-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U8Bxc+vNoUCq5GgRJXdNJ0gPe6Xh/5vLY7FlINYHmrUJ7rL9aJVaYi/sVxj2fLmE NwWgPWAzWzVbH2Umc/vwUg== 0000912057-01-517922.txt : 20010531 0000912057-01-517922.hdr.sgml : 20010531 ACCESSION NUMBER: 0000912057-01-517922 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20010530 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ISONICS CORP CENTRAL INDEX KEY: 0001023966 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 770338561 STATE OF INCORPORATION: CA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-56562 FILM NUMBER: 1650274 BUSINESS ADDRESS: STREET 1: 5906 MCINTYRE STREET CITY: GOLDEN STATE: CO ZIP: 80403 BUSINESS PHONE: 3032797900 MAIL ADDRESS: STREET 1: 5906 MCINTYRE STREET CITY: GOLDEN STATE: CO ZIP: 80403 SB-2/A 1 a2050556zsb-2a.txt SB-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 30, 2001 REGISTRATION NO. 333-56562 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------- ISONICS CORPORATION (Exact name of registrant as specified in its charter) CALIFORNIA 2819 77-0338561 ---------- ---- ---------- (State or other (Primary Standard (I.R.S. Employer of jurisdiction) Industrial Code Number) 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) ----------- JAMES E. ALEXANDER PRESIDENT, ISONICS CORPORATION 5906 MCINTYRE STREET GOLDEN, COLORADO 80403 (303) 279-7900 (Name, address, including zip code, and telephone number, including area code, of agent for service) ----------- COPIES TO: HERRICK K. LIDSTONE, JR. THERESA M. MEHRINGER NORTON LIDSTONE, P.C. PERKINS COIE LLP SUITE 850, THE QUADRANT SUITE 700 5445 DTC PARKWAY 1899 WYNKOOP STREET GREENWOOD VILLAGE, CO 80111 DENVER, CO 80202 TEL: 303-221-5552 TEL: 303-291-2300 FAX: 303-221-5553 FAX: 303-291-2400 ----------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: 1 AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. ----------- If securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / If this form is being filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number in the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number in the earlier effective registration statement for the same offering. / / ----------- CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED OFFERING PRICE AGGREGATE REGISTRATION FEE(d) PER UNIT OFFERING PRICE - ----------------------------------------------------------------------------------------------------------------------------------- Common Stock 450,000 $1.50(a) $675,000 $168.75 - ----------------------------------------------------------------------------------------------------------------------------------- Class B Common Stock 900,000 $0.25(b) $225,000 $56.25 Purchase Warrants - ----------------------------------------------------------------------------------------------------------------------------------- Shares of Common Stock 900,000 $1.50(c) $1,350,000 $337.50 underlying Class B Common Stock Purchase Warrants - ----------------------------------------------------------------------------------------------------------------------------------- Class C Common Stock 900,000 $0.00 $0 $0 Purchase Warrants - ----------------------------------------------------------------------------------------------------------------------------------- Shares of Common Stock 900,000 $2.50(c) $2,250,000 $562.50 underlying Class C Common Stock Purchase Warrants - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL $4,500,000 $1125.00
- -------------------- (a) Offered by the selling security holders. The registration fee is based on the closing market price for the Registrant's common stock on April 30, 2001, pursuant to Rule 457(c). (b) 900,000 warrants are offered by the selling security holders. The registration fee is based on the Registrant's estimate of the sale price of the Class B warrants. Although Class B warrants are currently outstanding, there is no market for the Class B warrants and no basis to calculate the value of the Class B warrants pursuant to Rule 457(c). (c) 900,000 shares are offered by the selling security holders. 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 (d) Calculated at the rate of $250 per $1,000,000 pursuant to fee rate advisory #13 (SEC press release # 200-194). ----------- 2 In accordance with SEC Rule 429, in addition to the shares of our common stock, Class B warrants, and Class C warrants included in this Registration Statement, the prospectus also includes 177,390 shares of common stock underlying our Class A warrants which are 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 (as to which the Registrant paid a filing fee of $3,642), and 630,110 Class B redeemable common stock Purchase warrants, 632,610 Class C redeemable common stock purchase warrants, and 1,262,720 shares of common stock underlying the Class B redeemable common stock purchase warrants and Class C redeemable common stock purchase warrants from post-effective amendment number 2 on Form SB-2 to our Registration Statement on Form S-4 filed with the Securities and Exchange Commission on January 18, 2001 (SEC File No. 333-37696 (as to which the Registrant paid a filing fee of $5,358). 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 Stockholders 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. 3 TABLE OF CONTENTS
