develop in the future will be eligible for
marketing under a 510(k) Pre-Market Notification, if cleared by FDA, but that
the substrate would require approval of a New Drug Application ("NDA"). We
believe that clinical studies would be required to obtain FDA approval of the
510(k)/NDA for the DBT instrument/substrate, and would be conducted under an
investigational device exemption ("IDE") approved by the FDA. An IDE normally
restricts the transfer of an investigational device to a limited number of
institutions, and use to a limited number of investigators. There can be no
assurances that FDA will allow us to conduct such clinical studies or that such
studies will provide the data necessary to obtain the approval of the 510(k)/NDA
for any DBT, or other product, that we may develop, or that the FDA will in fact
provide the necessary approval of the 510(k)/NDA in a timely manner, if at all.
In addition, use of DBTs and other diagnostic products that we may develop
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. Our ability to successfully market diagnostic
products within the U.S. may depend on our 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 us, and our
operations.
DRUG PRODUCTS
We have not yet developed any drug products, as defined by the FDA, and our
research and development efforts for such products are only in the very
preliminary stages. The development and marketing of drugs is highly regulated
by the FDA. Certain products that we may develop may be classified, depending on
their characteristics, as drugs regulated under the FDA. Development of a drug
product for use in humans is a multistep process. First, laboratory and animal
testing establish reasonable safety of the experimental product for testing in
humans, and suggest 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 is submitted to the FDA for
approval. Once approved, clinical investigations may commence.
Following the successful completion of clinical trials, the clinical
evidence that has been accumulated is submitted to the FDA as part of a new drug
application. 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 us from
commercializing our products and would have a material adverse effect on our
business. Furthermore, the process of seeking and obtaining FDA approval for a
new product generally requires substantial funding, and there can be no
assurance such funding will be available.
CGMPS AND OTHER CONTROLS
The FDA also has extensive regulations concerning manufacturing of regulated
products in accordance with current good manufacturing practices ("cGMPs"). If
we commence the manufacture of
48
<PAGE>
any products subject to FDA regulation (and we are not currently manufacturing
any such products), we will have to comply with cGMPs and we will have to
ensure, compliance by our third-party manufactures. 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 violators and its officers and employees who
are responsible for the activities that lead to the violations.
EXPORT AND ENVIRONMENTAL CONTROLS
Certain of our products and technology, particularly those having potential
nuclear energy or military applications, such as depleted zinc 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 our products and
technology would be exported.
Likewise, certain of our current and potential operations 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"). Additionally, we are required to
comply with stringent controls pertaining to the handling and distribution of
our 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 us to significant administrative civil and criminal penalties, including
loss of our approvals and licenses, or the imposition of additional restrictions
on our operations. There can be no assurances that we will be able to obtain and
maintain the approvals or licenses necessary to successfully market our 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 our business, financial condition and results of operations.
REGULATION OF NON-MEDICAL CHEMICAL PRODUCTS
The import, export, handling, transportation, sale, storage and other
activities undertaken in connection with our non-medical products are subject,
or potentially subject, to substantial federal, state, local and foreign
government controls pertaining to hazardous chemical and chemical wastes, import
export controls and other matters. These regulations are complex, pervasive and
constantly evolving. Our ability to effect and maintain compliance with these
controls is important to our commercial success.
With respect to transportation of our products, we rely predominantly on
Russian and U.S. freight carriers to handle and deliver all our shipments, and
utilize domestic overnight courier services for shipments to our customers.
These carriers must comply with Department of Transportation ("DOT") regulations
in the shipping and packaging of the stable isotope chemicals. We must also
comply with DOT regulations when packaging material kept in inventory for
domestic shipment. As required under federal and state law, we have prepared
Material Safety Data Sheets ("MSDS"), which are enclosed with each product
shipment. We must periodically update our MSDS sheets based on new literature
reports. We cannot assure that our MSDS sheets will continue to be in compliance
with applicable requirements.
49
<PAGE>
The shipments received at our Columbia, Maryland facility are subject to
Federal and Maryland regulations pertaining to hazardous chemicals and hazardous
waste disposal. These shipments are stored in an area of the facility designated
for such materials. Currently, we are considered a small quantity generator of
hazardous waste and will rely on certified haulers to dispose of our minimal
amounts of hazardous waste. We believe we are in compliance, in all material
respects, with applicable federal and state environmental regulatory
requirements.
Should the levels of hazardous waste increase as our inventory and handling
operations increase in volume, we would have to comply with Environmental
Protection Agency ("EPA") requirements and obtain an EPA ID number. However,
this is not currently necessary.
The shipments from Russian manufacturing sources now enter the U.S. duty
free (without tariff); however, there can be no assurance that such duty-free
importation will continue. If the shipments are subject to tariff, we cannot
assure that we will be able to sell the imported products or that the 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 1:5,000. At present, the deuterium
containing compounds that we import 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. We will not be able to ship these chemicals to certain
countries that require a special license for such shipments; none of these
countries represent significant current or expected future markets for our
anticipated and present products. In addition, certain technology or products
that we have 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 our ability to broadly
market such products.
Our facilities and employees are also required to comply with environmental
and other regulations concerning the operations of and the materials we use, 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 us.
In addition, the manufacture, distribution and export of some of our 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 we 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 us and our operations.
PRODUCT LIABILITY AND INSURANCE
Our business exposes us to potentially substantial product, environmental,
occupational and other liability risks which are inherent in product research
and development, manufacturing, marketing distribution and use of our products
and operations, including, but not limited to, products used in nuclear power
plants and medical device products. We have product liability insurance in order
to protect ourselves from such potential exposures. There can be no assurance
that adequate insurance coverage will be available at an acceptable cost, if at
all, or, a product liability or other claim would not materially and adversely
affect our business or financial condition. The terms of our agreements with our
customers provide that liability is limited to our standard warranty to replace
non-conforming product, and liability for consequential damages caused by the
improper use of our products is limited by contractual terms. Nevertheless, one
or more third parties could bring action against us based on
50
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product liability, breach of warranty or other claims, and, there can be no
assurance that the foregoing contract clauses would effectively limit our
liability in any such actions.
EMPLOYEES
As of September 22, 2000, we had 29 full and part-time employees, of whom
eight have Ph.D.s in scientific or engineering disciplines. Approximately eleven
employees are involved in research and product development, five in
manufacturing and sourcing, and thirteen in business development and
administration, but such employees' responsibilities may also encompass areas
other than their primary area of responsibility. We consider our relations with
our employees to be good. None of our employees are covered by a collective
bargaining agreement.
PROPERTIES
We relocated our headquarters to Golden, Colorado in December 1998, and now
share facilities with our wholly-owned subsidiary, Interpro. Interpro leases
approximately 41,000 square feet of office, research and production facilities.
The lease expires in July 2001. The facility is used for our zinc recovery and
recycling research and development project, silicon-28 materials processing, as
well as corporate administration. We also sub-let space and facilities to
contract research, development, and materials processing entities.
We lease 650 square feet for an administrative sales office in Columbia,
Maryland that expires November 30, 2001. Chemotrade leases office space in
Dusseldorf and Leipzig, Germany. IUT leases production and administration
facilities in Berlin, Germany.
LEGAL PROCEEDINGS
We are not subject to any pending or, to our knowledge, threatened, legal
proceedings.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
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MANAGEMENT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of all the Directors and
Executive Officers of Isonics, and the positions held by each such person as of
September 22, 2000. The directors each serve until their successors are duly
elected and qualified; officers are appointed by, and serve at the pleasure of,
the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- ---------------------------------------------------
<S> <C> <C>
James E. Alexander........................ 51 President, Chief Executive Officer and Chairman of
the Board
Boris Rubizhevsky......................... 49 Senior Vice President, Vice Chairman and Director
Daniel J. Grady........................... 46 Vice President, Life Sciences
Stephen J. Burden......................... 51 Vice President, Semiconductor Materials
Brantley J. Halstead...................... 43 Chief Financial Officer, Vice President, Finance
Robert Cuttriss........................... 51 President of Interpro, Vice President, Zinc
Recovery
Herbert Hegener........................... 53 Managing Director of Chemotrade
Lindsay A. Gardner(1)(2).................. 49 Director
Richard Parker(1)(2)...................... 57 Director
Larry J. Wells(1)(2)...................... 57 Director
</TABLE>
------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Each of the directors 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 our co-founder and has served as our President, Chief
Executive Officer and a director since our inception. He has worked full-time
for Isonics since January 1994. From June 1972 to December 1993, he worked in a
variety of technology positions at General Electric Corporation ("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 also a co-founder of Isonics and has been a Senior Vice
President and a director 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 General Electric Corporation as Business Development Manager in various
international locations. He received his Bachelors degree in Engineering from
Stevens Institute of Technology.
Dr. Grady joined us as Vice President, Medical, Research and Diagnostics in
1995. From March 1994 through September 1995, Dr. Grady was Vice President of
Research and Development at Sopha Medical Systems, a medical diagnostic imaging
equipment manufacturer. From April 1991 until March 1994, he served as Marketing
Manager, Nuclear Energy for General Electric Corporation ("GE"). From May 1988
through March 1991, Dr. Grady served as Software Engineer Manager, Nuclear
Medicine for GE in England. From October 1984 through May 1988, he served as
Clinical
52
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Applications Manager for GE Nuclear Medicine. Between June 1981 and
October 1984, he served as Engineering Analysis Section Head for TRW. Dr. Grady
received his Bachelors and Masters degrees, and Ph.D. in Nuclear Engineering
from the University of Michigan.
Dr. Burden joined us in 1997 as Director of Research & Development and was
promoted to Vice President, Semiconductor Materials effective January 1, 1999.
Prior to joining Isonics Dr. Burden was Director of Product Development at
sp3, Inc., a manufacturer of diamond-coated tools. From 1984 to 1993, he was
Manager of Advanced Materials R&D at GTE Valenite, a subsidiary of GTE
Corporation, a manufacturer of cutting tools. From 1974 to 1984, Dr. Burden was
employed by General Electric Corporation in various capacities. Dr. Burden
received his Ph.D., and Masters of Science degrees, in Materials Science and
Engineering, from Drexel University, and his Bachelors degree in Science
Engineering from Northwestern University. Dr. Burden also has an MBA from the
University of Michigan.
Mr. Halstead joined us as Chief Financial Officer in 1999 and was promoted
to Vice President, Finance effective January 30, 2000. Most recently,
Mr. Halstead was Chief Financial Officer of Bio-Medical Automation, Inc.
(formerly OZO Diversified Automation, Inc.), from 1997 through 1999.
Mr. Halstead also has nine years of management consulting experience, including
five years with Deloitte & Touche LLP. Prior to earning his Masters of Business
Administration in Finance from the University of Denver, Mr. Halstead worked as
a metallurgical engineer. Mr. Halstead received his Bachelors degree in
Metallurgical Engineering from the Colorado School of Mines, and his Masters of
Accountancy from the University of Denver.
Dr. Cuttriss has served as the President of Interpro since 1993. Since
May 2000, Dr. Cuttriss has also served as Vice President, Zinc Recovery. With
29 years experience in process operations in the mining and metallurgical
industries, Dr. Cuttriss' experience includes holding the title of principal
consultant and director of Metallurgy International, Inc., from 1983 through
1993. He has undertaken management and technical assignments covering the
design, commissioning and operation of mineral treatment plants, technical
audits and evaluations, pilot plant testing and process development for projects
throughout the world. Dr. Cuttriss received his Bachelors and Ph.D. degrees in
Metallurgy from the University of Melbourne and his Masters in Metallurgy from
the University of Queensland.
Mr. Hegener is a co-founder of Chemotrade and has served as the President
since its formation in 1991. From 1988 to 1991, Mr. Hegener was with Medgenix
Deutschland GmbH-Dusseldorf, and his last position with this firm was Managing
Director. From 1973 to 1988, Mr. Hegener worked at the Hempel Group, Dusseldorf,
Germany, in various management positions. Mr. Hegener is a specialist in stable
and radioactive isotopes. He has degrees in Chemistry and Economics.
Ms. Gardner was elected a director in September 1993. 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. During her tenure at
LG Associates Ms. Gardner resided in Moscow, Russia from September 1991 to
January 1994, when she moved to Beijing, China. As of April 2000, Ms. Gardner
resides in Cincinnati, Ohio. From 1977 to 1991, Ms. Gardner worked for General
Electric Corporation in a variety of management and functional positions
including international marketing, quality assurance and materials. Ms. Gardner
received a Bachelors degree in International Economics from The George
Washington University Elliott School of International Affairs, and earned a
Masters of Business Administration from the University of Louisville.
Mr. Parker has served as a director since August 1998. Mr. Parker is
presently Vice-President of Distribution Sales for Cypress Semiconductor and has
held that position since December 1997. Previously, Mr. Parker was Director of
Sales for Cypress from April 1984 to December 1997. Prior to joining Cypress, he
held various sales and marketing management positions at Fairchild Semiconductor
from 1973 to 1984. He received a Bachelors degree in Education from the
University of North Dakota.
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<PAGE>
Mr. Wells was elected a director of Isonics in January 2000. Since 1989,
Mr. Wells has been a general partner of SVP Management Company, the management
company for Sundance Venture Partners, L.P., a venture capital fund. From 1983
to 1989, Mr. Wells served as Vice President of Citicorp Venture Capital then
became Senior Vice president of Inco Venture Capital. Mr. Wells is a director of
Cellegy Pharmaceuticals, Identix, Inc., as well as several privately held
companies. Mr. Wells received his bachelors degree in Economics and earned a
masters degree in Business Administration from Stanford University. Mr. Wells
was previously a director of Isonics from September 1996 through December 1998.
There are no significant employees who are not also directors or executive
officers as described above. As of April 30, 2000, and subsequently, there were
and are no family relationships among the officers, directors or any person
chosen by the Company to become a director or officer. No arrangement exists
between any of the above officers and directors pursuant to which any one of
those persons was elected to such office or position.
MEETINGS OF THE BOARD AND COMMITTEES
The Board of Directors held three formal meetings during the fiscal year
ended April 30, 2000, and one meeting subsequently, on August 17, 2000, through
August 30, 2000. Each director attended all of the formal meetings either in
person or by telephone without exception. In addition, regular communications
were maintained throughout the year among all of the officers and directors of
the Company and the directors acted by unanimous consent five times during
fiscal 2000 and two times subsequently through August 30, 2000. Isonics has
standing audit and compensation committees. It does not have a standing
nomination committee.
AUDIT COMMITTEE
The audit committee was formed in 1996 and held one formal meeting during
the fiscal year ended April 30, 2000, and one meeting subsequently through
August 30, 2000. Each member of that committee attended each of those meetings
in person or by telephone. The responsibilities of the audit committee include:
- recommending the appointment of independent accountants;
- reviewing the arrangements for and scope of the audit by independent
accountants;
- reviewing the independence of the independent accountants;
- considering the adequacy of the system of internal accounting controls and
reviewing any proposed corrective actions;
- reviewing and monitoring Isonics' policies regarding business ethics and
conflicts of interest;
- discussing with management and the independent accountants Isonics' draft
annual financial statements and key accounting and reporting matters; and
- reviewing the activities and recommendations of our accounting department.
COMPENSATION COMMITTEE
The compensation committee held two formal meetings during the fiscal year
ended April 30, 2000, and no meetings subsequently through August 30, 2000. Each
member of that committee attended each of those meetings in person or by
telephone. The compensation committee has the authority to review and make
recommendations to our board of directors with respect to the compensation of
our executive officers.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of August 30, 2000, by: (i) each nominee for
director; (ii) each of the executive officers named in the Summary Compensation
Table; (iii) all executive officers and directors of the Company as a group; and
(iv) all those known by the Company to be beneficial owners of more than five
percent of its Common Stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
-----------------------------------
BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF TOTAL
---------------- ---------------- ----------------
<S> <C> <C>
James E. Alexander(1)....................................... 2,076,779 18.1%
Boris Rubizhevsky(2)........................................ 1,878,293 16.3%
Stephen J. Burden(3)........................................ 289,212 2.5%
Daniel J. Grady(4).......................................... 241,769 2.1%
Brantley J. Halstead(5)..................................... 141,000 1.2%
Robert H. Cuttriss(6)....................................... 307,982 2.7%
Herbert Hegener(7).......................................... 178,365 1.6%
Lindsay Gardner(8).......................................... 289,761 2.5%
Richard Parker(9)........................................... 40,000 0.3%
Larry Wells(10)............................................. 107,241 0.9%
All executive officers and directors as a group
(10 persons). The address for all of the above directors
and executives officers is:
5906 McIntyre Street, Golden, CO 80403.................... 5,550,402 45.3%
Richard Grossman(11)........................................ 1,873,336 16.3%
Anfel Trading(12)........................................... 666,668 5.7%
Eagle-Picher Technologies, LLC(13).......................... 3,130,435 27.4%
</TABLE>
------------------------
(1) Includes (i) 25,000 shares of Common Stock underlying options which are
currently exercisable, (ii) 45,455 shares of Common Stock held in the name
of The James & Carol Alexander Family Foundation, and (iii) 500,000 shares
held by wife Carol, and (iv) 4,000 shares held by son Benjamin Alexander,
and (v) 4,000 shares held by son Jonathan Alexander.
