<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON JANUARY 18, 2001
REGISTRATION NO. 333-37696
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 2 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)
CALIFORNIA 77-0338561
(State or other jurisdiction) (I.R.S. Employer of incorporation or
organization) Identification Number)
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)
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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)
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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:
<PAGE>
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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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. / /
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED OFFERING PRICE AGGREGATE REGISTRATION FEE(c)
PER UNIT OFFERING PRICE
<S> <C> <C> <C> <C>
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Class B Common Stock 810,000 $7.00(a) $5,670,000 $1,497
Purchase Warrants.......
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Shares of Common Stock 810,000 $5.80(b) $4,698,000 $1,240
underlying Class B
Common Stock Purchase
Warrants...................
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Class C Common Stock 810,000 $0.00 $0 $0
Purchase Warrants.......
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Shares of Common Stock 810,000 $10.00(b) $8,100,000 $2,139
underlying Class C Common
Stock Purchase Warrants.
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Class B Common Stock 80,000 $7.00(a) $560,000 $148
Purchase Warrants issuable
upon exchange of Warrants
underlying Underwriter
Warrants....
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Shares of Common Stock 80,000 $5.80(b) $464,000 $123
underlying Class B Common
<PAGE>
Stock Purchase Warrants.
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Class C Redeemable Common 80,000 $0 $0 $0
Stock Purchase Warrants.
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Shares of Common Stock 80,000 $10.00(b) $800,000 $211
underlying Class C
Redeemable Common Stock
Purchase Warrants.......
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TOTAL...................... $20,292,000 $5,358*
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* $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 as set forth in the
registration statement as originally filed.
(c) The fee was calculated at $264 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>
SUBJECT TO COMPLETION DATED JANUARY 18, 2001
PROSPECTUS DATED JANUARY ___, 2001
ISONICS CORPORATION
810,000 CLASS B REDEEMABLE WARRANTS
810,000 CLASS C REDEEMABLE WARRANTS
1,620,000 SHARES OF COMMON STOCK UNDERLYING
CLASS A REDEEMABLE WARRANTS, CLASS B REDEEMABLE WARRANTS, AND CLASS C
REDEEMABLE WARRANTS
Isonics Corporation ("Isonics," the "Company," or "We") hereby
offers holders of outstanding Class A Redeemable Warrants and Class A
Redeemable Warrants that may be issued upon the exercise of certain
outstanding warrants ("Underwriter's Warrants") the opportunity through April
30, 2001, to exchange their Class A Redeemable Warrants ("Class A Warrants")
for Class B Redeemable Warrants ("Class B Warrants"). The exercise price for
the Class B Warrants is $1.50 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 December 31, 2005. The Class C Warrants (which we will issue
to you only if you exercise the Class B Warrants or if you exercise Class A
Warrants on or before April 30, 2001) expire December 31, 2005, and will be
exercisable for one share of Common Stock at a price of $2.50 per share. The
Class C Warrants and (effective May 1, 2001) the Class B Warrants are redeemable
if our Common Stock trades at or above $3.75 per share for any 20 of 30
consecutive trading days provided a registration statement permitting the
exercise of those warrants is then 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 (December 31, 2005 with respect to
the Class B and Class C Warrants, and September 30, 2001, with respect to the
Class A Warrants). In accordance with SEC Rule 429, this prospectus also
constitutes the prospectus under post-effective amendment number 1 to our
Registration Statement on Form SB-2 for the exercise of our Class A Warrants.
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 January 17, 2001, the
reported closing price of our Common Stock was $1.9063 per share and of our
Class A Warrants was $1.0938 per warrant. Our Class B Warrants and Class C
Warrants are eligible for trading under the symbols ISONX and ISONY,
respectively, but no Class C Warrants have been issued and only 675,000
restricted Class B Warrants have been issued; consequently 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.
SEE "RISK FACTORS" BEGINNING ON PAGE 4. 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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary........................................................................................ 3
Risk Factors................................................................................... 7
The Exchange Offer............................................................................. 16
Procedure for Exercise of Warrants and Tax Aspects............................................. 22
Use of Proceeds................................................................................ 23
Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 25
Business....................................................................................... 38
Management..................................................................................... 60
Security Ownership of Certain Beneficial Holders and Management................................ 62
Section 16(a) Beneficial Ownership Reporting Compliance........................................ 64
Executive Compensation......................................................................... 66
Certain Relationships and Related Party Transactions........................................... 73
Isonics' Capital Stock......................................................................... 75
Market for Common Equity and Related Stockholder Matters....................................... 78
Shares Available for Future Sale............................................................... 79
Securities and Exchange Commission Position on Indemnification for Securities Act Liabilities.. 80
Experts........................................................................................ 80
Legal Matters.................................................................................. 80
How to Obtain Additional Information........................................................... 80
Financial Statements--April 30, 2000........................................................... F-1
Financial Statements--October 31, 2000......................................................... F-22
</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 Common Stock warrants 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.
-----------
1
<PAGE>
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.
-----------
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 to purchase
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>
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."
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 Class C Warrants have been issued and only 675,000
restricted Class B Warrants have been issued; therefore, no market has developed
for either 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 will:
- be exercisable for one share of Common Stock and one Class C
Warrant, for a purchase price of $1.50 per share,
- expire December 31, 2005, and
- be redeemable if our Common Stock trades at or above $3.75 per
share for any 20 of 30 consecutive trading days on or after
May 1, 2001.
When issued to holders who exercise their Class B Warrants (or to
holders who exercise their Class A Warrants before the Exchange Offer expires),
the Class C Warrants will:
3
<PAGE>
- be exercisable for one share of Common Stock at a price of
$2.50 per share,
- expire December 31, 2005, and
- be redeemable if our Common Stock trades at or above $3.75 per
share for any 20 of 30 consecutive trading days.
Class A Warrants submitted for exchange will be cancelled. The
offer to exchange the outstanding Class A Warrants for Class B Warrants will
expire on April 30, 2001, unless extended. The Class A Warrants expire on
September 21, 2001.
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 entitled "THE EXCHANGE
OFFER." AN INVESTMENT IN OUR CLASS B WARRANTS, OUR CLASS C WARRANTS, AND OUR
COMMON STOCK IS SUBJECT TO A SUBSTANTIAL AMOUNT OF RISK, INCLUDING THE RISK
OF LOSING YOUR ENTIRE INVESTMENT. 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. The exchange
offer expires on April 30, 2001, unless extended, and after that date you
will no longer have a right to exchange your Class A Warrants for Class B
Warrants. The Class A Warrants will expire on September 21, 2001.
4
<PAGE>
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.
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,
675,000 restricted Class B Warrants have been issued.
We are also offering a total of 1,485,000 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, on or before December 31, 2005. 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 Class A Warrants are exercised) to
a maximum of $4,698,000.00 (if all of the Class A Warrants are exercised.) We
will receive from $0.00 to a maximum of $2,227,500.00 (if all of the Class A
Warrants are exchanged for Class B Warrants, and all of the Class B Warrants
are all exercised.) The total number of Class A Warrants that could be
exercised (excluding any Class A Warrants which may be issued upon the
exercise of the Underwriters' Warrants, which we believe to be unlikely) is
810,000. The total number of Class B Warrants that could be exercised is
1,485,000. The Class B Warrant total includes 810,000 warrants received
through the exchange offer, and 675,000 warrants issued on December 13, 2000.
The latter scenario is more likely as it minimizes the cash investment by the
holders of our Class A Warrants. We expect to use any proceeds, from the
exercise of Class A Warrants and/or Class B Warrants, 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 $3,712,500.00.
The total number of Class C Warrants that could be exercised is 1,485,000,
all of which would be initially obtained through the exercise of Class B
Warrants. Both the Class B Warrants and the Class C Warrants will be publicly
tradable upon acceptance of this registration statement and other
registration statements we intend to file in the near future. We expect to
use any proceeds, from the exercise of Class C Warrants, for research and
development and working capital.
RISK FACTORS
THE PURCHASE OF ISONICS' COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
YOU SHOULD EXERCISE YOUR CLASS A WARRANTS, CLASS B WARRANTS, AND/OR CLASS C
WARRANTS ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK
FACTORS." We have not authorized anyone to give you information or to make any
representation other than those contained in this prospectus.
5
<PAGE>
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 important factors could affect
future results, causing the results to differ materially from those expressed in
the forward-looking statements in this prospectus:
- our working capital shortage, which has been aggravated by
certain collection issues related to accounts and notes
receivable, which are significantly past due, and our need for
additional financing;
- demand for, and acceptance of, our materials;
- changes in development, distribution, and supply
relationships;
- the impact of competitive products and technologies and no
assurance as to the validity of our intellectual property
rights;
- 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 potential adverse
impact on our market which may be caused by future sales of
restricted securities;
- the possibility of environmental violations relating to our
business activities and products;
- the fact that at the present time Isonics does not have
sufficient authorized capital to permit the exercise of all
outstanding options and warrants, and conversion of all
outstanding preferred stock; and
- the impact of new technologies.
6
<PAGE>
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. We recognized operating losses for the year
ended April 30, 2000, of approximately $2,401,000, and for the six months ended
October 31, 2000, of approximately $2,583,000. 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 prior 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. 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.
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 million, $1.155 million, and
$811,000, respectively. For the six months ended October 31, 2000, research
and development expenses were $716,000. 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
We depend on an isotope enrichment plant, located in Russia, which is
owned by the Ministry of Atomic Energy of the Russian Federation (the
"Ministry"), which is part of the cabinet of the government of the Russian
Federation, for most of our stable and radioisotopes. We signed an agreement
with the commercial department
7
<PAGE>
of the Ministry to purchase certain isotope separation services through 2001.
Disruption or termination of services provided by the Ministry could have a
material and adverse affect upon our financial condition and results of
operations.
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.
To date Eagle-Picher has failed to deliver any silicon-28 to
us, and we have no assurance that Eagle-Picher will be able to deliver any
silicon-28 to us in the future. We know that Eagle-Picher's silicon-28
production facility in Oklahoma has encountered certain technical difficulties,
which Eagle-Picher refers to as a FORCE MAJEURE. We believe that Eagle-Picher's
technical difficulties do not meet the definition of FORCE MAJEURE per our
agreements, which would entitle Eagle-Picher to a delay in the delivery
requirement. We have commenced pursuing the dispute resolution mechanisms as set
forth in the agreement with Eagle-Picher to address this and other related
matters. As of January 12, 2001, we have held several discussions with the
designated members of Eagle-Picher's management as called for in the first step
of the dispute resolution process. If these discussions do not result in a
satisfactory outcome, it is our intention to proceed to the second step of the
dispute resolution process, mediation, and we have informed Eagle-Picher of our
intentions. Eagle-Picher's non-performance under our agreement may force us to
seek other suppliers of silicon-28. 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 ("Uzbekistan"), and the
Republic of Georgia ("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 enriched stable isotopes, radioisotopes, or other isotope products in
accordance with our contractual requirements (whether or not the failure is our
fault) and possibly resulting in liability related to such failure. There can be
no assurance that these suppliers can produce sufficient quantities of
silicon-28 at reasonable prices to make silicon-28 commercially viable.