Page ---- Summary............................................................................................ 7 Risk Factors....................................................................................... 9 Selling Shareholders and their Plan of Distribution................................................ 19 Procedure for Exercise of Warrants and Tax Aspects................................................. 23 Use of Proceeds.................................................................................... 24 Management's Discussion and Analysis of Financial Condition or Plan of Operation................... 25 Business........................................................................................... 34 Management......................................................................................... 54 Security Ownership of Certain Beneficial Holders and Management.................................... 56 Section 16(a) Beneficial Ownership Reporting Compliance............................................ 59 Executive Compensation............................................................................. 60 Certain Relationships and Related Party Transactions............................................... 67 Isonics' Capital Stock............................................................................. 70 Market for Common Equity and Related Stockholder Matters........................................... 73 Shares Available for Future Sale................................................................... 74 Securities and Exchange Commission Position on Indemnification for Securities Act Liabilities...... 75 Experts............................................................................................ 76 Legal Matters...................................................................................... 76 How to Obtain Additional Information............................................................... 76 Isonics Corporation and Subsidiaries............................................................... 77 Part II - Information Not Required in Prospectus................................................... 78 Financial Statements--April 30, 2000............................................................... F-3 Financial Statements--January 31, 2001............................................................. F-17
----------- 4 SUBJECT TO COMPLETION DATED MAY 30, 2001 PROSPECTUS DATED MAY ___, 2001 ISONICS CORPORATION 900,000 CLASS B REDEEMABLE WARRANTS (OFFERED FOR RESALE BY SELLING HOLDERS) 1,530,110 CLASS C REDEEMABLE WARRANTS 2,340,110 SHARES OF COMMON STOCK UNDERLYING CLASS A REDEEMABLE WARRANTS, CLASS B REDEEMABLE WARRANTS, AND CLASS C REDEEMABLE WARRANTS 1,350,000 SHARES OF COMMON STOCK BEING OFFERED BY SELLING HOLDERS (450,000 ISSUED OR TO BE ISSUED AND 900,000 UNDERLYING RESTRICTED CLASS B WARRANTS) EXERCISE OF WARRANTS; SHARES AND WARRANTS OFFERED BY ISONICS. Isonics Corporation is offering up to a maximum of 2,340,110 shares of common stock to holders of our Class A redeemable warrants, Class B redeemable warrants, and Class C redeemable 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 21, 2001, with respect to the Class A 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 warrant. 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) expire December 31, 2005, and will be exercisable for one share of common stock at a price of $2.50 per share. The Class B and Class C 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 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, as well as the prospectus for the exercise of our Class B warrants and Class C warrants included in the post-effective amendment to our registration statement on Form S-4. You must exercise your Class A, Class B and Class C warrants before their respective expiration dates or you will lose your right to exercise those warrants. SHARES AND WARRANTS OFFERED BY SELLING HOLDERS. This Prospectus also relates to the sale to the public of up to 450,000 shares of our common stock issued or to be issued, up to 900,000 Class B warrants and up to 900,000 shares of our common stock underlying these Class B warrants, which are being offered and sold by the persons named on page 22 below, collectively referred to herein as the "Selling Shareholders." As of April 30, 2001, 337,500 restricted shares and 675,000 restricted Class B warrants have been issued to the Selling Shareholders. We may have an obligation, however, to issue an additional 112,500 shares and 225,000 Class B warrants (both of which are already included in the total amounts registered) if the average bid price for our common stock is not at least $2.00 per share for the thirty days following the date of this Prospectus. Our common stock and Class A warrants are quoted on the Nasdaq SmallCap Stock Market under the symbols "ISON" and "ISONW," respectively. Our Class B warrants and Class C warrants are eligible for quotation in the Over-the-Counter Bulletin Board under the symbols "ISONX" and "ISONY," respectively, but only 2,500 Class C warrants have been issued, and 1,305,110 Class B warrants have been issued (consisting of 630,110 registered warrants and 675,000 restricted warrants). No trading market has developed for either the Class B warrants or the Class C warrants. 