(2) Includes (i) 1,781,127 shares of Common Stock held jointly with
Mr. Rubizhevsky's wife, (ii) 22,500 shares of Common Stock underlying
options which are currently exercisable, and (iii) 33,333 shares of Common
Stock underlying 33,333 warrants to purchase Common Stock of Isonics,
(iv) 33,333 shares of Common Stock held by wife Nancy Eiden Rubizhevsky,
(v) 4,000 shares of Common Stock held by son Zachary Rubizhevsky,
(vi) 4,000 shares of Common Stock held by son Ryan Rubizhevsky.
(3) Includes 192,887 shares of Common Stock underlying options of which 146,346
have vested as of August 30, 2000, and which are currently exercisable.
(4) Includes 222,965 shares of Common Stock subject to stock options that are
currently exercisable.
(5) Includes 141,000 shares of Common Stock underlying options of which 91,000
have vested as of August 30, 2000, and which are currently exercisable.
55
<PAGE>
(6) Includes (i) 287,982 shares of Common Stock held in the name of Metallurgy
International, Inc., in which Dr. Cuttriss and his wife, P. D. Cuttriss,
are controlling shareholders, and (ii) 20,000 shares of Common Stock
underlying options that are currently exercisable.
(7) Includes 35,000 shares of Common Stock underlying warrants, which are
currently exercisable.
(8) Includes 40,000 shares of Common Stock underlying stock options, which are
currently exercisable.
(9) Includes 40,000 shares of Common Stock underlying stock options, which are
currently exercisable.
(10) Includes 30,000 shares of Common Stock underlying stock options, which are
currently exercisable. Also includes 77,241 shares owned by Daystar
Partners, L.P. of which an affiliate owned by Mr. Wells is general
partner, and in which Mr. Wells owns a 9.9% equity interest.
(11) Includes beneficial ownership of the following shares: (i) 40,000 shares
of Common Stock underlying 20,000 shares of Series A Preferred Stock and
20,000 warrants owned of record and beneficially by Richard Grossman,
(ii) 40,000 shares of Common Stock underlying 20,000 shares of Series A
Preferred Stock and 20,000 warrants owned of record and beneficially by
Orin Hirschman (of which shares Mr. Grossman disclaims beneficial
ownership), (iii) 1,106,668 shares of Common Stock underlying 553,334
shares of Series A Preferred Stock and 553,334 warrants owned of record
and beneficially by Adam Smith Investment Partners, L.P., (iv) 226,668
shares of Common Stock underlying 113,334 shares of Series A Preferred
Stock and 113,334 warrants owned of record and beneficially by Adam Smith
Investments, Ltd., and (v) 500,000 shares of Common Stock underlying
500,000 warrants owned of record and beneficially by Adam Smith &
Company, Inc., all as set forth on the Schedule 13D filed by such persons
on August 12, 1999. The business addresses of Richard Grossman and Orin
Hirschman, and the principal executive offices of Adam Smith Investment
Partners, L.P. and Adam Smith & Company, Inc., are located at 101 East
52nd Street, New York, New York 10022. The principal executive offices of
Adam Smith Investments, Ltd. are c/o Insinger Fund Administration (BVI)
Limited, Tropic Isle Building, P.O. Box 438, Road Town, Tortola, British
Virgin Islands.
(12) Includes 666,668 shares of Common Stock underlying 333,334 shares of
Series A Preferred Stock and 333,334 warrants. The principal executive
offices of Anfel Trading Ltd. are c/o Me. Andre Zolty, 24 Route De
Malagnou, 1208 Geneva, Switzerland.
(13) This share ownership results from Eagle-Picher's exercise of a warrant to
purchase 4,000,000 shares of our Common Stock at $3.75 per share, which
resulted in Eagle-Picher acquiring 3,130,435 shares upon surrender of the
warrant. (Eagle-Picher has not accepted our calculation of the number of
shares owed, and claims that an additional 155,279 may be due. We are
continuing to discuss this with Eagle-Picher.) We paid the warrants to
Eagle-Picher in consideration of its obligation to deliver 200 kilograms
of silicon-28 to us. If Eagle-Picher does not deliver the full 200
kilograms to us by December 31, 2000, the shares held pursuant to the
exercise of the warrants will be proportionately reduced. The principal
executive offices of Eagle-Picher Technologies, LLC are located at 250
East Fifth Street, Suite 500, Cincinnati, Ohio 45202.
The Series A Convertible Preferred Stock ("Series A Preferred Stock")
consists of 1,830,000 shares issued with a liquidation preference and conversion
right of $1.50 per share. Through September 22, 2000, 649,667 shares of
Series A Preferred Stock have elected to convert into Common Stock. The
Series A Preferred Stock is entitled to dividends or distributions equal to the
amount of the dividend or distribution per share of Common Stock payable at such
time multiplied by the number of shares of Common Stock then obtainable upon
conversion of such Series A Preferred Stock. The Redemption Trigger Date for the
Series A Preferred Stock shall be the business day immediately following the
thirtieth consecutive trading day that the average closing price during such
trading days (or, if no
56
<PAGE>
closing price is reported, the average of the bid and ask prices) of the shares
of Common Stock was above $8.00 per share (which minimum price shall be
proportionally adjusted for stock splits, stock dividends, reverse stock splits
and any other subdivision or combination of the Common Stock). After the
Redemption Date, the Company may redeem all or any part of the Series A
Preferred Stock at its election at any time and from time to time. The Series A
Preferred Stock is convertible into Common Stock at the option of the holder
until the Company, if at all, chooses to redeem such shares on the basis of one
share of Common Stock per share of Series A Preferred Stock and, until
converted, each share of Series A Preferred Stock is entitled to one vote at any
meeting of the shareholders of the Company.
The Company knows of no arrangement, the operation of which may, at a
subsequent date, result in change in control of the Company.
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<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
SECTION 16(a) DISCLOSURE
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires Isonics' directors, executive officers and persons who own more than
ten percent of a registered class of Isonics' equity securities, to file with
the SEC initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of Isonics. Officers, directors and
greater than ten percent shareholders are required by SEC regulation to furnish
Isonics with copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports
furnished to our and written representations that no other reports were
required, during the fiscal year ended April 30, 2000, and subsequently, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with exception (or in
addition) to the following:
1. Mr. Rubizhevsky filed a Form 4 in February 2000 reporting a purchase that
took place in July 1999. Mr. Rubizhevsky also filed a Form 4 after
April 10, 2000 to report a sale of 1,000 shares made in March 2000.
2. Mr. Parker filed a Form 3 in February 2000. He became subject to the
Section 16(a) reporting requirements when he became a director of Isonics in
August 1998.
3. Dr. Cuttriss and his affiliate, Metallurgy International, Inc., jointly
filed a Form 3 in February 2000. Dr. Cuttriss became subject to the
Section 16(a) reporting requirements when he became an executive officer of
Isonics in May 1998. A joint filing of two Form 4s was also made in
February 2000 reporting transactions that occurred in July 1999 and
September 1999, which Dr. Cuttriss amended in May 2000.
4. Mr. Halstead filed a Form 3 in February 2000. He became subject to the
Section 16(a) reporting requirements when he became an executive officer of
Isonics in March 1999.
5. Dr. Burden filed a Form 3 in February 2000. He became subject to the
Section 16(a) reporting requirements when he became an executive officer of
Isonics in January 1999. Dr. Burden also filed a Form 4 in February 2000
reporting a purchase that took place in July 1999. Dr. Burden filed a
Form 4 after April 10, 2000, reporting an exercise of warrants that occurred
in March 2000.
6. Mr. Herbert Hegener filed a Form 3 in February of 2000. He became subject to
the Section 16(a) reporting requirements when he became an executive officer
of Isonics' subsidiary, Chemotrade, Inc., in June 1998. Mr. Hegener filed a
Form 4 in February 2000, reporting a warrant acquired in June 1999.
Mr. Hegener also filed Forms 4 in August 2000 reporting sales that took
place in May, June and July of 2000.
7. Eagle-Picher Technologies, LLC became subject to the Section 16(a) reporting
requirements when it became a greater than 10% beneficial owner in December
of 1999. Eagle Picher filed a Form 3 in March 2000. Eagle-Picher exercised
warrants in March 2000 but, to our knowledge has not yet filed a Form 4
reporting the exercise; Eagle-Picher has also not yet filed an amendment to
its Schedule 13D reporting this exercise.
8. Mr. Paul Catuna, a former executive officer of Isonics, was subject to the
reporting requirements of Section 16(a) of the 1934 Act during the course of
his employment. Mr. Catuna has filed a Form 4 in February 2000, reporting a
stock bonus received in January 1999.
9. Mr. Wells filed a Form 4 after April 10, 2000, reporting that an affiliated
entity exercised warrants in March 2000.
10. Ms. Gardner filed a Form 4 in May 2000, reporting the exercise of warrants
in March 2000.
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<PAGE>
In addition to the foregoing, several directors and executive officers filed
Form 4s in February 2000, which voluntarily reported the acquisition of certain
Common Stock options that are exempt from the reporting requirements pursuant to
Rule 16b-3.
(a) Mr. Alexander voluntarily filed three Form 4s in February 2000 reporting
transactions that took place in January, April, and December of 1999. The
Board of Directors approved the January and April transactions in minutes
effective October 31,1999.
(b) Mr. Rubizhevsky voluntarily filed two Form 4s in February 2000 reporting
transactions that took place in January and April 1999. The January and
April transactions were approved by the Board of Directors in minutes
effective October 31,1999.
(c) Ms. Gardner voluntarily filed one Form 4 in February 2000 reporting
transactions that took place in May and October of 1998.
(d) Mr. Parker voluntarily filed a Form 4 in February 2000 reporting
transactions that occurred in October 1998.
(e) Mr. Halstead voluntarily filed two Form 4s in February 2000 reporting
transactions that took place in April 1999 and in January 2000. The Board of
Directors approved these transaction in minutes effective October 31,1999,
and January 30, 2000.
(f) Dr. Burden voluntarily filed one Form 4 in February 2000 reporting a
transaction that took place in April 1999. The Board of Directors approved
this transaction in minutes effective October 31,1999.
(g) Dr. Grady voluntarily filed two Form 4s in February 2000 reporting
transactions that took place in January and April 1999 and were approved by
the Board of Directors in minutes effective October 31,1999.
SHORT-SWING LIABILITY
On behalf of Metallurgy International, Inc., an affiliate of Dr. Cuttriss,
but without authorization from Dr. Cuttriss or Isonics, a broker-dealer sold and
purchased shares in July and September of 1999 respectively. With authorization
from Dr. Cuttriss and Isonics, Metallurgy International sold additional shares
in February and March 2000. As a result, Isonics raised the concern that
Dr. Cuttriss may have obtained a short-swing profit which Dr. Cuttriss
satisfied, subject to further review after consultation with his personal
counsel. Isonics has received an opinion of counsel, which reached the
conclusion that "a court would likely not impose liability on [Dr.] Cuttriss for
the unauthorized July 1999 and September 1999 transactions under Section 16(b)
of the Securities Exchange Act of 1934."
59
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation awarded,
paid to, or earned by the chief executive officer and the other principal
officers of Isonics for the three years ended April 30, 1998, 1999, and 2000. No
other person who is currently an executive officer of Isonics earned salary and
bonus compensation exceeding $100,000 during any of those years. This includes
all compensation paid to each by Isonics and any subsidiary.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
----------------------------------
AWARDS PAYOUT
----------------------- --------
ANNUAL COMPENSATION SECURITIES
------------------------------ ($) UNDERLYING
FISCAL ($) ($) ($) RESTRICTED OPTIONS & LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER(A) AWARDS SARS (#) PAYOUT COMPENSATION
--------------------------- -------- -------- -------- -------- ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James E. Alexander ............. 1998 204,870 0 60,553(g) 0 0 0 0
President & CEO 1999 200,000 50,000 35,016(g) 0 25,000(k) 0 0
2000 212,000 172,549(e) 39,280(h) 0 0 0 0
Boris Rubizhevsky .............. 1998 176,975 0 25,946(g) 0 0 0 0
Senior Vice President 1999 184,100 45,000 25,404(g) 0 22,500(l) 0 0
2000 191,000 147,670(f) 28,185(i) 0 0 0 0
Daniel J. Grady ................ 1998 125,603 0 0 0 0 0 0
Vice President 1999 127,188 16,000 0 0 15,625(m) 0 0
2000 125,000 10,271 23,833(j) 0 0 0 0
Stephen J. Burden, ............. 1998 N/A N/A N/A N/A N/A N/A N/A
Vice President(b) 1999 0 0 0 0 121,458(n) 0 0
2000 125,000 0 23,452 0 0 0 0
Robert H. Cuttriss ............. 1998 N/A N/A N/A N/A N/A N/A N/A
President of Interpro(c) 1999 92,872 80,000 0 0 20,000(o) 0 0
2000 104,815 0 3,144 0 0 0 0
Brantley J. Halstead, .......... 1998 N/A N/A N/A N/A N/A N/A N/A
Vice President(d) 1999 22,182 0 0 0 116,000(p) 0 0
2000 102,000 16,000 3,870 0 25,000(q) 0 0
</TABLE>
------------------------------
(a) Excludes other compensation, the aggregate amount of which does not exceed
the lesser of $50,000 or 10% of such named Executive Officers' annual
compensation.
(b) Dr. Burden became an officer of Isonics effective January 1999.
(c) Interpro was acquired effective April 30, 1998. Prior to May 1, 1998,
Dr. Cuttriss was not an Isonics employee. The bonus paid to Dr. Cuttriss in
fiscal year 1999 was for back pay accrued prior to the acquisition of
Interpro by Isonics.
(d) Mr. Halstead became an officer of Isonics in February 1999, upon his joining
the Company as Chief Financial Officer. Mr. Halstead was promoted to Vice
President, Finance in January 2000.
(e) Mr. Alexander's amount includes $133,451 for forgiveness of a loan owed to
the Company, and $39,098 to pay applicable payroll taxes on a stock bonus
granted in January 1999. Please see "CORPORATE LOANS TO OFFICERS."
(f) Mr. Rubizhevsky's amount includes $113,598 for forgiveness of a loan owed to
the Company, and $29,072 to pay applicable taxes on stock bonus granted in
January 1999, and a $5,000 additional cash bonus. Please see "CORPORATE
LOANS TO OFFICERS."
(g) Mr. Alexander's amounts represent $35,016 for interest and taxes payable as
a result of a loan in fiscal year 1999, and $60,553 for interest and taxes
payable as a result of a loan in fiscal year 1998. Mr. Rubizhevsky's amounts
represent $25,404 for interest and taxes payable as a result of a loan in
fiscal year 1999, and $25,946 for interest and taxes payable as a result of
a loan in fiscal year 1998.
(h) Mr. Alexander's amount includes $26,543 for accrued vacation that was paid
in December 1999, $9,487 car allowance, and $3,250 employer matching
contribution to the Company's 401k plan.
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<PAGE>
(i) Mr. Rubizhevsky's amount includes $15,005 for accrued vacation that was
paid in December 1999, $9,000 car allowance, and $4,180 employer matching
contribution to the Company's 401k plan.
(j) Dr. Grady's amount includes $12,020 for accrued vacation that was paid in
December 1999, $9,000 car allowance, and $2,813 employer matching
contribution to the Company's 401k plan.
(k) Options to purchase 25,000 shares of Common Stock were granted in
April 1999 as consideration for delaying salary in March and April 1999, and
are currently exercisable at $1 7/16 per share and expire April 26, 2004.
(l) Options to purchase 22,500 shares of Common Stock were granted in
April 1999 as consideration for delaying salary in March and April 1999, and
are currently exercisable at $1 7/16 per share and expire April 26, 2004.
(m) Options to purchase 15,625 shares of Common Stock were granted in
April 1999 as consideration for delaying salary in March and April 1999, and
are currently exercisable at $1 7/16 per share and expire April 26, 2004.
(n) Options to purchase 100,000 shares of Common Stock were granted in
January 1999 as consideration for Dr. Burden's promotion to vice president
in January 1999, with an exercise price of $1.10 per share (of which 50,000
have vested as of August 30, 2000, and continue to vest at a rate of 5%, or
5,000, per quarter). Options to purchase 21,458 shares of Common Stock were
granted in April 1999 as consideration for delaying salary in March and
April 1999, and are currently exercisable at $1 7/16 per share and expire
April 26, 2004.
(o) Options granted in May 1998 in connection with the acquisition of Interpro
by Isonics are currently exercisable at $2.00 per share and expire May 1,
2003.
(p) Options to purchase 100,000 shares of Common Stock were granted in
February 1999 as consideration for Mr. Halstead joining the Company as Chief
Financial Officer, with an exercise price of $2 9/16 per share (of which
50,000 have vested as of August 30, 2000, and continue to vest at a rate of
5%, or 5,000, per quarter). Options to purchase 16,000 shares of Common
Stock were granted in April 1999 as consideration for delaying salary in
March and April 1999, and are currently exercisable at $1 7/16 per share and
expire April 26, 2004.