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, and the Republic of
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
8
<PAGE>
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, Uzbekistan, or Georgia should occur, if trade between
Russia, Uzbekistan, and/or Georgia and the United States were interrupted, if
political conditions in Russia, Uzbekistan, or Georgia disrupt transportation or
processing of 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 radioactive isotopes, 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 radioactive isotopes, 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 were 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 periods. 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 radioactive isotope 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 isotope products ordered from us. A termination
of a customer relationship, or change, reduction, and/or delay in orders could
materially 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."
9
<PAGE>
MANAGEMENT OF GROWTH
We have experienced, and may again experience, 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, 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 at 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."
NEED FOR ADDITIONAL FINANCING
We had anticipated no need for additional financing in the current
fiscal year, but we had anticipated a need for a substantial amount of financing
after our current fiscal year ending April 30, 2001. Circumstances beyond our
control led us to need additional financing sooner than we anticipated, and it
is possible that these and other circumstances that may develop may lead to a
need for further financing.
- 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.
As discussed above and in more detail below, the first factor, relating
to Eagle-Picher has become a reality when Eagle-Picher failed to deliver
silicon-28 to us by December 31, 2000 in accordance with its contractual
obligation; in what we believe to be an effort to enhance its negotiating
position with us, Eagle-Picher failed to make a $500,000 payment due us on
November 30, 2000, from the sale of the depleted zinc business. These are two of
several disputes between us and Eagle-Picher, which are discussed in more detail
below.
10
<PAGE>
We have also had a customer fail to pay approximately $218,000 due us
for products sold in the quarter ended October 31, 2000. These events have
resulted in a significant decrease in our working capital position. We have
filed suit to collect these funds.
To alleviate cash shortages resulting from the foregoing, on December
13, 2000, we sold 337,500 units consisting of one share of our Common Stock and
two Class B warrants for $675,000 to a group of accredited investors. Unless we
are able to collect the amounts due us from Eagle-Picher and the other customer,
we may need to seek additional capital before the end of the current fiscal
year. If we need the additional capital, there is no assurance that we will be
able to obtain it through a private placement or otherwise.
The exercise of the Class A Warrants, the Class B Warrants, and/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."
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 upon 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
11
<PAGE>
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. Rapidly changing technology and
continuing process development characterize the market for our isotope
products. We believe that our future success will depend in large part upon
our ability to develop and market isotope products, which meet changing
customer needs, maintain technological leadership, and successfully
anticipate or respond to technological changes in isotope product technology
on a cost-effective and timely basis. We cannot guarantee that our product
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 isotope product delivery and
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. In the quarter ended October 31, 2000, we recognized a
$270,000 expense to remediate the Golden, Colorado facility we currently
lease. These costs will be paid prior to the expiration of our lease in June
2001 unless we are able to sell our Interpro subsidiary before then and the
purchasers assume this obligation. SEE "BUSINESS."
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<PAGE>
CONTROL BY DIRECTORS AND OFFICERS
Even if all of the Class A Warrants, Class B Warrants, and Class C
Warrants are exercised (which we cannot assure), our directors and officers will
beneficially own between 34.4% and 39.9% of the outstanding shares of Common
Stock as of January 17, 2001, 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."
<TABLE>
<CAPTION>
---------------------------------------------- --------------------------------- ------------------------------------
Description Number of New Common Stock Beneficial Ownership by Directors
Shares and Officers
---------------------------------------------- --------------------------------- ------------------------------------
<S> <C> <C>
Current Ownership* N/A 42.4%
---------------------------------------------- --------------------------------- ------------------------------------
Class A Warrants Exercised** 810,000 39.9%
---------------------------------------------- --------------------------------- ------------------------------------
Class A Warrants and Class B Warrants 1,485,000 38.0%
Exercised**
---------------------------------------------- --------------------------------- ------------------------------------
Class A Warrants, Class B Warrants, and 2,970,000 34.4%
Class CB Warrants Exercised**
---------------------------------------------- --------------------------------- ------------------------------------
</TABLE>
* The current number of Common Stock shares owned by directors and officers is
4,618,204. The current number of Common Stock shares outstanding is 12,000,056.
The current number of options and warrants exercisable owned by directors and
officers is 816,685.
** Assumes 100% exercise.
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 us 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."
PENNY STOCK REGULATIONS
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<PAGE>
Although our Common Stock (and Class A Warrants) are 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 this 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 January 17, 2001, approximately
8,000,775 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 have been 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 January 17, 2001, we had outstanding preferred stock convertible
into and options and warrants to purchase an aggregate of 6,723,208 shares of
Common Stock. As long as these shares of convertible preferred stock ("Series A
Convertible 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 Convertible
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 shareholder approval, issue shares of preferred stock with dividend,
liquidation, conversion, voting, or other rights that could adversely affect the
voting power or other rights of the holders of our Common Stock. Preferred stock
could also be issued to discourage, delay, or prevent a change in our control,
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<PAGE>
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, our state of incorporation. 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."
LACK OF ADEQUATE AUTHORIZED CAPITAL STOCK
As a result of the December 13, 2000, completion of a private placement to a
group of accredited investors, we issued a total of 337,500 shares of our
Common Stock and 675,000 Class B warrants. Additionally, if all of the 675,000
Class B warrants are exercised we will issue an additional 675,000 Class C
warrants. This private placement increased our shares of Common Stock
outstanding to 12,000,056.
As described above, we also have 980,333 shares of Series A Convertible
Preferred Stock outstanding, options outstanding of 1,107,852, and
warrants outstanding of 4,635,023 (this includes 675,000 restricted Class B
Warrants.) Additionally, we have reserved Common Stock shares as follows:
1,485,000 upon the possible conversion of Class C warrants (none of which are
currently outstanding), 796,779 shares reserved for our Employee Stock Option
Plans, and 172,063 shares of Common Stock reserved for our Employee Stock
Purchase Plan. The total of these outstanding shares of Common Stock, equity
instruments convertible and exercisable into Common Stock, and reserved shares
of Common Stock is 21,177,106. This exceeds our authorized capital of
20,000,000 by 1,177,106 shares of Common Stock.
Since our authorized Common Stock is only 20,000,000 shares, we will not be
able to issue any shares in excess of 20,000,000, and we may become liable for
our inability to issue shares as we have committed to do. We intend to propose
an amendment to our Articles of Incorporation to increase our authorized capital
as a special meeting of shareholders, which we expect to hold in March or April
2001. However, there can be no assurance that we will be able to obtain
approval of an increase in our authorized capitalization from our shareholders
at the meeting when held. Until then, and thereafter, if the shareholders do
not approve the increase we are potentially liable for our inability to issue
all shares as committed. We do not believe that the lack of authorized capital
will impact the ability of any person to exercise the Class B Warrants or the
Class C Warrants.
RISK OF FORWARD-LOOKING INFORMATION
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<PAGE>
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."
THE EXCHANGE OFFER
BACKGROUND OF AND REASONS FOR THE EXCHANGE OFFER
In connection with our underwritten initial public offering completed
in September 1997, an underwriter sold 810,000 Units. Each Unit consisted 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 at 5:00 p.m. on September 21,
2001, and the Class A Warrants will then become valueless. As of January 17,
2001, 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 "Underwriters' Warrants"),
all of which remain outstanding. The holders of the Underwriters' 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 Underwriters' Warrant to
participate in the warrant exchange, he or she will have to first exercise the
Underwriters' 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
equate the exercise and redemption provisions of our outstanding warrants with
the current market prices for our Common Stock. As an incentive to encourage
exchange, 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, and
the exercise prices for the Class B Warrants and the Class C Warrants are lower
than the current exercise price for the Class A Warrants. Persons who exchange
their Class A Warrants will be entitled to exercise their warrants for a longer
period of time, and at a lower exercise price, than those who do not exchange
their Class A Warrants for Class B Warrants (since the Class A Warrants expire
September 21, 2001, and are exercisable for $5.80 while the Class B Warrants
expire December 31, 2005, and are exercisable for $1.50.)
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 provide our Class A Warrant holders with an opportunity to acquire
warrants with a lower exercise price, a longer term, and additional value,
while also providing Isonics with redemption provisions which it may be able to
utilize in the future to encourage the exercise of the outstanding warrants. As
an incentive, each Class B Warrant is exercisable for one share of Common
Stock, at a lower exercise price ($1.50 versus $5.80) and one Class C Warrant.
We also hope that the exchange may have a positive effect on the liquidity of,
and the public market for, our 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:
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<PAGE>
- 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, as amended and restated, effective
January 15, 2001.
SUMMARY OF DIFFERENCES BETWEEN THE WARRANTS
<TABLE>
<CAPTION>
CLASS A WARRANTS CLASS B WARRANTS CLASS C WARRANTS (issuable only
upon the exercise of
Class B Warrants)
<S> <C> <C> <C>
Expiration Date September 21, 2001 December 31, 2005 December 31, 2005
Exercise Price $5.80 $1.50 $2.50
Product of Exercise Each person exercising a Class A Each person exercising a Class B Each person exercising a Class C
Warrant will receive one share of Warrant will receive one share Warrant will receive one share of
Common Stock and one Class C of Common Stock and one Class C Common Stock
Warrant if exercised before Warrant
April 30, 2001.
Redemption Provisions We may redeem the Class A We may redeem the Class B We may redeem the Class C
Warrants at a price of $0.10 per Warrants at a price of $0.10 per Warrants at a price of $0.10 per
Warrant on not less than 30 days' Warrant, on or after May 1, 2001, Warrant on not less than 30 days'
prior written notice if the or not less than 30 days' prior prior written notice if our
average price of the Common Stock written notice if our Common Common Stock trades at or above
has been at least $14.50 per Stock trades at or above $3.75 $3.75 per share (subject to
share (subject to adjustment) for per share (subject to adjustment) adjustment) for any 20 of 30
at least 20 consecutive trading for any 20 of 30 consecutive consecutive trading days ending
days ending within three days trading days ending not more than not more than three days before
prior to the date on which notice three days before the notice of the notice of redemption is
of redemption is given. redemption is deposited in the deposited in the United States
United States mails. mails.