5 AN INVESTMENT IN OUR CLASS A WARRANTS, CLASS B WARRANTS, CLASS C WARRANTS, AND OUR COMMON STOCK (SHOULD YOU CHOOSE TO EXERCISE ANY OF OUR WARRANTS OR PURCHASE THE COMMON STOCK) INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 9. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Only residents of Colorado, Delaware, Georgia, Illinois, Nevada and New York may exercise their Class A warrants, Class B warrants, or Class C warrants, or purchase the common stock offered by this Prospectus. We have not qualified the Class A warrants, Class B warrants, Class C warrants or the common stock 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 with 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. The delivery of this prospectus and/or the exercise 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 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 warrant holders may not exercise these warrants and the Selling Shareholders may not sell the common stock being registered herein until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to exercise these warrants or sell these securities and it is not soliciting an offer to exercise these warrants or purchase these securities in any state where the exercise or sale is not permitted. 6 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 that 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 Common Stock................................................. "ISON" Class A Warrants............................................. "ISONW" Class B Warrants............................................. "ISONX" Class C Warrants............................................. "ISONY"
The common stock and the Class A warrants are quoted on the Nasdaq SmallCap Market. 2,500 Class C warrants have been issued. Through May 10, 2001, 632,610 registered Class B warrants had been issued (of which 2,500 have been exercised), as well as 675,000 restricted Class B warrants. No market has developed for either the Class B warrants or the Class C warrants. SHARES OFFERED UPON EXERCISE OF WARRANTS Only residents of Colorado, Delaware, Georgia, Illinois, Nevada and New York may exercise their Class A warrants, Class B warrants, or Class C warrants, or purchase the common stock offered by this Prospectus. We have not qualified the Class A warrants, Class B warrants, Class C warrants or the common stock 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 with 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. 7 We are offering a total of 887,500 shares of common stock to persons who exercise either the outstanding 177,390 Class A warrants or the 630,110 registered Class B warrants. This total also includes up to 80,000 shares of common stock underlying Class A warrants, which may be issued to holders of warrants issued in September 1997 to the underwriter of our initial public offering. The total number of 887,500 may consist of shares issued to persons exercising Class A warrants and Class B warrants. As of May 10, 2001, 177,390 Class A warrants are outstanding, and 630,110 registered Class B warrants are outstanding. We are also offering a total of up to 1,530,110 Class C warrants and 1,532,610 shares of common stock underlying Class C warrants to persons who receive Class C warrants and exercise their Class C warrants. Class C warrants will be issued to any person who exercises a Class B warrant on or before December 31, 2005. As of May 10, 2001, 2,500 Class C warrants had been issued. THE OFFERING BY THE SELLING SHAREHOLDERS Nine persons (referred to as the "Selling Shareholders") are offering up to 450,000 shares of our common stock and 900,000 Class B warrants for sale, plus an additional 900,000 shares underlying the privately placed Class B warrants. Of these totals, 337,500 shares and 675,000 restricted Class B warrants are currently issued and outstanding, and are held by the Selling Shareholders. We have an obligation to issue up to an additional 112,500 shares and 225,000 Class B warrants to the Selling Shareholders (for no additional consideration) if the average bid price for our common stock during the 30 days after the date of this prospectus is less than $2.00 per share. The Selling Shareholders will receive all of the proceeds from the offer and sale of the shares described in this prospectus. Isonics will receive proceeds to the extent any of the Selling Shareholders exercise their Class B or Class C warrants for cash. We will pay the costs related to the filing of the registration statement in which this Prospectus is included. The Selling Shareholders will pay their own expenses related to the offer and sale of the Shares, including any underwriter discounts or commissions. SEE "THE SELLING SHAREHOLDERS AND THEIR PLAN OF DISTRIBUTION." USE OF PROCEEDS We will receive from $0.00 (if no Class A warrants are exercised) to a maximum of $1,028,862 (if all of the outstanding Class A warrants are 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) is 