(q) Options to purchase 25,000 shares of Common Stock were granted in
January 2000 as consideration for Mr. Halstead's promotion to Vice President
in January 2000, with an exercise price of $7 5/16 per share.
In October 1996, we adopted an employee benefit plan under Internal Revenue
Code Section 401(k). The 401(k) plan is a profit sharing plan under which both
employees and Isonics are entitled (at their own discretion) to contribute a
portion of compensation and earnings, respectively, to investment funds to
supplement employee retirement benefits. On November 1, 1999, the Isonics
Corporation 401(k) plan was merged with the Interpro 401(k) plan.
We do not have written plans to pay bonuses or deferred compensation to our
employees except those expressly stated in the following sections.
We have adopted medical, dental, and life insurance plans for our employees
and their dependents at our cost. In some cases, we also provide discretionary
disability and other insurance plans for the benefit of our employees.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
AGREEMENTS
In September 1997, we entered into employment agreements with James E.
Alexander and Boris Rubizhevsky. The agreements have a term of four years and
provide for annual salaries of $200,000 and $180,000, respectively, although
either Isonics or the individuals may terminate these agreements prematurely in
their discretion. By resolution of the Board made on January 30, 2000, both
Mr. Alexander and Mr. Rubizhevsky received salary increases commencing
February 1, 2000, equal to 20% of their current salary, $240,000 and $216,000,
respectively. The salary increases were granted in recognition of their
performance for Isonics and the fact that neither Mr. Alexander nor
Mr. Rubizhevsky had received salary increases in approximately two and one-half
years. Under the agreements, the officer is entitled to receive incentive
compensation up to 50% of the officer's annual salary, as we approve, pursuant
to such executive compensation plan as we 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 eighteen
(18) months of his salary, paid at the same time as salary payments, 25% of the
officer's annual prevailing salary, paid upon termination, and in addition all
outstanding stock options held by the officer will be accelerated and
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<PAGE>
will become exercisable in full and our 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 Isonics.
We have also entered into employment agreements with Dr. Daniel J. Grady and
Dr. Stephen J. Burden. The agreements have an indefinite term and provides for
at-will employment, terminable at any time by either party. The agreements
provide for a rate of annual compensation, which we will review annually. Under
the each agreement, Dr. Grady and Dr. Burden are entitled to participate in our
standard plans and policies. The agreements also include confidentiality and
invention assignment provisions. Additionally, Mr. Herbert Hegener and
Dr. Robert Cuttriss are covered by employment agreements extending through the
September 2001 and September 2003, respectively.
Mr. Brantley J. Halstead was hired as Chief Financial Officer in
February 1999. Mr. Halstead has entered into an employment agreement with us.
The agreement has an indefinite term and provides for at-will employment,
terminable at any time by either party. The agreement provided for an initial
rate of annual compensation of $96,000, and annual reviews. Under the agreement,
Mr. Halstead is entitled to participate in our standard plans and policies. The
agreement also includes confidentiality and invention assignment provisions.
Mr. Halstead received a raise to $120,000 effective February 1, 2000.
STOCK OPTIONS AND OPTION PLANS
We grant options to executive officers, employees and consultants under the
following plans (collectively the "Plans"):
(a) 1996 Stock Option Plan which has been terminated, but as to which, there
are options outstanding.
(b) 1996 Executives' Equity Incentive Plan (the "Executives' Plan")
authorized the grant of options to purchase 225,000 stock options, which
after being adjusted for stock splits that occurred following the
adoption of the plan resulted in 570,000 shares. The options granted may
be either incentive stock options if they meet the requirements of
Section 422 of the Internal Revenue Code, or non-qualified stock options.
The directors approved this plan in September 1996 and the shareholders
in October 1996.
(c) 1996 Equity Incentive Plan (the "Employees' Plan") authorized the grant
of options to purchase 50,000 stock options, which after being adjusted
for stock splits that occurred following the adoption of the plan
resulted in 150,000 shares. The options granted may be either incentive
stock options if they meet the requirements of Section 422 of the
Internal Revenue Code, or non-qualified stock options. The directors
approved this plan in September 1996 and the shareholders in
October 1996.
(d) 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan") authorized
employee purchase of up to 200,000 shares of Isonics Common Stock. The
directors approved this plan in August 1998, and the shareholders in
October 1998.
As of September 22, 2000, options to purchase a total of 365,583 shares,
104,500 shares, and 358,769 shares respectively, were outstanding under the
Executives' Plan, Employees' Plan, and 1996 Stock Option Plan, and options to
purchase 189,417, 9,862, and 0 shares, respectively, remained available for
grant. The Isonics shareholders are being asked to approve an increase in the
number of shares of Common Stock issuable under the Employees' Plan to 500,000
and under the Executives' Plan to 1,000,000. If these increases are approved by
our shareholders at the annual meeting scheduled for October 2000, the number of
options issuable under the two plans will be increased significantly.
Except for the Director's Plan, we have not adopted any other stock option
or stock appreciation rights plan. SEE "COMPENSATION OF DIRECTORS."
62
<PAGE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following options were granted to executive officers named in the
compensation table during the fiscal year ended April 30, 2000. We did not grant
any stock appreciation rights to any person during fiscal year 2000, or
subsequently. There were no exercises of options or SARs by executive officers
named in the compensation table during the fiscal year ended April 30, 2000.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/ SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE PRICE
NAME AND PRINCIPAL POSITION GRANTED (#) FISCAL YEAR ($/SH) EXPIRATION DATE
--------------------------- ------------ ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
James E. Alexander ........................... 0 0.0% N/A N/A
President & CEO
Boris Rubizhevsky ............................ 0 0.0% N/A N/A
Senior Vice President
Daniel J. Grady .............................. 0 0.0% N/A N/A
Vice President
Stephen J. Burden ............................ 0 0.0% N/A N/A
Vice President(a)
Robert H. Cuttriss ........................... 0 0.0% N/A N/A
President of Interpro
Brantley J. Halstead ......................... 25,000 28.7% $ 7 5/16 January 2005
Vice President
</TABLE>
--------------------------
(a) Does not include 33,333 warrants obtained in a private transaction completed
in July 1999, and exercised in March 2000.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
No officer exercised employee stock options during the fiscal year ended
April 30, 2000, or subsequently.
The following table sets forth information regarding the year-end value of
options being held by the Chief Executive Officer and the other such named
officers and persons on April 30, 2000.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
SHARES OPTIONS/SARS AT MONEY OPTIONS/SARS AT
ACQUIRED ON VALUE APRIL 30, 2000 APRIL 30, 2000
NAME AND PRINCIPAL POSITION EXERCISE (#) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---------------------------------- ------------ -------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
James E. Alexander ............... 0 0 25,000/0 $53,125.00/$0
President & CEO(a)
Boris Rubizhevsky ................ 0 0 22,500/0 $47,812.50/$0
Senior Vice President(a)(b)
Daniel J. Grady .................. 0 0 222,965/0 $651,851.78/$0
Vice President(a)
Stephen J. Burden ................ 0 0 78,599/114,288 $166,991/$257,822
Vice President(c)
Robert H. Cuttriss ............... 0 0 20,000/0 $31,350/$0
President of Interpro
Brantley J. Halstead ............. 0 0 86,000/55,000 $321,125/$140,938
Vice President
</TABLE>
--------------------------
(a) Does not include 45,455 shares of Common Stock awarded to Mr. Alexander,
36,364 shares of Common Stock awarded to Mr. Rubizhevsky, and 14,545 shares
of Common Stock awarded to Dr. Grady in January 1999. These were stock
grants and not grants of stock options.
(b) Does not include 33,333 warrants obtained in a private transaction completed
in July 1999.
(c) Does not include 33,333 warrants obtained in a private transaction completed
in July 1999, and exercised in March 2000.
63
<PAGE>
LONG TERM INCENTIVE COMPENSATION PLANS, AND DEFINED BENEFIT AND ACTUARIAL PLANS
Isonics has no long term incentive compensation plans, defined benefit
plans, or actuarial plans.
COMPENSATION OF DIRECTORS
The directors of Isonics were not compensated for their services during
fiscal year 1999, or subsequently during calendar year 1999. However, each
director was reimbursed for travel and related expenses associated with Board of
Directors' meetings. In January 2000, it was agreed to compensate non-employee
directors $2,000 for attending Board of Directors' meetings in person and $500
for attending Board of Directors' meetings telephonically beginning January 1,
2000.
The 1998 Directors' Plan (the "Directors' Plan") authorized each person
serving as a member of the Board who is not an employee of Isonics to receive
options to purchase 20,000 shares of Isonics Common Stock when such person
accepts his position as a Director and to receive an additional option to
purchase 10,000 shares when such person is re-elected as a Director provided
such person is not an employee of Isonics. The exercise price for the options is
the Fair Market Value (as defined in the Executives' Plan) on the date such
person becomes a director and the options are exercisable for five years from
such date. The options granted under the Directors' plan vest immediately upon
the date of the grant. In the event a Director resigns or is not re-elected to
the Board, failure to exercise the options in three months results in the
options' termination prior to the expiration of their term. Although the
Directors adopted the plan in 1998, the Board formalized the plan by resolution
in January 2000.
Under the Directors' Plan the following individuals have been granted
options:
(a) On May 21, 1998, Lindsay Gardner received 20,000 options exercisable at
$2.3750 per share through May 21, 2003.
(b) On August 1, 1998, Richard Parker received 20,000 options exercisable at
$1.65 per share through August 1, 2003.
(c) On October 5, 1998, as a result of their re-election to the Board of
Directors Ms. Gardner and Mr. Parker each received options to acquire an
additional 10,000 shares exercisable at $1.1875 per share through
October 5, 2003.
(d) On January 30, 2000, Larry J. Wells received 20,000 options exercisable at
$7.3125 per share through January 29, 2005.
(e) On April 26, 2000, following their re-election as directors at our annual
meeting of shareholders, we granted options to purchase 10,000 shares to
each of Ms. Gardner and Messrs. Parker and Wells. These options are
exercisable at $6.125 per share through April 26, 2005.
As of April 30, 2000, options to purchase a total of 110,000 shares were
outstanding under the Directors Plan. We do not have any other arrangements
pursuant to which we compensate the Directors for acting in their capacities as
such.
64
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following sets out information regarding transactions between officers,
directors and significant shareholders of the Company during the most recent two
fiscal years and during the subsequent fiscal year.
CORPORATE LOANS TO OFFICERS
During the fiscal years ended April 30, 1998, 1999, and 2000, we had loans
outstanding to two officers. The funds had been advanced to the officers to
allow them to exercise options prior to our Initial Public Offering. The options
were exercised in September 1996, in part, to allow us 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. Interest
was charged on these loans at a rate of 6.6% per annum. In minutes effective
October 31, 1999 and January 30, 2000, the Board of Directors agreed to forgive
a portion of the current interest and principal due and to accept Isonics Common
Stock, owned by the officers, in payment of the remaining balance owed. The
amount owed by Mr. Alexander, that was forgiven by the Board of Directors, in
October 1999, was $74,038.54. The amount owed by Mr. Rubizhevsky, that was
forgiven by the Board of Directors, in October 1999, was $60,534.23. In both
cases the amount forgiven was treated as bonus compensation to Mr. Alexander and
Mr. Rubizhevsky. Mr. Alexander and Mr. Rubizheysky surrendered 30,437 shares of
Isonics Common Stock each to pay off $175,012.33 in accumulated interest and
principal ($10,012.33 in interest and $165,000.00 in principal each). These
loans were partially repaid in December 1999, and the balances were paid in full
in January 2000, and, as of April 30, 2000, we had no loans receivable
outstanding with our officers or employees. Please refer to the following
schedule.
<TABLE>
<CAPTION>
JAMES E. ALEXANDER BORIS RUBIZHEVSKY
PRESIDENT & CEO SENIOR VICE PRESIDENT
------------------ ---------------------
<S> <C> <C>
Balance as of May 1, 1997................................. $198,570.46 $167,570.46
FY 1998 Borrowings(a)..................................... 86,662.35 59,812.86
FY 1998 Repayments(a)..................................... 53,207.42 4,040.88
----------- -----------
Balance as of April 30, 1998.............................. $232,025.39 $223,342.44
FY 1999 Borrowings(a)..................................... 8,360.78 3,750.51
FY 1999 Repayments(a)..................................... 4,025.79 3,767.73
----------- -----------
Balance as of April 30, 1999.............................. $236,360.38 $223,325.22
FY 2000 Borrowings (a).................................... 7,690.49 7,221.34
FY 2000 Repayments (a).................................... 244,050.87 230,546.56
----------- -----------
Balance as of April 30, 2000.............................. $ 0.00 $ 0.00
</TABLE>
------------------------
(a) Includes interest accrued and paid. Amounts are aggregated.
65
<PAGE>
CORPORATE LOANS FROM OFFICERS AND EMPLOYEES
On occasion during the fiscal years ended April 30, 1998, 1999 and 2000,
officers and employees of Isonics loaned Isonics funds. The following schedule
summarizes these borrowing and repayments.
<TABLE>
<CAPTION>
BALANCE AS OF FY 1998 FY 1998 BALANCE AS OF
NAME AND PRINCIPAL POSITION MAY 1, 1997 BORROWINGS (A) REPAYMENTS (A) APRIL 30, 1998
--------------------------- ------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
James E. Alexander
President & CEO.................... $ 0.00 $ 25,000.00 $ 25,000.00 $0.00
Boris Rubizhevsky
Senior Vice President.............. $ 0.00 $ 0.00 $ 0.00 $0.00
Daniel J. Grady
Vice President..................... $ 0.00 $ 15,600.00 $ 15,600.00 $0.00
Stephen J. Burden
Vice President(b).................. $ 0.00 $ 86,821.92 $ 86,821.92 $0.00
Lindsay Gardner
Director(c)........................ $ 0.00 $122,880.28 $122,880.28 $0.00
Jacques J. Delente(d)................ $150,000.00 $ 13,020.55 $163,020.55 $0.00
</TABLE>
------------------------
(a) Includes interest accrued and paid through April 30, 1998. Amounts are
aggregated.
(b) Dr. Burden was also granted warrants exercisable for 40,951 shares of Common
Stock issued in connection with a private placement (the "Placement I") of
12% nonconvertible promissory notes and warrants to purchase Isonics Common
Stock in September 1997.
(c) Ms. Gardner was also granted warrants exercisable for 91,001 shares of
Common Stock issued in connection with Placement I of 12% nonconvertible
promissory notes and warrants to purchase Isonics Common Stock in
September 1997.
(d) Dr. Delente was also granted warrants exercisable for 122,853 shares of
Common Stock issued in connection with Placement I of 12% nonconvertible
promissory notes and warrants to purchase Isonics Common Stock in
September 1997.
<TABLE>
<CAPTION>
BALANCE AS OF
BALANCE AS OF FY 1999 FY 1999 APRIL 30,
NAME AND PRINCIPAL POSITION MAY 1, 1998 BORROWINGS (A) REPAYMENTS (A) 1999
--------------------------- ------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
James E. Alexander
President & CEO......................... $0.00 $ 0.00 $ 0.00 $ 0.00
Boris Rubizhevsky
Senior Vice President................... $0.00 $44,290.20 $ 0.00 $44,290.20
Daniel J. Grady
Vice President.......................... $0.00 $47,100.00 $47,100.00 $ 0.00
Stephen J. Burden
Vice President.......................... $0.00 $ 0.00 $ 0.00 $ 0.00
Lindsay Gardner
Director................................ $0.00 $ 0.00 $ 0.00 $ 0.00
Jacques J. Delente........................ $0.00 $93,000.00 $48,000.00 $45,000.00
</TABLE>
------------------------
(a) Includes interest accrued and paid through April 30, 1999. Amounts are
aggregated.
66
<PAGE>
<TABLE>
<CAPTION>
BALANCE AS OF FY 2000 FY 2000 BALANCE AS OF
NAME AND PRINCIPAL POSITION MAY 1, 1999 BORROWINGS (A) REPAYMENTS (A) APRIL 30 2000
--------------------------- ------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
James E. Alexander
President & CEO..................... $ 0.00 $ 0.00 $ 0.00 $0.00
Boris Rubizhevsky
Senior Vice President(b)............ $44,290.20 $ 8,858.04 $53,214.24 $0.00
Daniel J. Grady
Vice President...................... $ 0.00 $ 0.00 $ 0.00 $0.00
Stephen J. Burden
Vice President(c)................... $ 0.00 $57,500.00 $57,500.00 $0.00
Lindsay Gardner
Director............................ $ 0.00 $ 0.00 $ 0.00 $0.00
Jacques J. Delente.................... $45,000.00 $13,500.00 $58,500.00 $0.00
</TABLE>
------------------------
(a) Includes interest accrued and paid through April 30, 2000. Amounts are
aggregated.
(b) Mr. Rubizhevsky's note to Isonics was converted into 66,666 shares of Common
Stock underlying 33,333 shares of Series A Convertible Preferred Stock and
33,333 warrants issued in connection with a second private placement (the
"Placement II") of Series A Convertible Preferred Stock and warrants to
purchase Isonics Common Stock on July 30, 1999.