Dilution Provisions The number of shares of Common The Class B Warrants will be The Class C Warrants will be
Stock issuable upon exercise is subject to similar dilution subject to similar dilution
subject to adjustment in a number adjustment provisions adjustment provisions
of circumstances
Ability to Trade The Class A Warrants have A public market may develop for A public market may develop for
historically traded on the the Class B Warrants. There can the Class C Warrants. There can
Over-The-Counter Bulletin Board, be no assurance that a market be no assurance that a market for
and on the Nasdaq SmallCap Market for the Class B Warrants will the Class C Warrants will develop
since July 2000. There can be no develop or, if it develops, or, if it develops,
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assurance that the market will will continue. We have applied will continue. We have applied
continue. for trading on the Nasdaq for trading on the Nasdaq
SmallCap Market. SmallCap Market.
Registration The Class A Warrants are The Class B Warrants are also The Class C Warrants are also
registered under the Securities registered under the 1934 Act. registered under the 1934 Act.
Exchange Act of 1934, as amended.
Warrant Holders are Holders of Class A Warrants are Holders of Class B Warrants are Holders of Class C Warrants are
not shareholders not considered to be Shareholders not considered to be not considered to be Shareholders
of Isonics, and do not have the Shareholders of Isonics, and do of Isonics, and do not have the
right to vote at shareholders' not have the right to vote at right to vote at shareholders'
meetings or to receive dividends shareholders' meetings or to meetings or to receive dividends
when and if declared. receive dividends when and if when and if declared.
declared.
</TABLE>
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 Underwriters'
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 or during
this exchange offer, we will issue a Class C Warrant to that person for no
additional consideration. However, a person exercising a Class A Warrant will
pay a substantially higher price ($5.80 per share) than were that person to
exchange the Class A Warrant for a Class B Warrant and then exercise the Class
B Warrant at $1.50 per share. We will not refund the difference to any person
who exercises their Class A Warrants.
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
CONSEQUENCES OF FAILURE TO EXCHANGE
There are significant consequences if you fail to exchange your Class
A Warrants before the expiration date of the exchange offer and the expiration
date of the Class A Warrants, as the Class B Warrants have a much lower
exercise price, have added value in the nature of the Class C Warrants to be
issued upon exercise of the Class B Warrants, and provide you a longer exercise
period (through December 31, 2005, subject to our right to call the Warrants
for redemption). After the expiration of the exchange offer on April 30, 2001,
unless extended, 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:
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<PAGE>
- 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 us to
constitute a material change, or if we waive a material condition of the
exchange offer, we 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 we may choose to make any public
announcement and subject to applicable law, we 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, we will issue
one Class B Warrant. The terms of the Class B Warrant are as follows:
- we will issue to the holder who exercises a Class B Warrant one
share of Common Stock and one Class C Warrant;
- the exercise price of the Class B Warrants is $1.50 per Class B
Warrant (subject to adjustment);
- the Class B Warrants will expire on December 31, 2005;
- 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; and
- the Class B Warrants will be redeemable, on or after May 1, 2001,
if our Common Stock trades at or above $3.75 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.
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:
- we 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 $2.50 per Class C
Warrant (subject to adjustment);
- the Class C Warrants will expire on December 31, 2005;
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<PAGE>
- 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 $3.75 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 Underwriters' 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 (the same date that the Class A Warrants expire),
holders of Class A Warrants will not have an opportunity to exchange their
Class A Warrants and their investment will be valueless. We do not intend to
make another exchange offer with respect to any Class A Warrants outstanding
after the expiration of this exchange offer, nor do we intend to extend the
expiration date of the Class A Warrants.
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.
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
20
<PAGE>
us, 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 we determine in our sole discretion. Neither we 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. We have the right, in our 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 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 us. 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 exchange offer, the information set forth above regarding the federal
income tax consequences of the exchange offer 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.
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
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<PAGE>
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. As of January 17, 2001, none of the Class A Warrants
have been exchanged for Class B Warrants. On December 13, 2000, 675,000
restricted Class B Warrants were issued. As of January 17, 2001, none of the
Class C Warrants have been issued, however:
additional unrestricted 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 A Warrant or a Class B Warrant before the following dates: April
30, 2001 with respect to the Class A Warrants, and December 31, 2005
with respect to the Class B Warrants.
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 Class A Warrant certificate, in order to exercise a Class A Warrant,
you must:
- complete the subscription form which is included as a part of the
Class A Warrant Certificate;
- sign the subscription form and have your signature medallion
guaranteed by a broker-dealer member of the STAMP program;
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<PAGE>
- 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
- include your payment for the exercise price ($5.80 times the
number of warrants being exercised for the Class A Warrants,
$1.50 times the number of warrants being exercised for the Class B
Warrants; and $2.50 times the number of warrants being exercised
for the Class C Warrants). You must pay for the exercise by
certified or bank cashiers' check payable in United States funds
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 we, nor Continental Stock Transfer, are 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 the 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 the 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 $1,215,000, from the
exercise of the Class B Warrants issuable upon exchange of the Class A Warrants
(not including any securities issuable upon exercise of the Underwriters'
Warrants). We expect to use any proceeds received for research and development
and working capital. We do not believe that it is in the best interests of any
person holding a Class A Warrant to exercise that Class A Warrant; we believe
that each person holding a Class A Warrant would be better served by exchanging
their Class A Warrant for a Class B Warrant.
If all of the Class A Warrants are exchanged and all of the Class B
Warrants are exercised before December
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<PAGE>
31 2005, (of which we can offer no assurance), there will be 1,485,000 Class C
Warrants outstanding. We will receive from $0.00 to a maximum of $3,712,500.00
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.
24
<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 enriched stable isotopes. Enriched stable
isotopes are ultra pure materials engineered at the molecular level to provide
enhanced performance properties in semiconductors, lasers and high performance
lighting and energy production. Enriched 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), as described in the paragraph, "REORGANIZATION OF INTERPRO
SUBSIDIARY." Previously Interpro was a contract research and development and
materials processing company and was developing new, lower cost technologies to
better meet our then existing 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. As discussed below, we have
entered into a letter of intent to sell all of Interpro to a management group,
although this transaction is subject to definitive agreements that have not yet
been negotiated, as well as other considerations.
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.
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<PAGE>
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 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.
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. Subject to certain conditions three
additional annual payments of $500,000 each are due on November 30, 2000, 2001
and 2002, representing the balance of $1.5 million. These installments are
contingent upon the performance of an unaffiliated supplier of depleted zinc
whose contract with us was assigned to Eagle-Picher.
Eagle-Picher failed to make the first additional payment due November
30, 2000. We believe that the condition precedent has been met and that
Eagle-Picher has no defense to its non-payment. We have demanded payment from
Eagle-Picher, but Eagle-Picher has made an unacceptable counteroffer.
Correspondence from Eagle-Picher indicated that it may be using the mandatory
payment as leverage to renegotiate certain other portions of our agreements.
We had intended to recognize a contingent gain, of $1.5 million, on a
straight-line basis over the thirty-six month period (approximately $41,667 per
month), as the aforementioned unaffiliated supplier performed under the
contract. Three months, or approximately $125,000, have been recognized in the
quarter ended October 31, 2000. Approximately $250,000 has been recognized in
the six months ended October 31, 2000. We will cease recognizing any additional
contingent gain until the dispute with Eagle-Picher has been resolved. We have
not yet established a reserve for the $500,000 due on November 30, 2000, as we
believe we will be able to resolve this dispute and collect the $500,000. If,
however, the matter is not resolved by January 31, 2001, we will incur a charge
of $500,000 to offset the contingent gain recognized since December 1999.
Additionally, we signed a long-term isotope supply agreement with
Eagle-Picher, and Eagle-Picher was to have supplied us by December 31, 2000,
with 200 kilograms of silicon-28 to be used in research and development
activities. We gave Eagle-Picher a warrant to obtain 4,000,000 shares of our
common stock, however, these warrants and the underlying shares, are contingent
upon the delivery of silicon-28 by Eagle-Picher by December 31, 2000. As
silicon-28 was to be delivered we intended to 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.
In addition to its refusal to pay the aforementioned $500,000 due
November 30, 2000, Eagle-Picher failed to deliver any portion of the required
200 kilograms of silicon-28. We know that Eagle-Picher's silicon-28 production
facility in Oklahoma has encountered certain technical difficulties, which
Eagle-Picher refers to as a FORCE MAJEURE. We believe that Eagle-Picher's
technical difficulties do not meet the definition of FORCE MAJEURE set forth in
our agreements and that there is no contractual excuse for its failure to meet
its delivery requirement.
Eagle-Picher exercised their warrant, under a net exercise provision in
the warrant agreement, and received 3,130,435 shares of our Common Stock, in
March 2000. 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. As Eagle-Picher is claiming FORCE MAJEURE, it believes
it is entitled to retain its ownership to the 3,130,435 shares, as well as the
disputed 155,279 shares of our Common Stock. We continue to dispute
Eagle-Picher's calculations, and we also believe Eagle-Picher may have
improperly exercised the Warrant
26
<PAGE>
because of its failure to execute the required subscription agreement. We are
evaluating the ramifications of this apparent improper warrant exercise. We
have also advised Eagle-Picher that we intend to cancel the shares issued to
it as partial satisfaction of the damages that we have suffered as a result
of Eagle-Picher's non-performance.
Isonics and Eagle-Picher have commenced efforts to resolve these and
other disputes relating to its contract, but there has been no satisfactory
resolution to date.
As a result of Eagle-Picher's alleged breaches and defaults, we did not
receive the 200 kilograms of silicon-28 meeting the specifications set forth in
the agreement, as promised by Eagle-Picher. We have other sources of supply for
silicon-28 meeting the necessary specifications, although orders have not been
placed. Without silicon-28 meeting our specifications our research and
development activities will be hindered. Additionally, Eagle-Picher's failure to
make the payment due on November 30, 2000, has caused our working capital to be
significantly reduced, and we are seeking other means of financing our
operations. On December 13, 2000, we entered into a financing agreement
described in more detail in the paragraph titled, "LIQUIDITY AND CAPITAL
RESOURCES."
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 quarters. Consequently, a lost or delayed
sale of stable or 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.
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.
We are presently considering alternatives for Interpro, and the zinc
recovery business, because of its significant negative cash flow and the failure
to attract any outside investors. Management estimates the negative cash flow
directly attributable to the zinc recovery project to be approximately $100,000
per month. It is also Management's opinion that outside investors are reluctant
to invest in the zinc recovery business as long as it is part of Isonics. As a
result, we have entered into a letter of intent for the sale of Interpro a
management group that will assume the related assets, liabilities, and all
subsequent expenses and costs of developing the zinc recovery business. The
Board of Directors has received such an offer subject to the finalization of
acceptable terms, the preparation of a "fairness opinion," and the possible
submission of the matter to, and approval by, our shareholders.