(c) Dr. Burden's note to Isonics was converted into 66,666 shares of Common
Stock underlying 33,333 shares of Series A Convertible Preferred Stock and
33,333 warrants issued in connection with Placement II on July 30, 1999.
Mr. Hegener had a loan payable to him from Isonics in the amount of $438,314
resulting from the 1998 purchase of Chemotrade by Isonics. Isonics issued to
Mr. Hegener 35,000 warrants to purchase Common Stock at $3.00 per share through
June 30, 2004, to compensate him for a late loan payment.
67
<PAGE>
ISONICS' CAPITAL STOCK
Our authorized capital stock consists of 20,000,000 shares of Common Stock
and 10,000,000 shares of Preferred Stock. As of September 22, 2000, there were
outstanding 11,439,326 shares of Common Stock and 1,180,333 shares of Series A
Convertible Preferred Stock. As of September 22, 2000, there were also
outstanding options issued pursuant to our employee benefit plans to purchase a
total of 878,352 shares, and other options and warrants to purchase a total of
3,813,794 shares of Common Stock. The number of outstanding shares includes
3,130,435 shares issued to Eagle-Picher pursuant to an exercise of a warrant to
purchase 4,000,000; these shares are subject to forfeiture to the extent that
Eagle-Picher does not deliver 200 kilograms of silicon-28 meeting certain
specifications to Isonics by December 31, 2000. Eagle-Picher believes that we
should issue it an additional 155,279 shares, although we dispute this
calculation and we are continuing to discuss this matter.
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 Bylaws provide that so long as we are a "listed company" as defined by
applicable California law, there will not be cumulative voting in connection
with the election of directors. At the present time, we are not a "listed
company" as defined in California law, 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
Isonics, the remaining assets legally available for distribution to
shareholders, after payment of claims or creditors and payment of 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 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
68
<PAGE>
Stock. Thus, the issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of Isonics.
We have issued 1,830,000 shares of our Series A Preferred Stock. This
Preferred Stock may be converted to common shares of Isonics stock at a fixed
conversion price of $1.50 per share, which would result in the exchange of one
share of Common Stock for each share of Series A Convertible Preferred Stock.
This conversion ratio is subject to dilution adjustments. The Series A
Convertible Preferred Stock is entitled to receive dividends on a
share-for-share basis with the shares of Common Stock except in the case of a
"Silicon Isotope Transaction" as defined in the Certificate of Determination
that was filed with the California Secretary of State to create the Series A
Convertible Preferred Stock. If a "Silicon Isotope Transaction" occurs, the
holders of Series A Convertible Preferred Stock have certain additional rights.
The Series A Convertible Preferred Stock is entitled to a liquidation preference
of $1.50 per share.
CLASS A WARRANTS
Class A Warrants to purchase Common Stock were issued in September 1997, and
are registered pursuant to Section 12(g) of the Securities Exchange Act of 1934,
as amended. The following is a brief summary of certain provisions of the
Warrants.
We issued Class A Warrants to purchase an aggregate of 810,000 shares of
Common Stock. We have also reserved 810,000 shares for issuance upon exercise of
the Class A Warrants. Each Class A Warrant entitles the registered holder
thereof to purchase one share of Common Stock at a price of $5.80, subject to
adjustment, through September 21, 2001. After expiration, the Warrants will be
void and of no value.
We may redeem the Warrants at a price of $0.10 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 $14.50 per share (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.
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. We are not required to issue fractional shares. In
lieu of the issuance of such fractional shares, we 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 Isonics unless such shareholder exercises such
Warrant.
CLASS B WARRANTS AND CLASS C WARRANTS
No Class B Warrants have yet been issued, but they will be issued to holders
of our Class A Warrants who accept the exchange offer.
No Class C Warrants have yet been issued, but they will be issued to persons
who exercise their Class A Warrants prior to the expiration of the exchange
offer, or who exercise their Class B Warrants prior to their expiration. The
Class B Warrants and the Class C Warrants have been registered pursuant to
Section 12(g) of the Securities Exchange Act of 1934, as amended.
The Class B Warrants and the Class C 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. We are not
69
<PAGE>
required to issue fractional shares. In lieu of the issuance of such fractional
shares, we 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 Isonics unless such
shareholder exercises such Warrant.
The material terms and conditions of the Class B Warrants and the Class C
Warrants are summarized above. SEE "THE EXCHANGE OFFER."
Underwriters' Warrants
Upon the completion of our initial public offering in September 1997 we
issued warrants to purchase 80,000 units to our underwriter. The Underwriters'
Warrants are exercisable at $5.80 per Unit and expire on September 1, 2002. If
any of the Underwriters' Warrants are exercised, the holder will receive one
share of our Common Stock and one Class A Warrant for each Underwriters' Warrant
properly exercised. If issued upon exercise of the Underwriters' Warrant, the
Class A Warrant will be subject to the Exchange Offer (which expires on
April 30, 2001) and to the other terms of the Class A Warrant agreement. This
prospectus assumes that no Underwriters' Warrants will be exercised.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On September 22, 1997, our Units (consisting one share of Common Stock and
one Class A Warrant) started trading on the Over The Counter (OTC) Bulletin
Board under the symbol ISONU. In October 1997, we unbundled the Units and the
Common Stock and Class A Warrants commenced trading on the OTC Bulletin Board
under the symbols ISON and ISONW, respectively. Although the Class B Warrants
(symbol "ISONX") and the Class C Warrants ("ISONY") are also eligible for
trading, no Class B Warrants or Class C Warrants have been issued and no market
has developed for either.
The following table sets forth the high and low bid prices for the Common
Stock (quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions) from September 22, 1997
through July 12, 2000 as reported by OTC Bulletin Board, and beginning July 13,
2000, by the Nasdaq SmallCap Market.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------
APR. 30,
JULY 31, 2000 OCT. 31, 2000* JAN. 31, 2001 2001
-------------- --------------- -------------- ---------
<S> <C> <C> <C> <C>
Common Stock (ISON)
High.......................... 7 1/16 4
Low........................... 3 3/8 3
</TABLE>
------------------------
* through September 22, 2000
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------
APR. 30,
JULY 31, 1999 OCT. 31, 1999 JAN. 31, 2000 2000
-------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Common Stock (ISON)
High........................... 3 5/8 2 1/8 10 1/2 17 15/16
Low............................ 1 7/8 7/8 1 1/4 5 9/16
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------
APR. 30,
JULY 31, 1998 OCT. 31, 1998 JAN. 31, 1999 1999
-------------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Common Stock (ISON)
High........................... 2 23/32 1 29/32 2 3 9/16
Low............................ 1 21/32 1 1/32 25/32 1 7/16
</TABLE>
As of September 22, 2000, there were approximately 250 holders of record of
our Common Stock. This does not include an indeterminate number of persons who
hold our Common Stock in brokerage accounts and otherwise in "street name.'
We have never declared or paid a cash dividend on our Common Stock. We
presently intend to retain our earnings to fund development and growth of our
business and, therefore, do not anticipate paying any cash dividends in the
foreseeable future. Additionally, the certificate of designation for the
Series A Convertible Preferred Stock contains restrictions on our ability to pay
dividends to holders of our Common Stock.
SHARES AVAILABLE FOR FUTURE SALE
The market price of our Common Stock could drop if substantial amounts of
shares are sold in the public market or if the market perceives that such sales
could occur. A drop in the market price could adversely affect holders of the
stock and could also harm our ability to raise additional capital by selling
equity securities. The securities that may be sold from time to time under this
prospectus represent a market overhang.
As of September 22, 2000, we had outstanding options, warrants and
convertible securities for the purchase of up to approximately 5,872,479 shares
of Common Stock at an average price of $2.84 per share, representing
approximately 33.9% of our outstanding shares of Common Stock on a fully-diluted
basis. The perception that these instruments may be exercised for or converted
into Common Stock that then could be sold into the public market could adversely
affect the market price of our Common Stock. In addition, we have entered into
registration rights agreements with certain of our stockholders entitling them
to include their shares of Common Stock in registration statements for
securities filed by Isonics under the Securities Act of 1933, as amended.
Awareness of the existence of these registration rights could lead to a
perception that sales of the shares subject to the registration rights could
occur, which could materially and adversely affect our stock price or could
impair our ability to obtain capital through sales of equity securities. In
addition, shares we have issued in private transactions over the past two years
will become eligible for sale in the public market under SEC Rule 144.
These shares are restricted securities as defined in Rule 144. Under that
rule, a stockholder who owns restricted shares that have been outstanding for at
least one year is entitled to sell, within any three-month period, a number of
restricted shares that does not exceed the greater of: (i) 1% of the then
outstanding shares of Common Stock, or approximately 114,393 shares as of
September 22, 2000; and (ii) an amount equal to the average weekly trading
volume in the Common Stock during the four calendar weeks preceding the sale.
SECURITIES AND EXCHANGE POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
The Articles of Incorporation of Isonics require it to indemnify its
officers, directors, employees and agents against certain liabilities incurred
by them in those capacities if they acted in good faith and reasonably believed
their conduct was in the best interests of Isonics or not opposed to it. Isonics
is also required to indemnify a person who is or was a director, officer,
employee or agent of Isonics and who was successful, on the merits or otherwise,
in defense of any proceeding to which he was a party,
71
<PAGE>
against reasonable expenses, which include attorneys' fees, incurred by him or
her in connection with the proceeding.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Isonics under the provisions discussed in the previous paragraph, or otherwise,
Isonics has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in that
Act and is, therefore, unenforceable.
EXPERTS
The consolidated balance sheets as of April 30, 1999 and 2000, and the
consolidated statements of operations, stockholders' 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.
LEGAL MATTERS
Certain legal matters, have been passed upon for Isonics by Norton-Lidstone,
P.C., Englewood, Colorado. Arter & Hadden, LLP, Los Angeles, California, has
passed on the validity of the shares of Common Stock offered hereby under
California law.
HOW TO OBTAIN ADDITIONAL INFORMATION
We file annual, quarterly, proxy statements, and other information with the
Securities and Exchange Commission (the "SEC"). You may read and copy any
document we have filed with the SEC in its public reference room at 450 Fifth
Street N.W. Washington, D.C. 20549. You may obtain information on the operation
of the public reference room by calling the SEC at 1-800-432-0330. The SEC
maintains a World Wide Web site on the Internet at http://www.sec.gov that
contains reports, proxy and information statements, and other information
regarding companies, including those that Isonics files electronically with the
SEC.
We also furnish Annual Reports to our shareholders that contain audited
financial information.
This prospectus is part of a registration statement we have filed with the
SEC relating to this exchange offer and our Common Stock described in this
prospectus. As permitted by the SEC rules, this prospectus does not contain all
of the information contained in the registration, accompanying exhibits and
schedules we file with the SEC. You may refer to the registration, the exhibits
and schedules for more information about our Company and our Common Stock. The
registration statement, exhibits, and schedules are also available at the SEC's
public reference rooms or through its EDGAR database on the Internet.
You should rely only on the information contained or incorporated by
reference in this prospectus. Isonics has not authorized anyone to provide you
with information that is different from what is contained in this prospectus.
You should not assume that the information contained in this prospectus is
accurate as of any date other than the date set forth on the front cover of this
prospectus.
72
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated Financial Statements for the Years Ended April
30, 1999 and 2000
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statement of Stockholders' Equity............ F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
Condensed Consolidated Financial Statements for the Three
Months Ended July 31, 2000 and April 30, 2000.............
Condensed Consolidated Balance Sheets..................... F-21
Condensed Consolidated Statements of Operations........... F-22
Condensed Consolidated Statements of Cash Flows........... F-23
Notes to Condensed Consolidated Financial Statements...... F-24
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Isonics Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Isonics
Corporation and Subsidiaries as of April 30, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, 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 auditing standards generally accepted
in the United States of America. 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 consolidated financial position of Isonics
Corporation and Subsidiaries as of April 30, 2000 and 1999, and the consolidated
results of their operations and their consolidated cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
GRANT THORNTON LLP
San Jose, California
June 26, 2000
F-2
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,385 $ 452
Accounts receivable (net of allowances of $119 and $82,
respectively)........................................... 1,055 932
Note receivable........................................... 208 --
Inventories............................................... 266 651
Prepaid expenses.......................................... 209 160
Deferred income taxes, current............................ 148 --
------- -------
Total current assets.................................... 5,271 2,195
PROPERTY AND EQUIPMENT, net................................. 660 1,018
GOODWILL, net............................................... 3,062 3,388
NOTES RECEIVABLE FROM SHAREHOLDERS.......................... 17 130
DEFERRED INCOME TAXES....................................... 492 --
OTHER ASSETS................................................ 31 75
------- -------
$ 9,533 $ 6,806
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and line of credit...... $ 20 $ 1,136
Notes payable to related parties.......................... -- 922
Accounts payable.......................................... 533 1,368
Accrued liabilities....................................... 591 1,036
Income taxes payable...................................... 373 50
------- -------
Total current liabilities............................... 1,517 4,512
STOCKHOLDERS' EQUITY
Class A Preferred Stock--no par value; 10,000,000 shares
authorized; shares issued and outstanding:
2000--1,830,000......................................... 2,745 --
Common stock--no par value; 20,000,000 shares authorized;
shares issued and outstanding: 2000--10,492,931;
1999--6,607,760......................................... 6,764 6,795
Notes receivable from shareholders........................ -- (469)
Deferred compensation..................................... (150) --
Accumulated deficit....................................... (1,343) (4,032)
------- -------
Total stockholders' equity.............................. 8,016 2,294
------- -------
$ 9,533 $ 6,806
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Net revenues................................................ $12,733 $16,998
Cost of revenues............................................ 10,156 13,375
------- -------
Gross margin.............................................. 2,577 3,623
Operating expenses:
Selling, general and administrative....................... 3,698 3,643
Research and development.................................. 1,224 1,155
Restructuring and office closure.......................... 56 691
------- -------
Total operating expenses................................ 4,978 5,489
------- -------
Operating loss.............................................. (2,401) (1,866)
Other income (expense)
Interest income........................................... 105 36
Interest expense.......................................... (321) (575)
Gain on sale of product line.............................. 5,296 --
Foreign currency gain..................................... 29 55
Other..................................................... 110 --
------- -------
Total other income (expense), net....................... 5,219 (484)
------- -------
Income (loss) before taxes.................................. 2,818 (2,350)
Income tax expense.......................................... 129 171
------- -------
NET INCOME (LOSS)........................................... $ 2,689 $(2,521)
======= =======
NET INCOME (LOSS) PER SHARE--BASIC
Net income (loss) per share............................... $ 0.40 $ (0.41)
Shares used in computing per share information............ 6,781 6,210
NET INCOME (LOSS) PER SHARE--DILUTED
Net income (loss) per share............................... $ 0.26 $ (0.41)
Shares used in computing per share information............ 10,409 6,210
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK SHAREHOLDER
-------------------- --------------------- NOTES DEFERRED (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT RECEIVABLE COMPENSATION DEFICIT) TOTAL
--------- -------- ---------- -------- ----------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, May 1, 1998...... -- $ -- 5,714,250 $5,289 $(337) $ -- $(1,511) $ 3,441
Issuance of common stock
for Chemotrade
acquisition............ -- -- 357,730 894 -- -- -- 894
Issuance of common stock
in lieu of salaries.... -- -- 118,182 130 -- -- -- 130
Conversion of debt into
common stock........... -- -- 127,209 191 -- -- -- 191
Exercise of stock options
and warrants........... -- -- 290,389 147 (130) -- -- 17
Fair value of warrants
issued with debt....... -- -- -- 144 -- -- -- 144
Interest on notes
receivable from
stockholders, net of
repayments............. -- -- -- -- (2) -- -- (2)
Net loss................. -- -- -- -- -- -- (2,521) (2,521)
--------- ------ ---------- ------ ----- ----- ------- -------
BALANCES, April 30, 1999... -- -- 6,607,760 6,795 (469) -- (4,032) 2,294
Issuance of preferred
stock.................. 1,830,000 2,745 -- -- -- -- -- 2,745
Exercise of stock options
and warrants........... -- -- 3,918,986 81 -- -- -- 81
Fair value of warrants
issued for debt
restructuring.......... -- -- -- 157 -- -- -- 157
Fair value of stock
issued for services as
deferred
compensation........... -- -- 25,000 153 -- (153) -- --
Amortization of deferred
compensation........... -- -- -- -- -- 3 -- 3
Shares issued under
Employee Stock Purchase
Program................ -- -- 13,723 13 -- -- -- 13
Repayment of notes
receivable from
stockholders, net of
interest............... -- -- -- -- 34 -- -- 34
Repayment of notes
receivable and accrued
interest with common
stock.................. -- -- (72,538) (435) 435 -- -- --
Net income............... -- -- -- -- -- -- 2,689 2,689
--------- ------ ---------- ------ ----- ----- ------- -------
BALANCES, April 30, 2000... 1,830,000 $2,745 10,492,931 $6,764 $ -- $(150) $(1,343) $ 8,016
========= ====== ========== ====== ===== ===== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 2,689 $(2,521)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Gain on sale of depleted zinc business.................. (5,296) --
Depreciation and amortization........................... 567 520
Interest on notes receivable from shareholders.......... (23) (24)
Fair value of warrants and stock issued and amortization
of deferred compensation.............................. 160 274
Interest recognized upon conversion of debt to equity... -- 64
Deferred income taxes................................... (640) --
Loss on disposal of property and equipment.............. 75 504
Forgiveness of notes receivable due from stockholders... 27 --
Changes in operating assets and liabilities:
Accounts and notes receivable......................... (146) 1,748
Inventories........................................... (1,066) (89)
Prepaid expenses and other assets..................... (139) 68
Accounts payable...................................... (522) (112)
Accrued liabilities and other......................... (336) (30)
Income taxes payable.................................. 323 (45)
------- -------
Net cash provided by (used in) operating
activities...................................... (4,327) 357
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (15) (159)
Proceeds from sale of depleted zinc business.............. 6,730 --
Purchase of Chemotrade, net of cash acquired.............. -- (546)
------- -------
Net cash provided by (used in) investing
activities...................................... 6,715 (705)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit and other borrowings........... (1,931) (1,000)
Proceeds from borrowings.................................. 75 717
Repayment of notes receivable from shareholders........... 57 22
Proceeds from issuance of preferred stock................. 2,250 --
Proceeds from issuance of common stock.................... 94 17
------- -------
Net cash provided by (used in) financing
activities...................................... 545 (244)
------- -------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS... 2,933 (592)
Cash and cash equivalents at beginning of period............ 452 1,044
------- -------
Cash and cash equivalents at end of period.................. $ 3,385 $ 452
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Isonics Corporation ("We" or the "Company") develop and market products
worldwide based on isotopes for applications in the energy, medical research,
diagnostic, pharmaceutical and semiconductor industries. Through one of our
subsidiaries, we also provide contract research and development services.