In the quarter ended October 31, 2000, we recognized a $270,000 expense
to remediate the Golden, Colorado facility we currently lease. This expense will
be incurred prior to the expiration of our lease in June 2001. In the event that
the zinc recovery business is sold, this would become the obligation of the
management group proposing to buy the zinc recovery business. A condition of the
transaction is that they obtain an extension of this lease, which would extend
the environmental remediation obligation.
27
<PAGE>
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 Ended Six Months Ended
October 31, October 31
------------------ ----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 79.3 77.8 77.0 77.8
----- ----- ----- -----
Gross margin 20.7 22.2 23.0 22.2
----- ----- ----- -----
Operating expenses:
Selling, general &
Administrative 91.0 21.2 74.7 24.3
Research & development 21.1 4.6 17.9 4.4
Restructuring & office closure -- -- -- 0.8
----- ----- ----- -----
Total operating expenses 112.1 25.8 92.6 29.5
----- ----- ----- -----
Operating income (loss) (91.4) (3.6) (69.6) (7.3)
----- ----- ----- -----
Other income (expense) net 2.1 0.4 4.9 (0.9)
----- ----- ----- -----
Income (loss) before income taxes (89.3) (3.2) (64.7) (8.2)
----- ----- ----- -----
Income tax expense (benefit) (0.1) -- -- --
----- ----- ----- -----
NET INCOME (LOSS) (89.2)% (3.2)% (64.7)% (8.2)%
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Twelve Months Ended
April 30,
-------------------
2000 1999
------ ------
<S> <C> <C>
Net revenues 100.0% 100.0%
Cost of revenues 79.8 78.7
----- -----
Gross margin 20.2 21.3
----- -----
Operating expenses:
Selling, general &
Administrative 29.1 21.4
Research & development 9.6 6.8
Restructuring & office closure 0.4 4.1
----- -----
Total operating expenses 39.1 32.3
----- -----
Operating income (loss) (18.9) (11.0)
----- -----
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C>
Other income (expense) net 41.0 (2.8)
----- -----
Income (loss) before income taxes 22.1 (13.8)
----- -----
Income tax expense (benefit) 1.0 1.0
----- -----
NET INCOME (LOSS) 21.1% (14.8)%
===== =====
</TABLE>
NET REVENUES
Net revenues for the three months ended October 31, 2000, were $1.955
million, a decrease of approximately 56%, or $2.505 million, from $4.460 million
for the same period in the prior fiscal year. The decrease is primarily because
our net revenues from isotope product sales decreased approximately $2.121
million for the three months ended October 31, 2000, to approximately $1.955
million. 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 sales decreased approximately $384,000 for the
three months ended October 31, 2000, to $0, because of our cessation of these
activities at our subsidiary Interpro.
Net revenues for the six months ended October 31, 2000, were $3.991
million, a decrease of approximately 47%, from $7.544 million for the same
period in the prior fiscal 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 sales decreased
approximately $717,000 for the six months ended October 31, 2000, to $0, because
of our cessation of these activities at our subsidiary Interpro.
Following the end of our fiscal quarter, we were adversely impacted by
one customer's failure to pay approximately $218,000 in invoices due.
Additionally, we had ordered, based on purchase orders placed by this customer,
approximately $131,000 in product from our suppliers. We have taken the actions
we believe appropriate to recover these obligations. We have been informed by
the management of this customer that they are currently selling a portion of
their business and intend to pay the amounts owed us with the proceeds from this
sale. We believe if this customer does not honor its purchase orders we will be
able to sell the inventory to other customers.
We do not anticipate significant revenues from sales of silicon-28
based products in the fiscal year ended April 30, 2001, and our ability to
achieve any revenues from silicon-28 based products is dependent on continuing
research and development, and our ability to obtain an adequate supply of
silicon-28 from Eagle-Picher or other suppliers. 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.
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.
29
<PAGE>
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 "SALE OF DEPLETED ZINC BUSINESS, AND REORGANIZATION OF
INTERPRO SUBSIDIARY."
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.
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.
Gross margin for the three months ended October 31, 2000, decreased to
approximately 20.7% of net revenues from approximately 22.2% for the same period
in the prior fiscal year. The decrease is primarily because of the lack of
depleted zinc sales and sales to a lost customer that carried higher margins.
Gross margin for the six months ended October 31, 2000, increased to
approximately 23.0% of net revenues from approximately 22.2% for the same period
in the prior fiscal year.
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
We anticipate that our selling, general, and administrative expenses
will increase during the current fiscal year as we increase our sales and
marketing efforts in other product lines. 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 on a dollar
basis to approximately $1.780 million, or approximately 91.0% of net revenues
for the three months ended October 31, 1999, from $945,000, or 21.2% of net
revenues in the comparable period of the prior year. The dollar increase for the
quarter ended October 31, 2000, was primarily attributable to increased usage of
professional services including legal, business development and accounting
services, bad debt expense (as described above in the paragraph titled "NET
REVENUES"), and remediation expenses related to our Golden facility, while the
percentage increase was
30
<PAGE>
primarily caused by lower revenues as described above, as well as, higher
levels of spending.
In the quarter ended October 31, 2000, we recognized a $270,000 expense
to remediate the Golden, Colorado facility we currently lease. This expense will
be incurred prior to the expiration of our lease in June 2001. If we are able to
sell the zinc recovery business, we anticipate that this would become the
obligation of the management group proposing to buy the zinc recovery business.
Selling, general and administrative expenses increased on a dollar
basis to approximately $2,980,000, or approximately 74.7% of net revenues for
the six months ended October 31, 2000, from approximately $1,830,000 million, or
approximately 24.3% of net revenues for the six months ended October 31, 1999.
The dollar increase for the six months ended October 31, 2000, is primarily
attributable to increased usage of professional services including legal,
business development and accounting services, bad debt expense, and remediation
expenses related to our Golden facility, while the percentage increase was
primarily caused by lower revenues as described above, as well as, higher levels
of spending.
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). 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 increased by approximately $207,000,
or approximately 101%, to $412,000, for the quarter ended October 31, 2000, from
$205,000 for the comparable period in fiscal 1999, while increasing on a
percentage basis to approximately 21.1% of net revenues from approximately 4.6%.
The dollar increase during the quarter ended October 31, 2000, was primarily
because of research and development costs associated with the development of our
zinc recovery and recycling project. The percentage increase is primarily
attributable to lower revenues as described above, as well as, higher levels of
spending.
Research and development expenses increased by approximately $384,000,
or approximately 116%, to $716,000 for the six months ended October 31, 1999,
from $332,000 for the comparable period in fiscal 1999, while increasing on a
percentage basis to approximately 17.9% of net revenues from approximately 4.4%.
The dollar increase during the six months ended October 31, 2000, was primarily
because of research and development costs associated with the development of our
zinc recovery and recycling project. The percentage increase is primarily
attributable to lower revenues as described above, as well as, higher levels of
spending.
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.
31
<PAGE>
As described above in the paragraph titled "SALE OF DEPLETED ZINC
BUSINESS," we signed a long-term isotope supply agreement with Eagle-Picher,
under which 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.
As also described above Eagle-Picher did not meet this obligation to
deliver the 200 kilograms of silicon-28 for which we have already paid
Eagle-Picher. We have held several discussions with Eagle-Picher regarding this
and other Eagle-Picher failures, which we believe, have occurred under our
agreements. If we are able to reach a resolution with Eagle-Picher, they may
still deliver the required silicon-28 to us in the future; if we are not able to
reach any agreement with Eagle-Picher, they may not deliver any silicon-28 to
us. If Eagle-Picher's delay in delivering the silicon-28 is significant, or if
Eagle-Picher's technology cannot produce silicon-28 meeting our requirements, we
will need to make other arrangements for our silicon-28 supply. These other
arrangements will likely delay our ability to complete our research and
development programs.
We believe that the development and introduction of new product
applications is 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.
As discussed above in the paragraph titled, "REORGANIZATION OF INTERPRO
SUBSIDIARY," we are presently considering alternatives for Interpro, and the
zinc recovery business, because of its significant negative cash flow and the
failure to attract any outside investors. Management estimates the negative cash
flow directly attributable to the zinc recovery project to be approximately
$100,000 per month. It is also Management's opinion that outside investors are
reluctant to invest in the zinc recovery business as long as it is part of
Isonics.
These alternatives include selling a portion or all of the zinc
recovery business to a management group that will assume the related assets,
liabilities, and all subsequent expenses and costs of developing the zinc
recovery business. The Board of Directors has received such an offer subject to
the finalization of acceptable terms, the preparation of a "fairness opinion",
and the possible submission of the matter to, and approval by, our Shareholders.
In the event that the zinc recovery business is sold, we will reduce our
research and development expenses by $75,000 to $100,000 per month.
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
32
<PAGE>
restructuring.
As of October 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 $40,000, and will be paid over the next four
years. The expense in fiscal 2000, was primarily related to moving costs
incurred by two senior executives.
OTHER INCOME (EXPENSE), NET
Other income (expense), net includes interest expense, amortization of
debt issuance costs and the fair value of warrants issued in connection with the
debt, and foreign currency gains and losses. Other income (expense), net
increased by approximately $26,000, to $42,000, for the quarter ended October
31, 2000, from other income, net of approximately $16,000, for the comparable
period of the previous fiscal year. The decrease in interest expense of
approximately $91,000 was offset by an increase in foreign currency losses of
$53,000 and a decrease in other income of approximately $12,000.
Other income, net increased by approximately $256,000, to $193,000, for
the six months ended October 31, 2000, from other (expense), net of
approximately $63,000, for the comparable period of the previous fiscal year.
The decrease in interest expense of approximately $199,000 was augmented by an
increase in other income of approximately $45,000, and a foreign currency
exchange gain of approximately $12,000.
As described above, Eagle-Picher failed to make the first additional
payment due November 30, 2000. We had intended to recognize a contingent gain,
of $1.5 million, on a straight-line basis over the thirty-six month period
(approximately $41,667 per month), as the aforementioned unaffiliated supplier
performed under the contract. Three months, or approximately $125,000, have been
recognized in the quarter ended October 31, 2000. Six months, or approximately
$250,000, have been recognized in the six months ended October 31, 2000.
We will cease recognizing any additional contingent gain until the
dispute with Eagle-Picher has been resolved. We have not yet established a
reserve for the $500,000 due on November 30, 2000, as we believe we will be able
to resolve this dispute and collect the $500,000. If, however, the matter is not
resolved by January 31, 2000, we will incur a charge of $500,000 to offset the
contingent gain recognized since December 1999.
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.
Also in fiscal 2000, we recognized a gain of $110,000 resulting from the
favorable settlement of a dispute with a vendor.
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, and state income taxes for which no loss carryforwards were
available.
33
<PAGE>
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.