PRINCIPALS OF CONSOLIDATION
The consolidated financial statements include our accounts and those of our
wholly-owned subsidiaries, International Process Research Corporation
("Interpro") and Chemotrade GmbH ("Chemotrade"). All significant intercompany
accounts have been eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents include investments purchased with a maturity of less than
ninety days. Cash balances held in foreign bank accounts were $151,000 at April
30, 2000.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject us 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. We extend credit to our customers, most of whom are
large, established companies. Credit risk is mitigated by performing ongoing
credit evaluations of our customers' financial condition and we generally do not
require collateral.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
We perform periodic assessments to determine the existence of obsolete, slow
moving and non-salable inventories, and record provisions to reduce such
inventories to net realizable value when necessary.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over three to seven years. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the lease term.
GOODWILL
Goodwill resulted from the acquisitions of Isoserve, Inc. and Chemotrade. We
evaluate goodwill for impairment by comparing the unamortized balance of
goodwill to the undiscounted future cash flows of the related assets. We modify
or adjust goodwill if impairment is indicated. Based upon our most recent
evaluation, we believe that no impairment of goodwill exists as of April 30,
2000; however, with the sale of the depleted zinc business to Eagle-Picher on
December 1, 1999, unamortized goodwill of $112,000 related to the
Isoserve, Inc. acquisition was charged against the gain on the sale of the
product line. The goodwill resulting from the Chemotrade acquisition is being
amortized on a straight-line basis over twenty years.
F-7
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
We account for income taxes using an asset and liability approach for
financial accounting and reporting purposes. A valuation allowance is provided
when deferred tax assets are not expected to be realized.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment. Product returns and
warranty costs have not been material in any period. Revenue from contract
research and development services is recognized ratably as services are
performed and costs are incurred.
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, we are required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of cash and equivalents, trade receivables, trade payables
and debt approximates carrying value due to the short maturity of such
instruments.
TRANSLATION OF FOREIGN CURRENCIES
We conduct substantially all of our transactions in U.S. dollars, except for
certain transactions of Chemotrade that are conducted in Duetsche Marks. The
financial statements of Chemotrade are prepared in Duetsche Marks and remeasured
into U.S. dollars for purposes of consolidation, with the U.S. dollar as the
functional currency. Gains and losses from remeasurement and transaction gains
and losses are included in the statement of operations.
ACCOUNTING FOR STOCK-BASED COMPENSATION
We account for stock-based awards to employees and directors using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees and related interpretations. We
provide additional pro forma disclosures as required under Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation.
NET INCOME (LOSS) PER SHARE
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common shares and potentially
dilutive securities outstanding during the period. Potentially dilutive
securities consist of the incremental common shares issuable upon conversion of
preferred stock (using the "if converted" method) and shares issuable upon the
exercise of stock options and warrants (using the "treasury stock" method).
Potentially dilutive securities are excluded from the computation if their
effect is anti-dilutive. Contingently issued shares are included in earnings per
share when the related conditions are satisfied.
F-8
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table reconciles the denominator used in the per share
computation (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Weighted average shares of common stock outstanding......... 7,174 6,210
Less: weighted average shares contingently issued........... (393) --
------ -----
Shares used for net income (loss) per share - basic....... 6,781 6,210
Dilutive effect of stock options and warrants............... 1,850 --
Dilutive effect of convertible preferred stock.............. 1,385 --
Add back: weighted average shares contingently issued....... 393 --
------ -----
Shares used for net income (loss) per share - diluted..... 10,409 6,210
====== =====
</TABLE>
A total of 3,464,047 shares issuable from the exercise of outstanding
options and warrants were excluded from the calculation of loss per share in
1999, as their inclusion would have been anti-dilutive.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 financial statements in
order to conform to the 2000 presentation.
NOTE 2--FINANCIAL STATEMENT COMPONENTS
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Finished goods.............................................. $139 $420
Work in process............................................. 127 --
Raw materials............................................... -- 231
---- ----
$266 $651
==== ====
</TABLE>
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Office furniture and equipment.............................. $ 174 $ 159
Production equipment........................................ 898 1,094
Leasehold improvements...................................... 19 19
------ ------
1,091 1,272
Accumulated depreciation and amortization................... (431) (254)
------ ------
$ 660 $1,018
====== ======
</TABLE>
F-9
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--FINANCIAL STATEMENT COMPONENTS (CONTINUED)
Goodwill related to acquisitions consists of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Isoserve, net of accumulated amortization of $472 and
$315...................................................... $ -- $ 157
Chemotrade, net of accumulated amortization of $323 and
$154...................................................... 3,062 3,231
------ ------
$3,062 $3,388
====== ======
</TABLE>
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Compensation................................................ $ 68 $ 391
Interest.................................................... -- 68
Customer advances and deposits.............................. 194 97
Restructuring costs......................................... 47 61
Other....................................................... 282 419
---- ------
$591 $1,036
==== ======
</TABLE>
Supplemental disclosure of non-cash investing and financing activities (in
thousands):
<TABLE>
<CAPTION>
APRIL 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Stock issued for note receivable............................ $ -- $ 130
==== =======
Conversion of trade payables into debt...................... $243 $ 95
==== =======
Conversion of liabilities and debt into preferred stock..... $495 $ --
==== =======
Retirement of common stock to pay shareholder notes
receivable................................................ $435 $ --
==== =======
Purchase of Chemotrade
Cash paid................................................. $ -- $ 546
Cash acquired............................................. -- 309
Stock issued to seller.................................... -- 894
Debt issued to seller..................................... -- 1,750
Liabilities assumed....................................... -- 1,598
Goodwill.................................................. -- (3,385)
---- -------
Assets acquired........................................... $ -- $ 1,712
==== =======
</TABLE>
F-10
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--FINANCIAL STATEMENT COMPONENTS (CONTINUED)
Supplemental disclosures of cash flow information (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Cash paid during the period for:
Interest.................................................. $388 $475
Income taxes.............................................. 433 227
</TABLE>
NOTE 3--ACQUISITIONS
On July 21, 1998, we acquired all of the outstanding shares of Chemotrade
and a subsidiary, which was owned by two shareholders. Chemotrade is engaged in
the distribution, development and manufacturing of stable and radioisotopes. The
purchase was effective June 1, 1998, the date control was transferred, and our
financial statements include the results of Chemotrade's operations from
June 1, 1998. Pro forma results of operations for 1999 have not been presented
as the pro forma amounts would not have been materially different than those
reported.
The consideration paid upon closing consisted of $546,000 cash, 357,730
restricted shares of common stock with a fair market value of $894,000, and two
notes. The first note of $924,000 (DM 1,663,000) bore interest at 2% per month
and was paid in August 1998, and the second note of $812,000 (DM 1,500,000) bore
interest at 10% per year and was paid by December 1999. Transaction costs were
$125,000. Imputed interest from the effective date of the acquisition totaled
$28,000.
The purchase agreement provides for the selling shareholders to receive
additional consideration in the event pretax earnings of $467,000 (DM 1,000,000)
are achieved for the year ending April 30, 2001. The maximum additional
consideration that can be earned is $234,000 (DM 500,000). Any additional
consideration will be recorded as additional goodwill.
NOTE 4--SALE OF DEPLETED ZINC BUSINESS
On December 1, 1999, we sold our depleted zinc business to Eagle-Picher
Technologies, LLC ("Eagle-Picher") for $8,230,000, including $1,500,000 to be
paid over a period of three years. We received cash of approximately $6,730,000
from Eagle-Picher at the closing, of which approximately $1,150,000 was used to
pay certain accrued liabilities and debt. Upon completion of the sale, we
recognized a net gain on the sale amounting to $5,088,000. Eagle-Picher's
obligation to pay the final $1,500,000 is subject to the performance of our
former depleted zinc supplier under the terms of a supply agreement that was
transferred to Eagle-Picher in the sale. We are recognizing the $1,500,000 on a
straight-line basis as our former supplier performs. As a result, we have
recognized additional gain of $208,000 through April 30, 2000, which is reported
as a note receivable at April 30, 2000.
F-11
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--INCOME TAXES
Deferred tax assets (liabilities) are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
APRIL 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Deferred tax assets
Accruals and expenses deductible in future periods....... $1,609 $ 1,269
Net operating loss carryforwards......................... -- 435
------ -------
Total deferred tax assets.............................. 1,609 1,704
Valuation allowance...................................... (376) (1,178)
------ -------
1,233 526
Deferred tax liabilities
Amortization and depreciation............................ (593) (526)
------ -------
$ 640 $ --
====== =======
</TABLE>
Income tax expense (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Current
Federal................................................... $ 640 $ --
State..................................................... 98 --
Foreign................................................... 31 171
----- ----
769 171
Deferred
Federal................................................... (640) --
State..................................................... -- --
----- ----
(640) --
----- ----
$ 129 $171
===== ====
</TABLE>
A reconciliation of our effective tax rate to the federal statutory tax rate
of 34% follows (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Expected tax (benefit) at federal statutory rate............ $ 958 $(799)
State taxes net of federal benefit.......................... 98 (104)
Foreign income taxed at different rates..................... (77) 26
Non-deductible expenses..................................... 67 84
Utilization of previously unrecognized net operating loss
and tax credit carryforwards.............................. (115) --
Change in valuation allowance............................... (802) 1,097
Other....................................................... -- (133)
----- -----
$ 129 $ 171
===== =====
</TABLE>
F-12
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--DEBT AND LINE OF CREDIT
At April 30, 1999, we had amounts owing to our primary lender, along with
other secured and unsecured debt, amounting to $1,136,000. We also had
borrowings amounting to $922,000 payable to related parties. We repaid all of
these borrowings, except for certain term debt with an outstanding balance of
$20,000 at April 30, 2000, with the proceeds from the sale of our depleted zinc
business. We currently have no lending facilities with any financial
institutions, except for an unsecured line of credit available to Chemotrade in
the amount of DM 400,000 ($187,000). At April 30, 2000, there are no borrowings
outstanding under this line of credit.
NOTE 7--STOCKHOLDERS' EQUITY
COMMON STOCK
On September 22, 1997, we completed an initial public offering of 810,000
units, each unit consisting of one share of common stock and one redeemable
common stock purchase warrant. Each warrant entitles the holder to purchase one
share of common stock at $5.80 per share, exercisable until September 21, 2001.
We may redeem the warrants at a price of $0.10 per warrant if the closing price
of our common stock is at least $14.50 per share for 20 consecutive trading
days.
In connection with the offering, we granted the underwriter warrants to
purchase up to 160,000 shares of common stock at a weighted average exercise
price of $7.77. The warrants are exercisable at anytime until September 21,
2001.
PREFERRED STOCK
On July 29, 1999, we completed a private placement financing to accredited
investors and certain creditors valued in total at approximately $2,745,000. We
issued 1,830,000 units, each consisting of one share of Series A Convertible
Preferred Stock and one warrant. We received $2,250,000 in cash proceeds and
converted $425,000 of long-term debt in connection with the private placement.
Each share of the Series A Convertible Preferred Stock is convertible into one
share of our Common Stock. The liquidation preference for the Series A
Convertible Preferred Stock is $1.50 per share, amounting to a total liquidation
preference of $2,745,000 at April 30, 2000. Each warrant allows the investor to
purchase one share of Isonics Common Stock for $3.75 through July 29, 2002. We
granted certain registration rights to the holders of the shares of common stock
underlying the Class A Convertible Preferred Stock and the warrants.
In addition to converting $425,000 of existing debt into equity as part of
the private placement we:
- Issued 500,000 warrants to purchase shares of our Common Stock to an
investment banker as a commission on this placement. The warrants are
exercisable at $3.75 per share through July 29, 2002.
- Issued 46,667 units in satisfaction of all current and future obligations
under the Isoserve royalty agreement.
- Extended the payment due date for the remaining balance on the Chemotrade
acquisition note to July 2000, which note has been paid in full.
- Extended the payment due date for certain unsecured promissory notes to
January 2000, which notes have been paid in full.
F-13
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION AND PURCHASE PLANS
1996 STOCK OPTION PLAN
Our 1996 Stock Option Plan authorized the grant of incentive and
nonqualified stock options to our key employees, directors or consultants. The
options generally expire ten years from the date of grant. In September 1997,
the Board of Directors terminated the 1996 Stock Option Plan. As of April 30,
2000, there remain 488,356 options outstanding under the 1996 Stock Option Plan.
DIRECTORS' STOCK OPTION PLAN
The 1998 Directors' Plan (the "Directors' Plan") provides that each person
serving as a member of the Board, who is not an employee of Isonics, receive
options to purchase 20,000 shares of Isonics Common Stock when such person
accepts the position as a Director and to receive an additional option to
purchase 10,000 shares when such person is re-elected as a Director provided
such person is not an employee of Isonics at the time of election. The exercise
price for the options is the fair market value on the date of grant and the
options are exercisable for five years from such date. The options granted under
the Directors' plan vest immediately. In the event a Director resigns or is not
re-elected to the Board, failure to exercise the options within three months
results in the options' termination. Although the Directors adopted the plan in
1998, the Board formalized the plan by resolution in January 2000.
As of April 30, 2000, options to purchase a total of 110,000 shares were
outstanding under the Directors' Plan. We do not have any other arrangements
under which we compensate the Directors for acting in their capacities as
Directors.
EXECUTIVE AND INCENTIVE STOCK OPTION PLANS
In November 1996, the Board of Directors adopted the Executive and Incentive
Stock Option Plans authorizing the granting of up to 570,000 and 150,000
incentive and nonqualified stock options to our key employees, directors or
consultants. 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. Options are exercisable when vested,
typically over five years, and expire ten years after the date of grant. As of
April 30, 2000, options to purchase a total of 488,408 shares were outstanding
under the Executive and Incentive Stock Option Plans.
EMPLOYEE STOCK PURCHASE PLAN
The employee stock purchase plan has reserved 200,000 shares of our common
stock for sale to all permanent employees who have met minimum employment
criteria. Employees who do not own 5% or more of the outstanding shares are
eligible to participate through payroll deductions. At the end of each offering
period, shares are purchased by the participants at 85% of the lower of the fair
market value of our Common Stock at the beginning or the end of the offering
period. As of April 30, 2000, 13,723 shares have been issued under the plan.
F-14
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDERS' EQUITY (CONTINUED)
PRO FORMA DISCLOSURE OF COMPENSATION EXPENSE UNDER SFAS NO. 123
The exercise price of options granted generally approximates the fair market
value per share of our stock on the date of grant. Accordingly, no compensation
cost has been recognized for grants from the plans made to employees or
directors. Had compensation cost for grants to employees and directors been
determined based on the fair value of the options at the grant dates consistent
with SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, our results of
operations and per share amounts for the years ended April 30, 2000 and 1999
would have been changed to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
2000 1999
---------- -----------
<S> <C> <C>
Net income (loss)
As reported....................................... $2,689,000 $(2,521,000)
Pro forma......................................... 1,248,000 (3,174,000)
Income (loss) per share--diluted
As reported....................................... $ 0.26 $ (0.41)
Pro forma......................................... 0.12 (0.51)
</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; no expected dividends, volatility of 150%; risk-free interest rate
of 6.0%; and expected lives of five (5) years. A summary of the status of our
stock option plans as of April 30, 2000 and 1999, and changes during the years
ending on these dates is presented below.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding, May 1, 1998.................................... 1,054,809 $1.84
Granted................................................... 480,721 $1.71
Exercised................................................. (195,830) $0.66
Canceled.................................................. (343,123) $3.35
---------
Outstanding, April 30, 1999................................. 996,577 $1.49
Granted................................................... 169,500 $6.35
Exercised................................................. (21,813) $1.16
Canceled.................................................. (57,500) $1.69
---------
Outstanding, April 30, 2000................................. 1,086,764 $2.25
=========
</TABLE>
The weighted average fair value of options granted during the years ended
April 30, 2000 and 1999 was $5.78 and $1.56, respectively.
F-15
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDERS' EQUITY (CONTINUED)
The following information applies to options outstanding at April 30, 2000:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE
EXERCISE NUMBER EXERCISE NUMBER NUMBER EXERCISE
PRICE OUTSTANDING PRICE OUTSTANDING EXERCISABLE PRICE
---------------------------------- ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.58...................... 336,927 $0.58 6 336,927 $0.58
$1.00 -- $1.44.................... 204,783 $1.27 9 149,783 $1.34
$1.62 -- $2.38.................... 208,054 $1.90 8 91,050 $1.88
$2.56 -- $3.50.................... 180,000 $2.98 8 125,000 $3.16
$5.56 -- $7.31.................... 157,000 $6.72 5 157,000 $6.72
--------- -------
1,086,764 $2.25 859,760 $2.35
========= =======
</TABLE>
NOTES RECEIVABLE FROM SHAREHOLDERS
In fiscal 1997, two of our executive officers exercised stock options to
each acquire 259,175 shares of common stock at an exercise price of $0.64 per
share. In fiscal 1999, two other executive officers exercised stock options to
acquire 57,603 and 138,227 shares of common stock at exercise prices of $0.87
and $0.58, respectively. In each case, we loaned the executive officer the
aggregate amount 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, during fiscal 1998, we loaned to each of the two
executive officers related to the fiscal 1997 option exercises, pursuant to a
five-year note with interest at the minimum applicable federal rate, the amount
equal to the federal and state tax liability incurred by him as a result of
exercising such option, and agreed to pay compensation to such officers equal to
the amount of interest payable under these loans and the amount of taxes payable
as a result of such compensation. At April 30, 1999, principal and interest due
on the loans to acquire the common stock totaled $460,000 and $9,000,
respectively, and, principal and interest on the loans to pay the federal and
state tax liabilities totaled $126,000 and $4,000, respectively.
In January 2000, the Board of Directors agreed to forgive the current
interest and principal due related to the tax notes and to accept Isonics Common
Stock, owned by the officers, in payment of the balances owed for the share
purchase loans. The amount owed by Mr. James Alexander, our President and CEO,
that was forgiven was $74,000. The amount owed by Mr. Boris Rubizhevsky, our
Senior Vice President, that was forgiven was $61,000. In both cases the amount
forgiven was treated as bonus compensation to Mr. Alexander and
Mr. Rubizhevsky. Each officer surrendered 30,437 shares of Isonics Common Stock
to pay off $175,000 of principal and accrued interest. The other two loans,
executed in fiscal 1999, were paid in full: the first, in cash, in March 2000;
and the second, by the surrender of 11,664 shares of our Common Stock in
January 2000. As of April 30, 2000 we had no notes receivable outstanding for
the acquisition of stock.
F-16
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
In addition to the warrants issued as part of our initial public offering,
we have issued warrants in connection with debt offerings and a private
placement of convertible preferred stock, and as consideration for concessions
from lenders and vendors. A summary of the activity in our warrants follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Outstanding, May 1, 1998.................................... 2,462,029 $3.81
Warrants issued with debt................................. 75,000 2.51
Exercised................................................. (94,559) 0.18
Expired................................................... -- 0.00
----------
Outstanding, April 30, 1999................................. 2,442,470 $3.90
Warrants issued in debt restructuring..................... 95,000 2.61
Warrants issued in private placement of convertible
preferred stock......................................... 2,330,000 3.75
Warrants issued for isotope supply agreement.............. 4,000,000 3.75
Exercised................................................. (3,897,173) 3.55
Forfeited, via net exercise............................... (1,043,650) 3.92
Expired................................................... -- 0.00
----------
Outstanding, April 30, 2000................................. 3,926,647 $4.01
==========
</TABLE>
In fiscal 1999 we issued two unsecured promissory notes bearing interest at
prime plus 4% for $200,000 each to a vendor and an unaffiliated party. The two
$200,000 notes were due in April 1999. The Company issued 50,000 warrants each
to the vendor and the unaffiliated party. The fair value of these warrants,
$144,000, was recorded as additional interest expense. The unaffiliated party
converted its $200,000 unsecured promissory note into 133,000 shares of
convertible preferred stock and 133,000 warrants as described above under
"PREFERRED STOCK."
In July 1999, we made a principal payment of $550,000 towards the amounts
owing to the former Chemotrade shareholders from the acquisition of Chemotrade.
At that time, we extended the due date of the balance to July 31, 2000. In
consideration for the extension, we issued 70,000 warrants to the former
Chemotrade shareholders, exercisable at $3.00 per warrant until June 30, 2004.
We recognized a charge amounting to $157,000 representing the fair value of the
warrants issued determined using the Black-Scholes option pricing model.
In conjunction with the sale of our depleted zinc business to Eagle-Picher,
we agreed that Eagle-Picher will sell to us 200 kilograms of silicon-28 in
consideration for warrants to purchase 4,000,000 shares of our common stock at a
purchase price of $3.75 per share, exercisable for forty-two months.
Eagle-Picher exercised the warrants in March 2000 under a 'net-exercise'
provision entitling Eagle-Picher to receive 3,130,435 shares of common stock.
These shares are subject to a prorated reduction to the extent Eagle-Picher does
not deliver the required 200 kilograms of silicon-28 in calendar 2000.
Accordingly, these contingent shares are excluded from the number of shares used
for calculating basic net income per share. The shares issued are subject to a
registration rights agreement. Eagle-Picher claims that we should issue to them
an additional 155,279 shares pursuant to the net exercise provision,
F-17
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDERS' EQUITY (CONTINUED)
but we believe their calculation is in error, and we are continuing discussions
with representatives of Eagle-Picher to resolve this dispute.
On June 13, 2000, we offered to the holders of the outstanding warrants
issued in our public offering (the "Class A Warrants") the opportunity to
exchange their Class A Warrants for Class B Warrants. The exercise price for the
Class B Warrants, $5.80 per share, is the same as that of the Class A Warrant.
If a Class B Warrant is exercised before its expiration date (September 30,
2000), we will issue one share of Common Stock and one Class C Warrant. The
Class C Warrants expire June 15, 2003, are exercisable for one share of Common
Stock at a price of $10.00 per share, and are redeemable if our Common Stock
trades at or above $15.00 per share for any 20 of 30 consecutive trading days.
We have reserved shares of common stock for issuance as follows:
<TABLE>
<CAPTION>
APRIL 30,
2000
---------
<S> <C>
Exercise of stock options................................... 1,296,543
Exercise of warrants........................................ 3,926,647
Employee stock purchase plan................................ 186,277
Convertible preferred stock................................. 1,830,000
---------
7,239,467
=========
</TABLE>
NOTE 8--BUSINESS SEGMENTS AND FOREIGN OPERATIONS
We have two operating segments: Isotope Production and Contract Research and
Development. Our reportable segments are strategic business units that offer
different products and services. They are managed based on the fundamental
differences in their operations.
Information by segment is set forth below (in thousands):
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Net revenues
Isotope Production........................................ $11,577 $14,384
Contract Research and Development......................... 1,156 2,614
Operating income (loss)
Isotope Production........................................ $(2,070) $(1,035)
Contract Research and Development......................... (331) (831)
Identifiable assets
Isotope Production........................................ $ 8,711 $ 5,713
Contract Research and Development......................... 822 1,093
</TABLE>
F-18
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--BUSINESS SEGMENTS AND FOREIGN OPERATIONS (CONTINUED)
A summary of our operations by geographic area is presented below (in
thousands):
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Net revenues
United States............................................. $ 4,501 $ 6,817
Germany................................................... 8,232 10,181
Operating income (loss)
United States............................................. $(2,486) $(2,322)
Germany................................................... 85 456
Identifiable assets
United States............................................. $ 8,117 $ 5,507
Germany................................................... 1,416 1,299
</TABLE>
NOTE 9--PROFIT SHARING PLAN
We have a profit sharing plan qualified under section 401(k) of the Internal
Revenue Code. The plan is a defined contribution plan, covering substantially
all of our employees. Company contributions to the plan aggregated approximately
$40,000 and $30,000 for 2000 and 1999, respectively.
NOTE 10--CONCENTRATIONS
Two customers accounted for approximately 15% and 10% of net revenues for
the year ended April 30, 2000. One of these customers accounted for 18% of
accounts receivable at April 30, 2000. Two separate customers accounted for 23%
and 13% of net revenues for the year ended April 30, 1999. Accounts receivable
at April 30, 1999, did not include any amounts due from either of these two
customers.
NOTE 11--RESTRUCTURING
In the year ended April 30, 1999, we recorded a charge to operations
amounting to $691,000 relating to a planned restructuring of our operations.
This charge consisted primarily of lease termination costs of $132,000,
severance pay for terminated employees of $91,000, and the write down of fixed
assets of $468,000. As of April 30, 2000, we had completed the restructuring.
The only costs remaining to be paid, which have been accrued, relate to the
lease payments of approximately $47,000 on our former facilities in excess of
the sublease income.
F-19
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--COMMITMENTS
We rent office, production facilities and equipment under operating leases
expiring through March 2004. Rent expense for operating leases was approximately
$224,000 and $202,000 for the years ended April 30, 2000 and 1999, respectively.
Future minimum annual operating lease commitments are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING APRIL 30,
---------------------
<S> <C>
2001.................................................. $163
2002.................................................. 40
2003.................................................. 16
2004.................................................. 8
----
$227
====
</TABLE>
On December 1, 1999, we signed a ten-year supply agreement with Eagle-Picher
by which we will have the exclusive right to purchase quantities of isotopically
pure silicon-28, silicon-29, and silicon-30, and a non-exclusive right to
purchase quantities of isotopically pure carbon-12 and carbon-13 produced by
Eagle-Picher from its Oklahoma-based facilities. We agreed to pay Eagle-Picher a
fee equal to 3% of the net revenues from all sales made by us of products
incorporating the enriched silicon isotopes supplied by Eagle-Picher. As of
April 30, 2000, no royalties have accrued under this agreement.
F-20
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JULY 31, 2000
--------------
(UNAUDITED)
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,059
Accounts receivable (Net of allowance of $81 and $119,
respectively)........................................... 1,170
Notes receivable.......................................... 333
Income taxes receivable................................... 173
Inventories............................................... 378
Prepaid expenses and other current assets................. 187
Deferred income taxes, current............................ 303
-------
Total current assets.................................... 4,603
-------
LONG-TERM ASSETS
Property and equipment, net............................... 569
Goodwill, net............................................. 3,019
Notes receivable from shareholders --
Deferred income taxes..................................... 492
Other assets 32
-------
Total long-term assets.................................. 4,112
-------
TOTAL ASSETS................................................ $ 8,715
=======
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
JULY 31, 2000
--------------
(UNAUDITED)
<S> <C>
CURRENT LIABILITIES:
Notes payable and line of credit.......................... $ 19
Accounts payable.......................................... 764
Accrued liabilities....................................... 475
Income taxes payable...................................... 26
-------
Total current liabilities............................... 1,284
-------
SHAREHOLDERS' EQUITY:
Class A Preferred Stock--no par value. 10,000,000 shares
authorized; 1,516,667 shares issued and outstanding on
July 31, 2000, and 1,830,000 shares issued and
outstanding on April 30, 2000........................... 2,275
Common stock--no par value. 20,000,000 shares authorized;
11,003,660 shares issued and outstanding on July 31,
2000, and 10,492,931 shares issued and outstanding on
April 30, 2000.......................................... 7,471
Deferred compensationm.................................... (131)
Accumulated deficit....................................... (2,184)
-------
Total shareholders' equity.............................. 7,431
-------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $ 8,715
=======
</TABLE>
See notes to condensed consolidated financial statements.
F-21
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Net revenues................................................ $2,036 $3,084
Cost of revenues............................................ 1,522 2,399
------ ------
Gross margin.............................................. 514 685
Operating expenses:
Selling, general and administrative....................... 1,203 885
Research and development.................................. 304 127
Restructuring and office closure.......................... -- 66
------ ------
Total operating expenses................................ 1,507 1,078
------ ------
Operating loss.............................................. (993) (393)
------ ------
Other income (expense):
Foreign exchange.......................................... 69 4
Interest and other income................................. 99 41
Interest expense.......................................... (16) (124)
------ ------
Total other income (expense), net....................... 152 (79)
------ ------
Loss before income taxes.................................... (841) (472)
Income tax expense.......................................... 1 1
------ ------
NET LOSS.................................................... $ (842) $ (473)
====== ======
Net loss per share--basic and diluted.......................
Net income (loss) per share................................. $(0.11) $(0.07)
Shares used in computing per share information.............. 7,639 6,608
</TABLE>
See notes to condensed consolidated financial statements.
F-22
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Net cash used in operating activities....................... $(1,508) $ (884)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (11) (1)
------- ------
Cash used in investing activities....................... (11) (1)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit.............................. -- 370
Proceeds from issuance of notes payable................... -- 75
Repayments of notes payable............................... -- (615)
Proceeds from issuance of common stock.................... 193 --
Proceeds from issuance of Class A Preferred Stock......... -- 2,230
------- ------
Cash provided by financing activities................... 193 2,060
------- ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:....... (1,326) 1,175
Cash and cash equivalents at beginning of period.......... 3,385 452
------- ------
Cash and cash equivalents at end of period................ $ 2,059 $1,627
======= ======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 1 $ 124
======= ======
Income taxes............................................ $ 675 $ 1
======= ======
Supplemental disclosure of noncash investing and financing
activities:
Accounts payable converted into notes payable........... $ -- $ 243
Liabilities converted into Class A Preferred Stock...... -- 495
Class A Preferred Stock converted into Common Stock..... 470 --
======= ======
</TABLE>
See notes to condensed consolidated financial statements.
F-23
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Isonics
Corporation and Subsidiaries (the "Company" or "Isonics") as of July 31, 2000,
and for the three months ended July 31, 2000, and 1999, have been prepared on
the same basis as the annual audited financial statements. In the opinion of
management, such unaudited information includes all adjustments (consisting only
of normal recurring accruals) necessary for a fair presentation of this interim
information. Operating results and cash flows for interim periods are not
necessarily indicative of results for the entire year. The information included
in this report should be read in conjunction with our audited financial
statements and notes thereto included in our Annual Report on Form 10-KSB for
the year ended April 30, 2000.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of
common shares and potentially dilutive securities outstanding during the period.
Potentially dilutive securities consist of the incremental common shares
issuable upon conversion of preferred stock (using the "if converted" method)
and shares issuable upon the exercise of stock options and warrants (using the
"treasury stock" method). Potentially dilutive securities are excluded from the
computation of net income (loss) per share if their effect is anti-dilutive. As
of July 31, 2000, a total of 4,814,999 outstanding stock options and warrants,
and 1,516,667 outstanding shares of Class A Convertible Preferred Stock have
been excluded from the diluted net income (loss) per share calculation, as the
inclusion would be anti-dilutive. As of July 31, 1999, a total of approximately
5,864,047 outstanding stock options and warrants, and 1,830,000 outstanding
shares of Class A Convertible Preferred Stock were excluded from the diluted net
income (loss) per share calculation, as their inclusion would be anti-dilutive.
Contingently issued shares are included in the computation when the related
conditions are satisfied. Accordingly, 3,130,435 shares of Common Stock were
excluded from the net income (loss) per share calculation, as the issuance of
this Common Stock is contingent upon the delivery of silicon-28 per the terms of
the Eagle-Picher transaction, as described in the paragraph entitled "SALE OF
DEPLETED ZINC BUSINESS." Eagle-Picher disputes our calculation and believes we
should issue to it an additional 155,279 shares of Common Stock. We believe
Eagle-Picher's calculation is in error and we are continuing discussions with
representatives of Eagle-Picher to resolve this matter. These disputed shares
have also been excluded from the earnings per share calculation, as they have
not been issued.
During the three month period ended July 31, 2000, we issued the following
shares of Common Stock:
<TABLE>
<CAPTION>
DESCRIPTION NUMBER OF COMMON STOCK SHARES
----------- -------------------------------
<S> <C>
Balance as of April 30, 2000................................ 10,492,931
Exercise of employee stock options for cash................. 185,912
Conversion of Class A Preferred Stock....................... 313,333
Issuance for services....................................... 4,000
Shares issued from employee stock purchase plan............. 7,484
----------
Balance as of July 31, 2000................................. 11,003,660
</TABLE>
F-24
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
JULY 31, 2000
--------------
<S> <C>
Finished goods.............................................. $221
Work in progress............................................ 157
----
Total inventories......................................... $378
====
</TABLE>
RESTRUCTURING AND OFFICE CLOSURE COSTS
On October 31, 1998, the Company announced a restructuring of its operations
and relocation of its headquarters from San Jose, California to Golden,
Colorado, the location of the Company's subsidiary, Interpro. As of July 31,
2000, the only significant restructuring cost remaining is the lease payments on
the former San Jose office. This liability, net of sublease income, is estimated
to be approximately $44,000, and will be paid over the next four years.