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 for the amount in excess of the taxes paid in prior
years that are subject to refund.
NET INCOME (LOSS)
We recognized net losses of $2,583,000 and $616,000, for the six months
ended October 31, 2000 and 1999, respectively. We recognized net losses of
$1,744,000 and $143,000, for the quarters ended October 31, 2000 and 1999,
respectively. Losses of this magnitude will likely continue until revenues
increase from our current operations or research and development projects.
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 and was adversely
affected by a customer failing to pay an account receivable when due, 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
October 31, 2000 $1.725 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
34
<PAGE>
sales of preferred stock. We used cash in operating activities of
approximately $2.495 million and $1.385 million during the three months ended
October 31, 2000, and 1999, respectively. Cash used in operating activities
during the six months ended October 31, 2000 was principally the result of a
net loss of approximately $2.583 million. Cash used by operating activities
during the three months ended October 31, 1999, was principally the result of
a net loss of $1.744 million 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.
Our investing activities used cash of $21,000, and $0 for the three
months ended October 31, 2000, and 1999, respectively, resulting from purchases
of property and equipment.
Financing activities generated cash of $213,000 and $1.246 million for
the three months ended October 31, 2000, and 1999, respectively. Cash provided
by financing activities during the three months ended October 31, 2000, resulted
primarily from the exercise of employee stock options. Net repayments of debt of
$3,000 were the primary use of cash in financing activities for the six months
ended October 31, 2000. Cash provided by financing activities during the six
months ended October 31, 1999, resulted primarily from the issuance of
convertible preferred stock for cash of $2.250 million and proceeds from the
issuance of long-term debt of $75,000. Net repayments on the revolving line of
credit of $298,000 and repayments of debt of $781,000 were the primary uses of
cash during the six-month period ended October 31, 1999.
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.
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.
Financing activities provided cash of $545,000 in fiscal 2000, and used
cash of $244,000 in fiscal 1999. In
35
<PAGE>
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.
Significant positive influences on our fiscal 2001 cash flow from
operations included:
- a decrease in accounts receivable of $200,000; and
- a decrease in prepaid expenses and other current assets of
$119,000;
- an increase in accrued liabilities of $153,000.
- non-cash charges for bad debt write-offs, and depreciation and
amortization expense of $423,000; and
Other negative influences on our fiscal 2000 and 2001 cash flow
included:
- net loss of approximately $2,583,000;
- an increase in notes receivable of $250,000;
- an increase in income taxes receivable of $426,000;
- a decrease in taxes payable of $367,000;
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 $2,745,000 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 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;
36
<PAGE>
- extended the payment due date for the remaining balance on the
Chemotrade acquisition note to July 2000; and
- 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, and subsequently.
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 currently have no borrowing agreements in place with any lenders
or similar organizations.
At October 31, 2000, we had approximately $1.082 million of cash and
cash equivalents, a decrease of approximately $2.303 million, compared to $3.385
million as of April 30, 2000. At October 31, 2000 we has positive working
capital of $1.725 million, a decrease of $2.029 million from April 30, 2000. The
decrease is largely attributable to net loss of $2.583 for the same period.
During the six months ended October 31, 1999, we issued approximately
$2.745 million in convertible preferred stock. Cash proceeds totaled
approximately $2.250 million and conversion of notes payable and other
obligations to preferred stock totaled approximately $495,000. This convertible
preferred stock placement is described in detail in the Form 8-K we filed on
August 11, 1999.
Two events, subsequent to the end of the quarter ended October 31,
2000, significantly and adversely impacted our cash position. A customer has not
paid approximately $218,000 in invoices due at the end of the quarter. This
account receivable has been fully reserved as of October 31, 2000. We have taken
actions we believe appropriate to recover this obligation. In addition we have
ordered $131,000 of product based on purchase orders placed by this customer. We
have been informed by the management of this customer that they are currently
selling a portion of their business and intend to pay the amounts owed us with
the proceeds from this sale. We believe if this customer does not honor its
purchase orders we will be able to sell the inventory to other customers.
The second adverse event subsequent to the end of the quarter was
Eagle-Picher's failure to make the $500,000 annual installment due November 30,
2000. We have not reserved this amount at this time, as we believe we will
collect this amount including accrued interest in the near future. However, if
we have not collected the $500,000 by January 31, 2001, we will incur a charge
of $500,000 to offset the contingent gain recognized since December 1999.
One event, subsequent to the end of the quarter ended October 31, 2000,
significantly and positively impacted our cash position. In a private placement
with approximately ten accredited investors we sold 337,500 units consisting of
one share of our Common Stock and two Class B Warrants for $675,000 ($2.00 per
unit). This transaction was completed on December 13, 2000.
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If the zinc recovery business is sold, as discussed in the paragraph
titled, "REORGANIZATION OF INTERPRO SUBSIDIARY," we will reduce our cash
outflow by approximately $100,000 per month. We will also eliminate certain
current liabilities totaling between $500,000 and $750,000, which will
improve our working capital position.
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
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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 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 www.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.
We are presently considering alternatives for Interpro, and the zinc
recovery business, because of its
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significant negative cash flow and the failure to attract any outside
investors. Management estimates the negative cash flow directly attributable
to the zinc recovery project to be approximately $100,000 per month. It is
also Management's opinion that outside investors are reluctant to invest in
the zinc recovery business as long as it is part of Isonics.
These alternatives include selling a portion or all of the zinc
recovery business to a management group that will assume the related assets,
liabilities, and all subsequent expenses and costs of developing the zinc
recovery business. The Board of Directors has received such an offer subject
to the finalization of acceptable terms, the preparation of a "fairness
opinion," and the possible submission of the matter to, and approval by, our
Shareholders.
In the quarter ended October 31, 2000, we recognized a $270,000
expense to remediate the Golden, Colorado facility we currently lease. This
expense will be paid prior to the expiration of our lease in June 2001.
In the event that the zinc recovery business is sold, this would likely
become the obligation of the management group proposing to buy the zinc
recovery business.
CHEMOTRADE
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 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 $481,000 (DM
1,000,000) are achieved for the year ending April 30, 2001. The maximum
additional consideration that can be earned is $241,000 (DM 500,000). Any
additional consideration will be recorded as additional goodwill.
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:
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- focusing on development of high value-added products, which we
expect to have a competitive advantage in large or growing
markets;
- 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.
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
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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
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
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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.
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 (or 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,
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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 and eye 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.
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 known amounts of 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, and/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.
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.
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CALIBRATION STANDARDS (NON-LIFE SCIENCES). In addition to the life sciences
calibration standards market described above, 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.
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 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% isotopically 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."
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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 for natural abundance silicon, 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, from its pilot
plant, on an exclusive basis. The initial 200-kilogram delivery was scheduled
for delivery by December 31, 2000. Eagle-Picher failed to make timely
delivery of this amount. We know that Eagle-Picher's silicon-28 production
facility in Oklahoma has encountered certain technical difficulties, which
Eagle-Picher refers to as a FORCE MAJEURE. We believe that Eagle-Picher's
technical difficulties do not meet the definition of FORCE MAJEURE per our
agreements, which would entitle Eagle-Picher to a delay in the delivery
requirement. We have invoked the dispute resolution process called for in the
Supply Agreement to resolve this and other related issues. SEE "SALE OF
DEPLETED ZINC BUSINESS" 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, construction has commenced, and we
expect this facility to be completed 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.
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.
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ZINC RECOVERY AND RECYCLING BUSINESS OPPORTUNITY
We have pursued a business opportunity in our efforts 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. For various
economic factors discussed above in MANAGEMENT'S DISCUSSION AND ANALYSIS -
REORGANIZATION OF INTERPRO SUBSIDIARY and elsewhere herein, we have concluded
that the research and development necessary to pursue this product
opportunity may not be affordable to Isonics at this time. Until we are able
to sell our Interpro subsidiary on reasonable terms, however, we intend to
continue to pursue this zinc recovery and recycling opportunity.
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 1.65 million tons ($1.8 billion). Over the
past twenty years the increase in galvanizing consumption worldwide 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
scrap 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).
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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 was originally 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 was then 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.
We are presently considering alternatives for Interpro, and the zinc
recovery business, because of its significant negative cash flow and the
failure to attract any outside investors. Management estimates the negative
cash flow directly attributable to the zinc recovery project to be
approximately $100,000 per month. It is also Management's opinion that
outside investors are reluctant to invest in the zinc recovery business as
long as it is part of Isonics.
These alternatives include selling a portion or all of the zinc
recovery business to a management group that will assume the related assets,
liabilities, and all subsequent expenses and costs of developing the zinc
recovery business. Although this offer will not result in the payment of any
cash to Isonics as a part of the purchase price, it will relieve us from a
monthly negative cash flow, certain long-term liabilities, and (by retaining
a 25% interest) will provide us with an opportunity to benefit from any
success achieved by the purchasers. The Board of Directors has accepted such
an offer subject to the finalization of acceptable terms, the preparation of
a "fairness opinion," and the possible submission of the matter to, and
approval by, our shareholders.
In the quarter ended October 31, 2000, we recognized a $270,000
expense to remediate the Golden, Colorado facility we currently lease. This
expense will be incurred prior to the expiration of our lease in June 2001.
In the event that the zinc recovery business is sold, this would become the
obligation of the management group proposing to buy the zinc recovery
business.
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
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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 "MANAGEMENT'S DISCUSSION AND ANALYSIS - SALE OF DEPLETED
ZINC BUSINESS."
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 million and
$1.155 million, 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. Both of these
projects are still underway as of the date of this prospectus.
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.
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
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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.
As described above, we believe this new technology has numerous
benefits compared to conventional zinc scrap recycling processes, but we do
not believe that Isonics is currently in a position to complete the necessary
research and development to pursue these opportunities. Consequently (also as
described above), we are considering selling our Interpro subsidiary to a
management group. We will continue our research and development in this area
(to the extent permitted by our resources) until the sale has been completed.
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 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.
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,
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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.
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.
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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 ("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, and
other zinc-consuming, industries. 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. As described above, Eagle-Picher
failed to deliver the required silicon-28 to us in a timely manner, and we
have no assurance that it will be able to do so.
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-
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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. We believe Techsnabexport has honored
the Supply Agreement as of the date of this prospectus; however, Eagle-Picher
has not yet paid the first installment of $500,000 due November 30, 2000, and
we have commenced our contractual dispute resolution process as a result of
this default.
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, and elsewhere within the former Soviet
Union, entail certain other risks, including, among others, supply
disruptions as well as introduction of tariffs and fluctuations in freight
rates. SEE "RISK FACTORS."
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 had expected 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 and, in fact, Eagle-Picher did not
deliver the 200 kilograms by December 31, 2000. We are in negotiations with
Eagle-Picher in regards to this and other related matters. 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 has the potential to 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.