SIGNIFICANT CUSTOMERS
At July 31, 2000, one customer accounted for 12.7% of total accounts
receivable. The same customer accounted for approximately 20.6% of net revenues
during the three months ended July 31, 2000. Two customers accounted for
approximately 29% and 12% of net revenues during the three months ended
July 31, 1999.
SEGMENT INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Segment revenues:
Isotope products.......................................... $2,036 $2,710
Contract research and development services and other...... -- 374
------ ------
Total................................................... $2,036 $3,084
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Segment operating (loss) income:
Isotope products.......................................... $ (993) $ (303)
Contract research and development services and other...... -- (90)
------ ------
Total................................................... $ (993) $ (393)
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 2000
--------------
<S> <C>
Identifiable Assets:
Isotope products.......................................... $7,827
Contract research and development services and other...... 888
------
Total................................................... $8,715
</TABLE>
F-25
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of operations by geographic area is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Net revenues:
United States............................................. $ 528 $ 844
Germany................................................... 1,508 2,240
------ ------
Total................................................... $2,036 $3,084
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Operating (loss) income:
United States............................................. $ (875) $ (449)
Germany................................................... (118) 56
------ ------
Total................................................... $ (993) $ (393)
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 2000
--------------
<S> <C>
Identifiable Assets:
United States............................................. $7,159
Germany................................................... 1,556
------
Total................................................... $8,715
</TABLE>
SALE OF DEPLETED ZINC BUSINESS
On December 1, 1999, we sold our depleted zinc business to Eagle-Picher
Technologies, LLC. ("Eagle-Picher") for approximately $8.2 million, of which
$6.7 million was paid on December 1, 1999. Additionally, we signed a long-term
isotope supply agreement with Eagle-Picher, and Eagle-Picher will supply us in
2000 with 200 kilograms of silicon-28 to be used in research and development
activities. We also gave Eagle-Picher a warrant to obtain 4,000,000 shares of
our common stock. The warrants are contingent upon the delivery of silicon-28 by
Eagle-Picher. As silicon-28 is delivered we will record the value of the silicon
and the warrants proportionately (20,000 warrants per kilogram), at a value of
$25.00 per gram. This is the price we most recently paid for silicon-28 from
another supplier. Eagle-Picher exercised their warrant, under a net exercise
provision in the warrant agreement and received 3,130,435 shares of Common
Stock. Eagle-Picher disputes our calculation and believes we should issue to it
an additional 155,279 shares of Common Stock. We believe Eagle-Picher's
calculation is in error and we are continuing discussions with representatives
of Eagle-Picher to resolve this matter.
The balance of $1.5 million is payable in three annual installments of $500
thousand. These installments are contingent upon the performance of an
unaffiliated supplier of depleted zinc whose contract with us was assigned to
Eagle-Picher. We will recognize the contingent gain on a straight-line basis
over the thirty-six month period, approximately $41,667 per month, as the
supplier performs under the contract. Three months, or approximately $125,000,
have been recognized in the quarter ended July 31, 2000.
F-26
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REORGANIZATION OF INTERPRO SUBSIDIARY
On May 1, 2000, we substantially reorganized one of our subsidiaries,
Interpro, to focus on one specific application, the recovery and recycling of
zinc metal from various sources, including galvanized steel scrap, electric arc
furnace dust, and brass scrap. We chose this course of action for two reasons.
First, we believe the market potential for this, and related processes, is
significant. Second, the profound and lengthy slump in the mineral processing
and mining industries has significantly eroded Interpro's historical customer
base. We will continue to meet the demands of a few remaining customers through
various sub-contractor relationships. We will also keep the physical
infrastructure in place at our Golden, Colorado location if market conditions
warrant a reentry into Interpro's historical markets. Currently, we are using a
significant portion of this infrastructure in our zinc recovery and recycling
project.
F-27
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation of Isonics include a provision that eliminates
to the fullest extent permitted by law the personal liability of its directors
to Isonics 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 Isonics 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 Isonics 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
Isonics 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
Isonics or its shareholders,
(vi) under Section 310 of the California Corporations Code (the "California
Code") concerning contracts or transactions between Isonics 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 Isonics' shareholders for
any violation of a director's fiduciary duty to Isonics or its shareholders.
The Articles of Incorporation further authorize Isonics 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 Bylaws of
Isonics provide for indemnification of directors and officers. The Bylaws also
permit Isonics to enter into indemnity agreements with individual directors,
officers, employees and other agents. Isonics intends to enter into such
agreements with its directors and executive officers effective upon the closing
of this offering. These Agreements, together with the Bylaws and Articles of
Incorporation, may require Isonics, 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 Isonics to whom authority to act for the Board in connection with
that 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
II-1
<PAGE>
may be, is adjudged to have behaved in bad faith, in a grossly negligent manner,
or with intentional misconduct as to duties.
Isonics currently has directors and officers' liability insurance.
At present, there is no pending litigation or proceeding involving a
director, officer or employee of Isonics pursuant to which indemnification is
sought, nor is Isonics aware of any threatened litigation that may result in
claims for indemnification.
Section 317 of the Code and the Bylaws of Isonics make provision for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons, under certain circumstances, for
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, Isonics 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......... $ 5,358
NASD filing fee............................................. 0
Accounting fees and expenses................................ 30,000
Legal fees and expenses..................................... 35,000
Printing fees and expenses.................................. 10,000
Blue-sky fees and expenses.................................. 8,000
Transfer agent and registrar fees and expenses.............. 5,000
Miscellaneous............................................... 6,642
--------
Total....................................................... $100,000
========
</TABLE>
ITEM 26 RECENT SALES OF UNREGISTERED SECURITIES.
EMPLOYEE OFFERINGS
(a) SECURITIES SOLD. During the past three years, Isonics has issued shares of
Common Stock, and options to purchase shares of Common Stock pursuant to its
existing employee benefit plans. These employee benefit plans are as
follows:
1996 Stock Option Plan which has been terminated, but as to which, there
are options outstanding.
II-2
<PAGE>
1996 Executives' Equity Incentive Plan (the "Executives' Plan")
authorized the grant of options to purchase 225,000 stock options, which
after being adjusted for stock splits that occurred following the
adoption of the plan resulted in 570,000 shares (1,000,000 shares if
Proposal No. 2 is approved). The options granted may be either incentive
stock options if they meet the requirements of Section 422 of the
Internal Revenue Code, or non-qualified stock options. The directors
approved this plan in September 1996 and the shareholders in
October 1996.
1996 Equity Incentive Plan (the "Employees' Plan") authorized the grant
of options to purchase 50,000 stock options, which after being adjusted
for stock splits that occurred following the adoption of the plan
resulted in 150,000 shares (500,000 shares if Proposal No. 3 is
approved). The options granted may be either incentive stock options if
they meet the requirements of Section 422 of the Internal Revenue Code,
or non-qualified stock options. The directors approved this plan in
September 1996 and the shareholders in October 1996.
1998 Employee Stock Purchase Plan (the "Stock Purchase Plan") authorized
employee purchase of up to 200,000 shares of Isonics Common Stock. The
directors approved this plan in August 1998, and the shareholders in
October 1998.
As of August 30, 2000, options to purchase a total of 365,583 shares,
104,500 shares, and 358,769 shares respectively, were outstanding under
the Executives' Plan, Employees' Plan, and 1996 Stock Option Plan, and
options to purchase 189,417, 9,862, and 0 shares, respectively, remained
available for grant.
Isonics has also issued options and stock bonuses to its employees
outside of its existing employee benefit plans.
(b) NAMES OF PRINCIPAL UNDERWRITERS. None
(c) CONSIDERATION RECEIVED. The stock options and bonuses issued outside of
Isonics' employee benefit plans were, for the most part, issued in
consideration of services rendered and did not (therefore) involve the offer
or sale of securities. In some cases they were issued to induce the
performance of services in the future.
(d) EXEMPTION CLAIMED. Many of the securities referred to in this section were
not offered or sold in a manner that constituted a "sale" of securities as
that term is defined in Section 2(a)(3) of the Securities Act. Where a
"sale" occurred, the transactions were exempt from registration under the
Securities Act of 1933, as amended by reason of Sections 4(2) and 4(6) of
the Securities Act of 1933 or Rule 701.
(e) NOT APPLICABLE.
(f) USE OF PROCEEDS. Where proceeds were received, the proceeds were utilized
for working capital purposes.
DECEMBER 1999 WARRANT ISSUANCE
(a) SECURITIES SOLD. The sale, as described below, occurred on December 1, 1999.
The securities sold consists of one restricted warrant (A Warrant to
purchase 4,000,000 shares of restricted Common Stock issued at an exercise
price of $3.75 per share.
(b) UNDERWRITERS AND OTHER PURCHASERS. No underwriters, agents, or placement
agents participated in the private placement.
(c) PURCHASE PRICE. The warrant was issued to a single accredited investor as
consideration for the purchase of 200 kilograms of silicon-28 pursuant to an
Asset Purchase Agreement executed between Isonics and Eagle-Picher
Technologies, LLC, an accredited investor.
II-3
<PAGE>
(d) EXEMPTION CLAIMED. The transactions were exempt from registration under the
Securities Act of 1933, as amended by reason of Sections 4(2) and 4(6) of
the Securities Act of 1933.
(e) TERMS OF CONVERSION OR EXERCISE. Terms of conversion or exercise are as
follows:
The Warrant granted to Eagle-Picher may be exercised to purchase 4,000,000
shares of restricted Common Stock issued on a warrant-for-share basis with
Isonics Common Stock (subject to dilution adjustment) for a purchase price
of $3.75 per share through the expiration date, May 30, 2003. On March 15,
2000, Eagle-Picher notified us of its exercise of the Warrant pursuant to a
"net exercise' provision, which will result in Eagle-Picher acquiring
3,130,435 shares of our Common Stock. We are still discussing the terms of
Eagle-Picher's net exercise. (Eagle-Picher has not accepted our calculation
of the number of shares owed, and claims that an additional 155,279 may be
due.) We paid the warrants to Eagle-Picher in consideration of its
obligation to deliver 200 kilograms of silicon-28 to us. If Eagle-Picher
does not deliver the full 200 kilograms to us by December 31, 2000, the
shares held pursuant to the exercise of the warrants will be proportionately
reduced.
Isonics also entered into a registration rights agreement relating to
the shares of Common Stock underlying the Warrant.
(f) USE OF PROCEEDS. Isonics intends to use the 200 kilograms of silicon-28 from
the issuance of the Warrant for the continued development and
commercialization of silicon-28 wafers for the semiconductor industry.
JULY 1999 PRIVATE PLACEMENT
(a) SECURITIES SOLD. The sale of securities, as described below, occurred on
July 29, 1999. The securities sold include:
(i) 1,830,000 shares of restricted Series A Convertible Preferred Stock,
created by filing an amended certificate of determination of preferences
and rights (the "Certificate of Determination") with the California
Secretary of State; and
(ii) 1,830,000 restricted warrants to purchase shares of restricted Common
Stock issued on a warrant-for-share basis with the Series A Convertible
Preferred Stock; and
(iii) 500,000 restricted warrants issued as a fee pursuant to an investment
banking agreement
(b) UNDERWRITERS AND OTHER PURCHASERS.
(i) No underwriters, agents, or placement agents participated in the private
placement; and
(ii) 1,500,000 Units (each Unit consisting of one share of Series A
Convertible Preferred Stock and one warrant) were sold to accredited
investors for cash; and
(iii) 330,000 Units were issued to accredited investors in settlement of debt
obligations; and
(iv) 500,000 warrants were issued to a single accredited investor as
compensation pursuant to an investment banking agreement.
(c) OFFERING PRICE. The Units were sold for a purchase price of $1.50 per Unit.
The Units described in (b)(ii) above were sold for cash; the Units described
in (b)(iii) above were issued in satisfaction of debt obligations.
(d) EXEMPTION CLAIMED. The transactions were exempt from registration under the
Securities Act of 1933, as amended by reason of Sections 4(2) and 4(6) of
the Securities Act of 1933, and Rule 506 of Regulation D thereunder.
II-4
<PAGE>
(e) TERMS OF CONVERSION OR EXERCISE. Terms of conversion or exercise are as
follows:
(i) The Series A Convertible Preferred Stock is convertible into shares of
Common Stock on a share-for-share basis, subject to dilution
adjustments. The Series A Convertible Preferred Stock is entitled to
receive dividends on a share-for-share basis with the shares of Common
Stock except in the case of a "Silicon Isotope Transaction" as defined
in the Certificate of Determination, in which case the holders of
Series A Convertible Preferred Stock have certain additional rights. The
Series A Convertible Preferred Stock is entitled to a liquidation
preference of $1.50 per share.
(ii) The warrants are each exercisable to purchase a single share of Common
Stock (subject to dilution adjustment) for a purchase price of $3.75
per share through the expiration date, July 29, 2002.
(iii) Isonics also entered into a registration rights agreement relating to
the shares of Common Stock underlying the Series A Convertible
Preferred Stock and the warrants, by which (subject to certain
conditions) Isonics is required to register the underlying Common Stock
on the request of the holders of 30% or more of the "registerable
securities." Isonics is not obligated to obtain effectiveness for more
than two such registration statements during the term of the
registration rights agreement, which expires upon the unanimous consent
of the holders and Isonics.
(f) USE OF PROCEEDS. Isonics intends to use the cash proceeds from the sale of
the Units for repayment of debt, working capital, and to finance the
continued growth of operations including the continued development and
commercialization of silicon-28 wafers for the semiconductor industry.
JUNE 1998 CHEMOTRADE ACQUISITION
(a) SECURITIES SOLD. 357,730 shares of Common Stock.
(b) NAMES OF PRINCIPAL UNDERWRITERS. None.
(c) CONSIDERATION RECEIVED. The shares issued were partial consideration for
Isonics' acquisition of all of the outstanding shares of Chemotrade GmbH,
75% of the outstanding shares of Chemotrade Leipzig GmbH and 6% of the
outstanding shares of IUT (collectively "Chemotrade"). All three companies
are located in Germany. Chemotrade GmbH is located in Dusseldorf, Chemotrade
Leipzig GmbH is located in Leipzig, and IUT is located in Berlin. Two common
shareholders owned all three companies. All three companies continue to be
engaged in the distribution, development and manufacture, of stable and
radioactive isotopes.
(d) EXEMPTION CLAIMED. The transactions were exempt from registration under the
Securities Act of 1933, as amended by reason of Regulation S for offers and
sales made to non-U.S. Persons.
(e) NOT APPLICABLE.
(f) USE OF PROCEEDS. Not applicable.
JUNE 1998 INTERPRO ACQUISITION
(a) SECURITIES SOLD. 353,982 shares of Common Stock.
(b) NAMES OF PRINCIPAL UNDERWRITERS. None.
(c) CONSIDERATION RECEIVED. The shares issued were partial consideration for
Isonics' acquisition of all of the outstanding shares of International
Process Research Corporation ("Interpro"), which does business as Colorado
Minerals Research Institute, and which is a contract research and
development, and materials processing company located in Golden, Colorado. A
single corporate
II-5
<PAGE>
shareholder, Metallurgy International, Inc., a previously unaffiliated
corporation principally owned by an individual who is now an executive
officer of Isonics, owned Interpro.
(d) EXEMPTION CLAIMED. The transactions were exempt from registration under the
Securities Act of 1933, as amended by reason of Sections 4(2) and 4(6).
(e) NOT APPLICABLE.
(f) USE OF PROCEEDS. Not applicable.
ITEM 27 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits Pursuant to Item 601 of Regulation S-B:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------- ------------------------------------------------------------
<C> <S>
1.01* Form of Underwriting Agreement.
3.01* Registrant's Amended and Restated Articles of Incorporation.
(1)
3.02* Registrant's Bylaws. (1)
3.03* Certificate of Determination of Preferences and Rights of
the Series A Preferred Stock. (SEE EXHIBIT 10.18)
4.01* Specimen Common Stock Certificate. (1)
4.02* Form of Representatives' Warrant Agreement. (1)
4.03* Form of Warrant Agreement between the Registrant and
Continental Stock Transfer & Trust Company, Monroe Parker
Securities. (1)
4.04* Specimen Class A Warrant Certificate (1)
4.05* Form of Warrant Agreement between the Registrant and
Continental Stock Transfer & Trust Company
4.06+ Specimen Class B Warrant Certificate
4.07+ Specimen Class C Warrant Certificate
4.08* Amendment No. 1 to Warrant Agreement between the Registrant
and Continental Stock Transfer & Trust Company (7)
5.01* Opinion of Arter & Hadden LLP
10.01* Registrant's 1996 Stock Option Plan. (1)(2)
10.02* Form of Employment Agreement between the Registrant and
certain officers of the Registrant. (1)(2)
10.03* Registrant's 1996 Executives Equity Incentive Plan. (1)(2)
10.04* Registrant's 1996 Equity Incentive Plan. (1)(2)
10.05* Memorandum of Agreement between Electrochemical Plant, AO
Techsnabexport, Co., Ltd. and Registrant. (1)
10.06* Option Agreement between the Registrant and Yale University.