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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 prospectus, 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
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product we develop which is subject to FDA 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 multi-step 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 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 manufacturers. Continued compliance with
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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.
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.
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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. However, 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 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.
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EMPLOYEES
As of January 1, 2001, we had 30 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
fourteen 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 June 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 1,750 square feet for an administrative sales office in
Columbia, Maryland that expires December 1, 2003. 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 except litigation we instituted against International
Isotopes, Inc. in the United States District Court for the District of
Colorado for the collection of approximately $280,000 we believe it owes us
for product we have sold to and delivered to International Isotopes, Inc.
This litigation is in the preliminary stages and we have only recently
received the answer filed by International Isotopes, Inc. in which it denied
all of our material allegations and contested the jurisdiction of the
Colorado court.
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 January 1, 2001. 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.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James E. Alexander 51 President, Chief Executive Officer and Chairman of the Board
Boris Rubizhevsky 50 Senior Vice President, Vice Chairman and Director
Daniel J. Grady 46 Vice President, Life Sciences
Stephen J. Burden 52 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.
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
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1991, Dr. Grady served as Software Engineer Manager, Nuclear Medicine for GE
in England. From October 1984 through May 1988, he served as Clinical
Applications Manager for GE Nuclear Medicine. Between June 1981 and October
1984, he served as 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, Germany, 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
U.S.-based, management consulting firm providing materials management expertise
to foreign company affiliates of U.S. 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 management.
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
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Bachelors degree in Education from the University of North Dakota.
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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of the our Common Stock as of January 17, 2001, 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 us to be beneficial owners of more than
five percent of our Common Stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
--------------------
BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF TOTAL
---------------- ---------------- ----------------
<S> <C> <C>
James E. Alexander (1) 2,076,779 17.3%
Boris Rubizhevsky (2) 1,828,293 15.2%
Stephen J. Burden (3) 289,880 2.4%
Daniel J. Grady (4) 243,309 2.0%
Brantley J. Halstead (5) 141,000 1.2%
Robert H. Cuttriss (6) 307,982 2.6%
Herbert Hegener (7) 80,644 0.7%
Lindsay Gardner (8) 299,761 2.5%
Richard Parker (9) 50,000 0.4%
Larry Wells (10) 117,241 1.0%
All executive officers and directors as a group (10persons). The address for all 5,434,889 42.4%
of the above directors and executives officers is:
5906 McIntyre Street, Golden, CO 80403
Richard Grossman (11) 1,873,336 15.6%
Anfel Trading (12) 666,668 5.4%
Eagle-Picher Technologies, LLC (13) 3,130,435 26.1%
</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, (iv) 4,000 shares held by son
Benjamin Alexander, and (v) 4,000 shares
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held by son Jonathan Alexander.
(2) Includes (i) 1,731,127 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, and (vi) 4,000 shares of Common Stock held by son Ryan
Rubizhevsky.
(3) Includes 192,887 shares of Common Stock underlying options of which
130,025 have vested as of December 31, 2000, and which are currently
exercisable.
(4) Includes 222,965 shares of Common Stock subject to stock options that
are currently exercisable.
(5) Includes 125,000 shares of Common Stock underlying options of which
80,000 have vested as of December 31, 2000, and which are currently
exercisable.
(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 50,000 shares of Common Stock underlying stock options, which
are currently exercisable.
(9) Includes 50,000 shares of Common Stock underlying stock options, which
are currently exercisable.
(10) Includes 40,000 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 333,334 shares of Common Stock underlying 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
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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. Furthermore Eagle-Picher did not meet its
contractual obligation to deliver 200 kilograms of silicon-28 to us by
December 31, 2000. We believe that we may have the right to cancel all
of these shares and we have so advised Eagle-Picher. We are continuing
to discuss these and other related matters with Eagle-Picher.) 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 December 31, 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 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.
SECTION 16(b) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
SECTION 16(b) 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
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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 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 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 J. Catuna, Jr., 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. Mr.
Catuna is no longer subject to the reporting requirement of Section
16(a).
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.
11. Mr. Alexander filed a Form 4 after July 10, 2000, reporting a sale of
536,000 shares in June 2000.
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
Board of Directors approved the January and April transactions 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 1998.
(d) Mr. Parker voluntarily filed a Form 4 in February 2000, reporting
transactions that occurred in October 1998.
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<PAGE>
(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 transactions 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 1999,
respectively. With authorization from Dr. Cuttriss and Isonics, Metallurgy
International, Inc. 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."
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 $100,000 during any of those
years. This includes all compensation paid to each by Isonics and any
subsidiary.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
------------------- COMPENSATION AWARDS
-------------------
AWARDS PAYOUT
---------- ------
NAME AND PRINCIPAL POSITION FISCAL ($) ($) ($) ($) SECURITIES LTIP ALL OTHER
--------------------------- YEAR SALARY BONUS OTHER(a) RESTRICTED UNDERLYING PAYOUT ---------
---- ------ ----- -------- AWARDS OPTIONS & ------ COMPENSATION
------ SARS (#) ------------
----------
<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
66
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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.
(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 $1.4375 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
67
<PAGE>
delaying salary in March and April 1999, and are currently exercisable
at $1.4375 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 $1.4375 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 $1.4375 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 $2.5625 per share
(of which 55,000 have vested as of December 31, 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 $1.4375 per share and expire April 26, 2004.
Mr. Halstead exercised these options in October 2000 for cash.
(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 $7.3125 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-
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half years. Under the agreements, each 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 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 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. In October 2000, our
shareholders approved increasing the number of stock options
available to 1,000,000, an increase of 430,000 stock options.
The directors approved this increase in August 2000.
(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. In October 2000, our shareholders approved increasing
the number of stock options available to 500,000, an increase
of 350,000 stock options. The directors approved this increase
in August 2000.
(d) 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan")
authorized employee purchase of
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<PAGE>
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 January 1, 2001, options to purchase a total of 329,583 shares,
279,500 shares, and 358,769 shares respectively, were outstanding under the
Executives' Plan, Employees' Plan, and 1996 Stock Option Plan, and options to
purchase 619,417, 177,362, and 0 shares, respectively, remained available for
grant. Our shareholders were 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. These increases were approved by our
shareholders at the annual meeting held October 11, 2000. The number of options
issuable under the two plans was increased by 350,000, in the Employees' Plan,
and 430,000, in the Executives' Plan.
Except for the Director's Plan, we have not adopted any other stock
option or stock appreciation rights plan. SEE "COMPENSATION OF DIRECTORS."
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. We
have not granted any stock options to executives named in the compensation table
in fiscal 2001.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION NUMBER OF PERCENT OF TOTAL EXERCISE PRICE EXPIRATION DATE
--------------------------- SECURITIES OPTIONS/ SARS ($/SH) ---------------
UNDERLYING GRANTED TO ------
OPTIONS/SARS EMPLOYEES IN
GRANTED (#) FISCAL YEAR
----------- -----------
<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% $7.3125 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. Mr. Halstead exercised 16,000 stock options for cash in
October 2000. These stock options were granted in April 1999, and
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<PAGE>
approved by the board of directors in October 1999.
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>
NAME AND PRINCIPAL POSITION SHARES VALUE NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
--------------------------- ACQUIRED ON REALIZED UNDERLYING UNEXERCISED MONEY OPTIONS/SARS AT
EXERCISE (#) -------- OPTIONS/SARS AT APRIL 30, 2000
------------ APRIL 30, 2000 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.
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
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<PAGE>
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 through January 1, 2001:
(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 $1.6563 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 $6.1250 per share through April 26, 2005.
(f) On October 11, 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 $2.1875 per share through October 10, 2005.
As of January 1, 2001, options to purchase a total of 140,000 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.
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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. Rubizhevsky 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, and
subsequently, 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
FY 2001 Borrowings (a) 0.00 0.00
FY 2001 Repayments (a) 0.00 0.00
---- ----
Balance as of December 31, 2000 $0.00 $0.00
</TABLE>
-----------
(a) Includes interest accrued and paid. Amounts are aggregated.
CORPORATE LOANS FROM OFFICERS AND EMPLOYEES
On occasion during the fiscal years ended April 30, 1998, 1999 and
2000, officers, directors, and employees of Isonics loaned Isonics funds. The
following schedule summarizes these borrowing and repayments.
73
<PAGE>
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION BALANCE AS OF MAY 1, 1997 FY 1998 BORROWINGS (a) FY 1998 REPAYMENTS (a) BALANCE AS OF APRIL 30, 1998
--------------------------- ------------------------- ---------------------- ---------------------- ----------------------------
<S> <C> <C> <C> <C>
James E. Alexander $0.00 $25,000.00 $25,000.00 $0.00
President & CEO.............
Boris Rubizhevsky $0.00 $0.00 $0.00 $0.00
Senior Vice President.......
Daniel J. Grady $0.00 $15,600.00 $15,600.00 $0.00
Vice President..............
Stephen J. Burden $0.00 $86,821.92 $86,821.92 $0.00
Vice President (b)..........
Lindsay Gardner $0.00 $122,880.28 $122,880.28 $0.00
Director (c)................
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>
NAME AND PRINCIPAL POSITION BALANCE AS OF MAY 1, 1998 FY 1999 BORROWINGS (a) FY 1999 REPAYMENTS (a) BALANCE AS OF APRIL 30, 1999
--------------------------- ------------------------- ---------------------- ---------------------- ----------------------------
<S> <C> <C> <C> <C>
James E. Alexander $0.00 $0.00 $0.00 $0.00
President & CEO............
Boris Rubizhevsky $0.00 $44,290.20 $0.00 $44,290.20
Senior Vice President......
Daniel J. Grady $0.00 $47,100.00 $47,100.00 $0.00
Vice President.............
Stephen J. Burden $0.00 $0.00 $0.00 $0.00
Vice President.............
Lindsay Gardner $0.00 $0.00 $0.00 $0.00
Director...................
Jacques J. Delente......... $0.00 $93,000.00 $48,000.00 $45,000.00
</TABLE>
-----------
74
<PAGE>
(a) Includes interest accrued and paid through April 30, 1999. Amounts are
aggregated.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION BALANCE AS OF MAY 1, 1999 FY 2000 BORROWINGS (a) FY 2000 REPAYMENTS (a) BALANCE AS OF APRIL 30 2000
--------------------------- ------------------------- ---------------------- ---------------------- ---------------------------
<S> <C> <C> <C> <C>
James E. Alexander $0.00 $0.00 $0.00 $0.00
President & CEO............
Boris Rubizhevsky $44,290.20 $8,858.04 $53,214.24 $0.00
Senior Vice President (b)..
Daniel J. Grady $0.00 $0.00 $0.00 $0.00
Vice President.............