(1)
10.07* Office Lease Agreement between Paulsen Properties and the
Registrant dated as of January 1, 1996, as amended. (1)
10.08* Letter from Yale University to Registrant dated February 10,
1996. (1)
10.09* Form of Indemnity Agreement entered into by Registrant with
each of its directors and investors. (2)
10.10* Stock Purchase Agreement, dated as of April 30, 1998, among
Isonics Corporation, a California corporation, Metallurgy
International, Inc., a Nevada corporation, and International
Process Research Corporation, a Colorado corporation. (3)
10.10.1* Escrow Agreement, dated as of May 15, 1998, among Isonics
Corporation, a California corporation, Metallurgy
International, Inc., a Nevada corporation, Robert H.
Cuttriss (as Agent), and Colorado Business Bank, as Escrow
Agent. (3)
10.11* Registration Rights Agreement dated as of September 27, 1996
by and between Registrant and certain investors. (1)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------- ------------------------------------------------------------
<C> <S>
10.12* Employment Agreement between the Registrant and James E.
Alexander. (1)(2)
10.13* Employment Agreement between the Registrant and Boris
Rubizhevsky. (1)(2)
10.14* Security Agreement dated March 31, 1995 between Isonics and
Isoserve, Inc. (1)
10.15 Omitted
10.16* February 1997 Agreement between the Registrant,
Electrochemical Plant and AO Techsnabexport, Co., Ltd. (1)
10.17* Letter from Yale University to Registrant dated January 28,
1997. (1)
10.18* Certificate of Determination of Preferences and Rights of
the Series A Preferred Stock. (4)
10.19* Form of Subscription Agreement. (4)
10.20* Form of Warrant. (4)
10.21* Investment Banking Agreement. (4)
10.22* Form of Registration Rights Agreement. (4)
10.23* Asset Purchase Agreement dated December 1, 1999 between the
Registrant and Eagle-Picher Technologies, LLC. (5)
10.24* Registration Rights Agreement dated December 1, 1999 between
the Registrant and Eagle-Picher Technologies, LLC. (5)
10.25* Warrant Agreement dated December 1, 1999 between the
Registrant and Eagle-Picher Technologies, LLC. (5)
10.26* Supply Agreement between the Registrant and Eagle-Picher
Technologies, LLC. (6)
20.01* Form of Letter of Transmittal
23.10+ Consent of independent accountants.
23.11* Consent of Arter & Hadden, LLP (see exhibit 5.01)
24.01* Power of Attorney (see signature page).
27.01* Financial Statement Schedule.
</TABLE>
------------------------
(1) Incorporated herein by reference to exhibit filed with Isonics' Registration
Statement on Form SB-2 ("Registration Statement") (Commission file
No. 333-13289) in which this exhibit bears the same number except
exhibit 3.01 which was numbered 3.03 in that registration statement.
(2) Items that are management contracts or compensatory plans or arrangements
required to be filed as exhibits pursuant to Item 13(a) of Form 10-KSB.
(3) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531), dated
May 15 and filed May 27, 1998, and incorporated herein by reference.
(4) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531), dated
July 29 and filed August 12, 1999, and incorporated herein by reference.
(5) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531) dated
December 1, 1999 and filed December 10, 1999, and amendment thereto filed
February 10, 2000, and incorporated herein by reference.
(6) Confidential treatment requested.
(7) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531) dated
August 17, 2000, 2000 and filed August 18, 2000, and incorporated herein by
reference.
* Previously filed.
+ Filed herewith.
II-7
<PAGE>
ITEM 28 UNDERTAKINGS
The Registrant hereby undertakes the following:
(a) (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) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial BONA
FIDE offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(b) 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-8
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Golden,
State of Colorado, on September 28, 2000.
<TABLE>
<S> <C> <C>
ISONICS CORPORATION
By: /s/ JAMES E. ALEXANDER
-----------------------------------------
James E. Alexander,
PRESIDENT
</TABLE>
In accordance with the requirements of the Securities Act of 1933, the
following persons in their capacities and on the dates stated signed this
registration statement.
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
constitutes and appoints James E. Alexander and Boris I. Rubizhevsky, or either
of them, as true and lawful attorneys-in-fact and agents with full power of
substitution and re-substitution, for him and in his name, place and stead, in
any and all capacities to sign the Registration Statement file herewith and any
or all amendments to said Registration Statement (including post-effective
amendments and registration statements filed pursuant to Rule 462 and
otherwise), and to file the same, with all exhibits thereto, and other documents
in connection therewith, the Securities and Exchange Commission granting unto
said attorney-in-fact and agents the full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
foregoing, as to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agents or any of them, or his substitute, may lawfully do or cause to be done by
virtue hereof.
<TABLE>
<C> <S> <C>
/s/ JAMES E. ALEXANDER President, Chief Executive
-------------------------------------- Officer, Chief Operating September 28, 2000
James E. Alexander Officer, and Director
/s/ BORIS I. RUBIZHEVSKY
-------------------------------------- Director September 28, 2000
Boris I. Rubizhevsky
/s/ LINDSAY A. GARDNER
-------------------------------------- Director September 28, 2000
Lindsay A. Gardner
/s/ RICHARD PARKER
-------------------------------------- Director September 28, 2000
Richard Parker
/s/ LARRY J. WELLS
-------------------------------------- Director September 28, 2000
Larry J. Wells
/s/ BRANTLEY J. HALSTEAD Chief Financial Officer
-------------------------------------- and Principal Accounting September 28, 2000
Brantley J. Halstead Officer
</TABLE>
II-9
<PAGE>
ISONICS CORPORATION
LETTER OF TRANSMITTAL
To accompany certificates representing Class A Warrants to acquire shares of
common stock of Isonics Corporation, surrendered in exchange for certificates
representing Class B Warrants; each Class B Warrant is exercisable for one share
of common stock and one Class C Warrant to purchase shares of Isonics common
stock. Please follow carefully the instructions below. You must deliver this
transmittal letter, properly completed and signed, together with your original
warrant certificate to the Exchange Agent not later than the close of business
in New York City on April 30, 2001.
To: Continental Stock Transfer & Trust Company, Exchange Agent
By US Postal Service or Overnight Courier: _________ By Hand
Delivery: _________
Continental Stock Transfer & Trust Company
Exchange Agent for Isonics Corporation
2 Broadway
New York, New York 10004
Ladies and Gentlemen:
In connection with the offer by Isonics Corporation ("Isonics") to issue
Class B Warrants, each exercisable for one share of common stock and one
Class C Warrant to purchase shares of common stock of Isonics registered under
the Securities Act of 1933 in exchange for Class A Warrants of Isonics, (the
"Exchange Offer"), the undersigned hereby surrenders for exchange the warrant
certificate(s) identified below representing Class B Warrants to purchase shares
of common stock of Isonics. (IF I AM EXERCISING THE CLASS B WARRANTS AT THE SAME
TIME I AM SUBMITTING THE CLASS A WARRANTS FOR EXCHANGE, I UNDERSTAND THAT I MUST
ALSO COMPLETE THE INFORMATION RELATING TO THE EXERCISE OF THE WARRANT ON THE
REVERSE SIDE OF THIS LETTER OF TRANSMITTAL.)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Number of Warrants Represented
by Warrant
Name(s) and Address of Registered Owner(s) Certificate(s) and Exercise
As They Appear on Certificate(s) Certificate(s) Surrendered Price per Share
-----------------------------------------------------------------------------------------------------------------
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
Total Warrants
-----------------------------------------------------------------------------------------------------------------
</TABLE>
The undersigned represents that he/she has full authority to surrender the
certificate(s) identified above and that except for the restrictions under the
Securities Act of 1933, the Class A Warrants represented by such certificate(s)
are free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claims. The undersigned will, upon request, execute any
additional documents necessary to complete the surrender of the Class B Warrants
represented by such certificate(s). All authority conferred or agreed to be
conferred in this Letter of Transmittal shall be binding upon the successors,
assigns, heirs, executors, administrators and legal representatives of the
undersigned and shall survive and not be affected by the death or incapacity of
the undersigned. The undersigned hereby acknowledges that delivery of the
certificate(s) identified above shall be affected, and risk of loss and title to
such certificate(s) shall pass, only upon proper delivery thereof to you.
Please issue a Class B Warrant in the name(s) shown in the box above and
deliver such certificates and check by mail to the address shown in the box
above UNLESS contrary instructions are given in the box below.
<PAGE>
EXERCISE OF CLASS B WARRANT: If there is a current prospectus for the
exercise of Class B Warrants, you may choose to exercise the Class B Warrants to
be issued in exchange for the Class A Warrants at the same time you are
submitting the Class A Warrants for exchange. To do so, you must initial and
follow the instructions given below:
____ I hereby elect to exercise all Class B Warrants to be issued in
exchange for the Class A Warrants I am surrendering for exchange;
____ I hereby tender the Class B Warrant certificates to be issued in
exchange for the Class A Warrants;
____ I hereby tender the exercise price of the Class B Warrants
(calculated by multiplying the number of Class B Warrants being
exercised times $5.80 per share) in a check made payable to Isonics
Corporation.
I understand that the exercise is effective as of the date this Letter of
Transmittal and all other required documents are received by the Exchange Agent
provided that: all required documents are included; all required signatures have
been included and signatures have been properly guaranteed; good funds are
tendered; and I am a resident of a jurisdiction where the exercise of the
Class B Warrants has been qualified under state law. If I am tendering a check,
I understand that I must wait until the funds are cleared before any
certificates will be issued.
--------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
Fill in ONLY if delivery of the certificates representing the Class B
Warrants is to be mailed to an address OTHER than that appearing in the box
above. Please see instruction 3.
Mail or deliver Certificate to:
Name:
-----------------------------------------
(Please Print)
Address:
--------------------------------
----------------------------------------
(Include Zip Code)
--------------------------------------------------------------------------------
ALL SHAREHOLDERS MUST SIGN IN THE SPACE PROVIDED BELOW
--------------------------------------------------------------------------------
X ______________________________________________________________________________
(Signatures of Shareholders)
Title: _________________________________________________________________________
Name(s): _______________________________________________________________________
X ______________________________________________________________________________
________________________________________________________________________________
(Please Print)
Daytime Telephone Number
(including Area Code) __________________________________________________________
Must be signed by registered holder(s) exactly as name(s) appear(s) on
certificate(s). If signed by an officer of a corporation or others acting in a
fiduciary or representative capacity, please provide the following information.
See Instructions 2 and 5.
MEDALLION
GUARANTEE OF SIGNATURE(S)
(See instruction 4)
Name of firm: __________________________________________________________________
Authorized Signature: __________________________________________________________
<PAGE>
<TABLE>
<C> <S> <C>
------------------------------------------------------------------------------------------------------------------
SUBSTITUTE PART 1 Taxpayer Part II For Payee Exempt
FORM W-9 Identification No.--For
All Accounts From Backup
Withholding
---------------------------------------------------------------------
Enter your taxpayer
identification number in
Payer's Request for Taxpayer the appropriate box. For Social Security Number
Identification Number most individuals, this
is your social security Employer Identification Number
number.
OR
------------------------------------------------------------------------------------------------------------------
Certification--Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct taxpayer identification number, or I am waiting for a number to
be issued to me and either (a) I have mailed or delivered an application to receive a taxpayer identification
number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I
intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer
identification number within sixty (60) days, 31% of all reportable payments made to me thereafter will be
withheld until I provide a number.
(2) I am not subject to backup withholding either because (a) I am exempt from backup withholding, or (b) I have
not been notified by the Internal Revenue Service ("IRS") that I am subject to backup withholding as a result of
a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to
backup withholding; and
(3) Any other information provided on this form is true, correct and complete.
SIGNATURE: DATE: , 20
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</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER.
<PAGE>
INSTRUCTIONS
Forming Part of the Terms and Conditions of this Letter of Transmittal
1. USE OF LETTER OF TRANSMITTAL. This Letter of Transmittal, duly
completed and signed, together with the surrendered certificates representing
restricted shares and warrants to purchase restricted shares and any other
documents required by these Instructions, should be sent by mail or overnight
courier or delivered by hand to the Exchange Agent at the address set forth
above. Delivery shall be affected, and risk of loss and title to the
certificates representing restricted shares and warrants to purchase restricted
shares shall pass, only upon actual delivery of such certificates to the
Exchange Agent. THE METHOD OF DELIVERY OF ALL DOCUMENTS IS AT THE ELECTION AND
RISK OF THE HOLDER. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, IS RECOMMENDED. A return envelope is enclosed for
your convenience.
2. SIGNATURES. The signatures on this Letter of Transmittal must
correspond exactly with the name(s) as written on the face of the surrendered
certificates. In the case of joint tenants, all should sign. If the surrendered
certificates are registered in different forms of the name of any person signing
this Letter of Transmittal (e.g. "John Smith" on one certificate and "J. Smith"
on another), it will be necessary for such person either to sign this Letter of
Transmittal in each way in which the certificates are registered or to sign as
many Letters of Transmittal as there are different name registrations. When
signing as an agent, attorney, administrator, executor, guardian, trustee, or in
any other fiduciary or representative capacity, or as an officer of a
corporation on behalf of the corporation, please give your full name and title
as such. If a certificate is registered in the name of joint owners with right
of survivorship and one or more of the owners is deceased, the surviving
owner(s) should sign the Letter of Transmittal and furnish a letter providing
information concerning the death of the registered owner(s). It is only
necessary to deliver to the Exchange Agent a properly signed Letter of
Transmittal, together with the related surrendered certificates (it is not
necessary to sign the back of such stock certificates).
3. DELIVERY OF CERTIFICATES AND CHECK TO A DIFFERENT ADDRESS. If a
certificate representing registered shares and/ or warrants to purchase
registered shares or check for cash in lieu of fractional shares, if any, is to
be delivered to an address different from that appearing in the top box above,
please complete the "Special Delivery Instructions" box above.
4. CORRECTION OF, OR CHANGE IN, NAME. For a correction of name, or for a
change in name which does not involve a change of ownership, proceed as follows:
(i) for a change in name by marriage, the surrendered certificates and this
Letter of Transmittal should be endorsed or signed, e.g., "Mary Doe, now by
marriage, Mary Jones" and (ii) for a correction in name, the surrendered
certificates and this Letter of Transmittal should be endorsed or signed, e.g.,
"James E. Brown" incorrectly inscribed as "J.E. Brown." In such event, the
signature on this Letter of Transmittal reflecting such correction or change
must be guaranteed by a financial institution or brokerage firm having
membership in good standing, in a recognized guarantee program [Securities
Transfer Agents Medallion Program, New York Stock Exchange, Inc. Medallion
Program, or the Stock Exchanges Medallion Program (the "Programs")]. No
guarantee will be accepted if the aggregate value of the transaction exceeds the
authorized limit as defined in the Program. Notaries Public CANNOT execute
acceptable guarantees of signatures.
5. SUPPORTING EVIDENCE. In case any Letter of Transmittal, certificate
endorsement or stock power is executed by an agent, attorney, administrator,
executor, guardian, trustee, or in any other fiduciary or representative
capacity, or by an officer of a corporation on behalf of such corporation, there
should be submitted with the Letter of Transmittal and surrendered certificates,
documentary evidence of the authority of the person making such execution to
assign, sell and transfer shares. Such documentary evidence of authority must be
in the form satisfactory to the Exchange Agent. See Instructions 8 and 9.
6. LOST OR STOLEN STOCK CERTIFICATES. If certificates representing
restricted shares or warrants to purchase restricted shares have been lost or
stolen, the Exchange Agent should be contacted in writing. The letter should
include the certificate number(s) and number of shares/warrants that have been
lost or stolen along with the holder's name and address. The Exchange Agent will
forward affidavits for completion so that a bond or other satisfactory indemnity
can be obtained, and to make other arrangements so that the lost certificates
can be replaced and the shareholder may receive certificates representing
registered shares, certificates representing warrants to purchase registered
shares, and a check for cash in lieu of fractional shares, if any, in exchange
for such restricted shares and warrants.
7. MISCELLANEOUS. In the event that a surrender of certificates is
defective, the Exchange Agent shall attempt, in consultation with ISONICS, to
take such action as may be necessary to resolve promptly the irregularity, and
in that connection, the Exchange Agent may use its best efforts to contact the
appropriate capital shareholder by whatever means of communication it deems most
expedient. ISONICS shall have the absolute right to reject any or all of such
surrenders that are not in proper form and to waive any defects in or conditions
of such surrender.
<PAGE>
8. INQUIRIES. All inquiries with respect to the surrender of certificates
representing restricted shares or warrants in exchange for certificates
representing registered shares or warrants, and a check for cash in lieu, if
applicable, as well as requests for additional copies of this Letter of
Transmittal, should be made directly to Continental Stock Transfer & Trust
Company, Exchange Agent, at the address above or by telephoning 212-509-4000.