Stephen J. Burden $0.00 $57,500.00 $57,500.00 $0.00
Vice President (c).........
Lindsay Gardner $0.00 $0.00 $0.00 $0.00
Director...................
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.
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 January 17, 2001, there
were outstanding 12,000,056 shares of Common Stock and 980,333 shares of Series
A Convertible Preferred Stock. As of January 17, 2001, there were also
outstanding options issued pursuant to our employee benefit plans to purchase a
total of 1,107,852 shares, and warrants to purchase a total of 4,635,023 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. We have advised Eagle-Picher that these shares are subject to
forfeiture since Eagle-Picher failed to 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 and other
related matters. We have invoked the dispute resolution process as defined in
our agreements with Eagle-Picher to resolve this issue and we will make a
determination regarding their Common Stock shares based on the outcome of the
dispute resolution process.
75
<PAGE>
As described above, we also have 980,333 shares of Series A
Convertible Preferred Stock outstanding, options outstanding totaling 1,107,852,
and warrants outstanding of 4,635,023. Additionally, we have reserved Common
Stock shares for 1,485,000 upon the possible conversion of Class C warrants
(none of which are currently outstanding), 796,779 shares are reserved for our
Employee Stock Option Plans, and 172,063 shares of Common Stock are reserved for
our Employee Stock Purchase Plan. The total of these outstanding shares of
Common Stock, convertible and exercisable into Common Stock equity instruments,
and reserved shares of Common Stock is 21,177,106. This exceeds our authorized
capital of 20,000,000 shares, by 1,177,106 shares of Common Stock.
Since our authorized Common Stock is only 20,000,000 shares, we will
not be able to issue any shares in excess of 20,000,000, and we may become
liable for our inability to issue shares as we have committed to do. We intend
to propose an amendment to our Articles of Incorporation to increase our
authorized capital as a special meeting of shareholders, which we expect to
hold in March or April 2001. However, there can be no assurance that we will be
able to obtain approval of an increase in our authorized capitalization from
our shareholders at the meeting when held. Until then, and thereafter, if the
shareholders do not approve the increase we are potentially liable for our
inability to issue all shares as committed.
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
76
<PAGE>
by the shareholders. The Board of Directors may authorize the issuance of
Preferred Stock with voting or conversion rights that could adversely affect
the voting power or other rights of the holders of Common Stock. Thus, the
issuance of Preferred Stock may have the effect of delaying, deferring, or
preventing a change in control of 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. The Series A Convertible Preferred Stock is
entitled to a liquidation preference of $1.50 per share.
CLASS A REDEEMABLE WARRANTS
Class A Redeemable 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 Class A Warrants
will be void and of no value.
We may redeem the Class A 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 REDEEMABLE WARRANTS AND CLASS C REDEEMABLE WARRANTS
On December 13, 2000, we issued 675,000 restricted Class B Warrants.
As of January 17, 2001, no Class B Redeemable Warrants, ("Class B Warrants,")
have yet been issued as a result of the exchange offer. However, up to
810,000 additional Class B Warrants will be issued to holders of our Class A
Warrants who accept the exchange offer.
No Class C Redeemable Warrants, ("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 (810,000 only that
would be issued as a result of Class A Warrants being exchanged) and the Class C
Warrants (810,000 only that would be issued upon the
77
<PAGE>
exercise of either Class A Warrants or upon the exercise of Class B Warrants
received upon the exchange of Class A Warrants) have been registered pursuant
to Section 12(g) of the Securities Exchange Act of 1934, as amended. The
additional 675,000 restricted Class B Warrants, and Class C Warrants that
would be issued upon the exercise of these restricted Class B Warrants, will
be registered in the near future.
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
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 $9.57 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 C Warrants have been issued and only 675,000 restricted Class
B Warrants have been issued which are not eligible for trading; consequently, no
market has developed for either the Class B Warrant or the Class C Warrant.
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
May 1, 1998 through July 12, 2000 as reported by OTC Bulletin Board, and
beginning July 13, 2000, by the Nasdaq SmallCap Market.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------
JULY 31, 2000 OCT. 31, 2000 JAN. 31, 2001*
------------- ------------- --------------
<S> <C> <C> <C>
Common Stock (ISON)
High 7.0625 4.0000 2.6265
Low 3.3750 1.4375 1.0625
</TABLE>
---------------------
78
<PAGE>
* through January 17, 2001
<TABLE>
<CAPTION>
QUARTER ENDED
-------------
JULY 31, 1999 OCT. 31, 1999 JAN. 31, 2000 APR. 30,
------------- ------------- ------------- --------
2000
----
<S> <C> <C> <C> <C>
Common Stock (ISON)
High 3.6250 2.1250 10.5000 17.9375
Low 1.8750 0.8750 1.2500 5.5625
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------
JULY 31, 1998 OCT. 31, 1998 JAN. 31, 1999 APR. 30,
------------- ------------- ------------- --------
1999
----
<S> <C> <C> <C> <C>
Common Stock (ISON)
High 2.7188 1.9063 2.0000 3.5625
Low 1.6563 1.0313 0.7813 1.4375
</TABLE>
As of December 31, 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 January 17, 2001, we had outstanding options and warrants for
the purchase of up to approximately 5,742,875 shares of Common Stock at an
average price of $3.26 per share, representing approximately 30.7% of our
outstanding shares of Common Stock on a fully-diluted basis. Additionally, we
have 980,333 shares of Series A Convertible Preferred Stock outstanding
convertible to 980,333 shares of our Common Stock. The sum of these
convertible securities, 6,723,208 represent 35.9% 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. Effective October 10, 2000, virtually all of the Common
Stock shares underlying these convertible securities were registered. 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
79
<PAGE>
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 120,000 shares as of
December 31, 2000; and (ii) an amount equal to the average weekly trading volume
in the Common Stock during the four calendar weeks preceding the sale. The
average weekly trading volume in December 2000, adjusted for days the markets
were closed because of holidays was approximately 1,017,000.
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, 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 and quarterly reports, 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
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<PAGE>
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.
81
<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 and Six Months Ended October 31, 1999 and 2000
Condensed Consolidated Balance Sheets F-22
Condensed Consolidated Statements of Operations F-23
Condensed Consolidated Statements of Cash Flows F-24
Notes to Condensed Consolidated Financial Statements F-25
</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: 2,745 --
2000--1,830,000..................................................................................
Common stock--no par value; 20,000,000 shares authorized; shares issued and outstanding: 6,764 6,795
2000--10,492,931; 1999--6,607,760................................................................
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 -- -- 357,730 894 -- -- -- 894
for Chemotrade
acquisition...........
Issuance of common stock -- -- 118,182 130 -- -- -- 130
in lieu of salaries...
Conversion of debt into -- -- 127,209 191 -- -- -- 191
common stock..........
Exercise of stock options -- -- 290,389 147 (130) -- -- 17
and warrants..........
Fair value of warrants -- -- -- 144 -- -- -- 144
issued with debt......
Interest on notes -- -- -- -- (2) -- -- (2)
receivable from
stockholders, net of
repayments............
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 -- -- 3,918,986 81 -- -- -- 81
and warrants..........
Fair value of warrants -- -- -- 157 -- -- -- 157
issued for debt
restructuring.........
Fair value of stock issued -- -- 25,000 153 -- (153) -- --
for services as
deferred compensation.
Amortization of deferred -- -- -- -- -- 3 -- 3
compensation..........
Shares issued under -- -- 13,723 13 -- -- -- 13
Employee Stock Purchase
Program...............
Repayment of notes -- -- -- -- 34 -- -- 34
receivable from
stockholders, net of
interest..............
Repayment of notes -- -- (72,538) (435) 435 -- -- --
receivable and accrued
interest with common
stock.................
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
F-7
<PAGE>
Isonics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Chemotrade acquisition is being amortized on a straight-line basis over
twenty years.
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.
The following table reconciles the denominator used in the per share
computation (in thousands):
F-8
<PAGE>
Isonics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<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>
Goodwill related to acquisitions consists of the following (in thousands):
F-9
<PAGE>
Isonics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<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>
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
F-10
<PAGE>
Isonics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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):
F-12
<PAGE>
Isonics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<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 (115) --
and tax credit carryforwards
Change in valuation allowance (802) 1,097
Other -- (133)
$129 $171
------- -------
</TABLE>
F-13
<PAGE>
Isonics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 granted to the underwriter are exercisable at
anytime until September 1, 2002.
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-14
<PAGE>
Isonics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
F-15
<PAGE>
Isonics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
NUMBER OF WEIGHTED
SHARES AVERAGE
--------- EXERCISE
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-16
<PAGE>
Isonics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7--STOCKHOLDERS' EQUITY
The following information applies to options outstanding at April 30,
2000:
<TABLE>
<CAPTION>
RANGE OF NUMBER WEIGHTED NUMBER NUMBER WEIGHTED
EXERCISE OUTSTANDING AVERAGE OUTSTANDING EXERCISABLE AVERAGE
PRICE ----------- EXERCISE ----------- ----------- EXERCISE
PRICE 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.
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:
F-17
<PAGE>
Isonics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES AVERAGE
--------- EXERCISE
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, 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.
F-18
<PAGE>
Isonics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
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>
F-19
<PAGE>
Isonics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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-20
<PAGE>
Isonics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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-21
<PAGE>
Isonics Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS
(Unaudited)
October 31, 2000
-------------------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,082
Accounts receivable (Net of allowance of $308) 637
Notes receivable 458
Income taxes receivable 426
Inventories 280
Prepaid expenses and other current assets 90
Deferred income taxes, current 53
-------------------------
Total current assets 3,026
-------------------------
LONG-TERM ASSETS
Property and equipment, net 506
Goodwill, net 2,977
Notes receivable from shareholders
Deferred income taxes 492
Other assets 32
-------------------------
Total long-term assets 4,007
-------------------------
TOTAL ASSETS $ 7,033
=========================
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
October 31, 2000
-------------------------
<S> <C>
CURRENT LIABILITIES:
Notes payable and line of credit $ 17
Accounts payable 534
Accrued liabilities 744
Income taxes payable 6
-------------------------
Total current liabilities 1,301
-------------------------
SHAREHOLDERS' EQUITY:
Class A Preferred Stock--no par value. 10,000,000
shares authorized; 1,180,333 shares issued and
outstanding
1,770
Common stock--no par value. 20,000,000 shares
authorized; 11,455,826 shares issued and outstanding
7,999
Deferred compensation (112)
Accumulated deficit (3,925)
-------------------------
Total shareholders' equity 5,732
-------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,033
=========================
</TABLE>
See notes to condensed consolidated financial statements.
F-22
<PAGE>
Isonics Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 1,955 $ 4,460 $ 3,991 $ 7,544
Cost of revenues 1,550 3,469 3,071 5,868
------------ ------------ ------------ ------------
Gross margin 405 991 920 1,676
Operating expenses:
Selling, general and administrative 1,780 945 2,980 1,830
Research and development 412 205 716 332
Restructuring and office closure -- -- -- 66
------------ ------------ ------------ ------------
Total operating expenses 2,192 1,150 3,696 2,228
------------ ------------ ------------ ------------
Operating loss (1,787) (159) (2,776) (552)
------------ ------------ ------------ ------------
Other income (expense):
Foreign exchange (57) (4) 11 --
Interest and other income 109 121 208 162
Interest expense (10) (101) (26) (225)
------------ ------------ ------------ ------------
Total other income (expense), net 42 16 193 (63)
------------ ------------ ------------ ------------
Loss before income taxes (1,745) (143) (2,583) (615)
Income tax expense (benefit) (1) -- -- 1
------------ ------------ ------------ ------------
NET LOSS $ (1,744) $ (143) $ (2,583) $ (616)
============ ============ ============ ============
Net loss per share--basic and diluted
Net loss per share $ (0.21) $ (0.02) $ (0.33) $ (0.09)
Shares used in computing per share
Information 8,112 6,608 7,878 6,608
</TABLE>
See notes to condensed consolidated financial statements.
F-23
<PAGE>
Isonics Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended October 31,
--------------------------------------------
2000 1999
-------------------- --------------------
<S> <C> <C>
Net cash (used in) operating activities $ (2,495) $ (1,385)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (21) --
-------------------- --------------------
Cash used in investing activities $ (21) $ --
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit -- (298)
Proceeds from issuance of notes payable -- 75
Repayments of notes payable (3) (781)
Proceeds from issuance of common stock 216 --
Proceeds from issuance of Class A Preferred Stock -- 2,250
-------------------- --------------------
Cash provided by financing activities $ 213 $ 1,246
-------------------- --------------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS: (2,303) (139)
Cash and cash equivalents at beginning of period 3,385 452
-------------------- --------------------
Cash and cash equivalents at end of period $ 1,082 $ 313
==================== ====================
Supplemental disclosure of cash flow information: Cash paid
during the period for:
Interest $ 1 $ 186
==================== ====================
Income taxes $ -- $ 1
==================== ====================
Supplemental disclosure of noncash investing and financing activities:
Accounts payable converted into notes payable $ -- $ 243
Liabilities converted into Class A Preferred Stock -- 495
Issuance of warrants in conjunction with notes payable -- 157
Class A Preferred Stock converted into Common Stock 975 --
==================== ====================
</TABLE>
See notes to condensed consolidated financial statements.
F-24
<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 October 31,
2000, and for the three months and six months ended October 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.
Accordingly, as of October 31, 2000, a total of approximately 4,921,646
outstanding stock options and warrants, and 1,180,333 outstanding Class A
Convertible Preferred Stock shares have been excluded from the diluted net
income (loss) per share calculation, as the inclusion would be anti-dilutive.
Accordingly, as of October 31, 1999, a total of approximately 5,794,047
outstanding stock options and warrants, and 1,830,000 outstanding Class A
Convertible Preferred Stock shares have been 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, as of October 31, 2000, 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 titled "SALE OF DEPLETED ZINC BUSINESS," under Management's Discussion
and Analysis. 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 six month period ended October 31, 2000, we issued the following
shares of Common Stock:
<PAGE>
Isonics Corporation and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DESCRIPTION NUMBER OF COMMON STOCK SHARES
----------- -----------------------------
<S> <C>
Balance as of April 30, 2000 10,492,931
Exercise of options for cash 185,912
Conversion of Class A Preferred Stock 313,333
Issuance for services 4,000
ESPP issuances 7,484
-----
Balance as of July 31, 2000 11,003,660
Exercise of options for cash 16,500
Conversion of Class A Preferred Stock 336,334
Surrender of Warrants for Common Stock 99,332
------
Balance as of October 31, 2000 11,455,826
</TABLE>
INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
October 31, 2000
----------------
<S> <C>
Finished goods $ 156
Work in progress 124
---
Total inventories $ 280
</TABLE>
F-25
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SIGNIFICANT CUSTOMERS
At October 31, 2000, four customers accounted for 56.3% of total accounts
receivable. These four customers, plus a fifth customer accounted for
approximately 42.6% of net revenues during the three months ended October 31,
2000. These same five customers accounted for approximately 45.4% of net
revenues during the six months ended October 31, 2000. A different customer
accounted for approximately 17% of net revenues during the three months ended
October 31, 1999, and the same customer accounted for approximately 10% of net
revenues during the six months ended October 31, 1999.
F-26
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEGMENT INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
------------------------------------ ------------------------------------
2000 1999 2000 1999
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Segment revenues:
Isotope products $ 1,955 $ 4,076 $ 3,991 $ 6,827
Contract research and development
services and other -- 384 -- 717
---------------- --------------- --------------- ----------------
Total $ 1,955 $ 4,460 $ 3,991 $ 7,544
</TABLE>
F-27
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
------------------------------------ ------------------------------------
2000 1999 2000 1999
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Segment operating (loss) income:
Isotope products $ (1,787) $ (28) $ (2,776) $ (329)
Contract research and development
services and other -- (131) -- (223)
---- ----------- --- ----------- --- ----------- --- ------------
Total $ (1,787) $ (159) $ (2,776) $ (552)
</TABLE>
<TABLE>
<CAPTION>
October 31, 2000
------------------------------
<S> <C>
Total Assets:
Isotope products $ 6,190
Contract research and development
services and other 843
------------------------------
Total $ 7,033
</TABLE>
A summary of operations by geographic area is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
------------------------------------ ------------------------------------
2000 1999 2000 1999
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net revenues:
United States $ 771 $ 1,895 $ 1,299 $ 2,805
Germany 1,184 2,565 2,692 4,739
---------------- --------------- --------------- ----------------
Total $ 1,955 $ 4,460 $ 3,991 $ 7,544
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
------------------------------------ ------------------------------------
2000 1999 2000 1999
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Operating (loss) income:
United States $ (1,766) $ (275) $ (2,637) $ (724)
Germany (21) 116 (139) 172
---------------- --------------- --------------- ----------------
Total $ (1,787) $ (159) $ (2,776) $ (552)
</TABLE>
F-28
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
October 31, 2000
------------------------------
<S> <C>
Total Assets:
United States $ 5,780
Germany 1,253
------------------------------
Total $ 7,033
</TABLE>
F-29
<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.
II-1
<PAGE>
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 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............................................................ 45,000
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
II-2
<PAGE>
Total.............................................................................. $110,000
--------
</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.
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. The Executives' Plan was amended
to increase the number of shares to 1,000,000. This increase
was approved by the directors in August 2000, and the
shareholders in October 2000.
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. The Employees' Plan was amended to increase the number
of shares to 500,000. This increase was approved by the
directors in August 2000, and the shareholders in October
2000.
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 January 1, 2001, options to purchase a total of
329,583 shares, 279,500 shares, and 358,769 shares
respectively, were outstanding under the Executives' Plan,
Employees' Plan, and 1996 Stock Option Plan, and options to
purchase 619,417, 177,362, and 0 shares, respectively,
remained available for grant. Our shareholders were 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. These increases were approved
by our shareholders at the annual meeting held October 11,
2000. The number of options issuable under the two plans was
increased by 350,000, in the Employees' Plan, and 430,000, in
the Executives' Plan.
Isonics has also issued options and stock bonuses to its
employees outside of its existing employee
II-3
<PAGE>
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 2000 UNIT ISSUANCE
(a) SECURITIES SOLD. The sale, as described below, occurred on December 13,
2000. The securities sold as units consisted of one share of Common
Stock and two Class B Redeemable Common Stock Warrants. The total
number of units sold were 337,500, with the possibility that up to an
additional 112,500 units might be issued based on future market
conditions.
(b) UNDERWRITERS AND OTHER PURCHASERS. No underwriters, agents, or
placement agents participated in the private placement.
(c) PURCHASE PRICE. The Units were offered and sold to nine accredited
investors for cash payments totaling $675,000 ($2.00 per unit). To the
extent additional units are issued, the total price per unit will be
reduced.
(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 for transactions not involving a
public offering and for transactions with accredited investors only.
(e) TERMS OF CONVERSION OR EXERCISE. The Class B Warrants are exercisable
on the terms set forth herein.
(f) USE OF PROCEEDS. 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.
II-4
<PAGE>
(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.
(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. Isonics and Eagle-Picher are attempting to resolve certain
disputes relating to the issuance of these shares and other matters.
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.
II-5
<PAGE>
(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.
(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. 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. In a
registration statement on Form S-3, dated October 10, 2000,
all of the shares of Common Stock underlying the Series A
Convertible Preferred Stock and the warrants were registered.
(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.
II-6
<PAGE>
(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 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
------- -----
<S> <C>
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 (see exhibit 10.27)
4.07+ Specimen Class C Warrant Certificate (see exhibit 10.27)
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
II-7
<PAGE>
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)
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)
10.27+ Amended and Restated Warrant Agreement effective as of January 15, 2001, between the Registrant and Continental
Stock Tranfer and Trust Company, Inc.
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).
</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.
II-8
<PAGE>
(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 obtained.
(7) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531)
dated August 17, 2000, and filed August 18, 2000, and incorporated
herein by reference.
* Previously filed.
+ Filed herewith.
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-9
<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 January 18, 2001.
<TABLE>
<S> <C>
ISONICS CORPORATION
By:
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>
<S> <C> <C>
President, Chief Executive Officer, Chief January 18, 2001
Operating Officer, and Director
James E. Alexander
Director January 18, 2001
Boris I. Rubizhevsky
Director January 18, 2001
Lindsay A. Gardner
Director January 18, 2001
Richard L. Parker
Director January 18, 2001
Larry J. Wells
Chief Financial Officer and Principal Accounting January 18, 2001
Officer
Brantley J. Halstead
</TABLE>
II-10
<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>
Name(s) and Address of Registered Owner(s) Certificate(s) Surrendered Number of Warrants
As They Appear on Certificate(s) Represented by Warrant
Certificate(s) and Exercise
Price per Share
<S> <C> <C>
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
<PAGE>
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.
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 $1.50 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)
<PAGE>
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:
<TABLE>
<S><C>
SUBSTITUTE PART 1 Taxpayer Identification No.--For Part II For Payee Exempt
FORM W-9 All Accounts From Backup Withholding
Enter your taxpayer identification number
in the appropriate box. For most -
Payer's Request for Taxpayer individuals, this is your social security Social Security Number
Identification Number number. OR -
Employer Identification Number
</TABLE>
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
-- -- --
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.
INSTRUCTIONS
<PAGE>
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
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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.
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.