177,390. We will receive from $0.00 (if no Class B warrants are exercised) to a maximum of $2,295,165 (if all of the Class B warrants are exercised, including those currently outstanding and those issuable if our average bid price for the 30 days after the date of this prospectus is less than $2.00 (the "Average Minimum Bid") are exercised). This maximum amount could be reduced to $1,147,583 if we are required to reduce the exercise price of the Class B warrants, as described under Isonics' Capital Stock. The total number of Class B warrants that could be exercised is 1,530,110. The Class B warrant total includes 675,000 restricted Class B warrants issued on December 13, 2000, and up to an additional 8 225,000 restricted Class B warrants (the "Contingent Class B Warrants") issuable if the Average Minimum Bid is not met. 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 we will receive from $0.00 to a maximum of $3,831,525. The total number of Class C warrants that could be exercised is 1,532,610, all of which would be initially obtained through the exercise of Class B warrants (including the Contingent Class B Warrants). The registered 630,110 Class B warrants and all of the Class C warrants are publicly tradable when issued as a result of their registration under the Securities Exchange Act of 1934, as amended. 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. 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 materializes, 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. WE HAVE CONTINUING LOSSES WHICH COULD AFFECT OUR ABILITY TO PAY CREDITORS We have not operated profitably 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 nine months ended January 31, 2001, of approximately $3,764,000. 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. We expect to continue to have losses for the current fiscal year. The inability to operate profitably may lead to the inability to pay creditors, and in turn, the inability to obtain credit and/or continue to receive services from our service providers. SEE "SALE OF DEPLETED ZINC BUSINESS." 9 WE MAY NOT BE ABLE TO GENERATE REVENUES TO REPLACE THE REVENUES GENERATED BY OUR DEPLETED ZINC BUSINESS, FURTHERING THE LIKELIHOOD THAT OUR LOSSES WILL CONTINUE The depleted zinc business accounted for a significant portion of our revenues during prior fiscal years. Having sold our depleted zinc business, we must rely on products that have not produced significant revenues to date. The inability to generate additional revenues to replace the revenues from the depleted zinc business and sufficient in amount to cover our selling, general and administrative expenses increases the likelihood our losses will continue. This may prevent us from paying creditors as debts are due, which could materially impact our ability to continue our business operations. THE DISAGREEMENTS WITH OUR SUPPLIERS OVER THE PERFORMANCE OF SUPPLY CONTRACTS HINDERS OUR RESEARCH AND DEVELOPMENT ACTIVITIES We 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 these 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 technical difficulties, which Eagle-Picher refers to as FORCE MAJEURE. We believe that Eagle-Picher's technical difficulties do not meet the definition of FORCE MAJEURE per our agreements. Still, Eagle-Picher is relying upon the FORCE MAJEURE provisions to delay their delivery requirements. We are pursuing the dispute resolution mechanisms set forth in the agreement with Eagle-Picher to address this and other related matters. Eagle-Picher's non-performance under our agreement may force us to seek other suppliers of silicon-28. There can be no assurance that these suppliers can produce sufficient quantities of silicon-28 at prices to make silicon-28 commercially viable. We filed for arbitration of our dispute with Eagle-Picher on March 26, 2001, though no hearings have been scheduled. Without the use of Eagle-Picher's 200 kilograms of silicon-28 meeting our specifications our research and development activities are significantly hindered. We planned to use the 200 kilograms to make bulk wafers made entirely of silicon-28. These wafers were to have been used to further our development of the concept that silicon-28 as a superior semiconductor material as compared to natural abundance silicon. Because of the nature of the silicon wafer manufacturing process, 200 kilograms was what we believed to be the minimum amount of material needed to produce bulk wafers. We estimated that the 200 kilograms would have yielded approximately 500 to 600 prime 8-inch bulk wafers. We would have given, or sold at a nominal cost, these bulk wafers to manufacturers of microprocessors, memory, and power semiconductor devices in addition to select research entities and 10 universities. If our disputes over supply contracts hinders our research and development activities, we are less likely to be able to produce marketable products. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS" and "BUSINESS." OPERATIONS IN RUSSIA, THE REPUBLIC OF UZBEKISTAN, AND THE REPUBLIC OF GEORGIA MAY BE DISRUPTED BECAUSE OF A VOLATILE POLITICAL AND ECONOMIC CLIMATE BEYOND OUR CONTROL, WHICH COULD ADVERSELY AFFECT OUR SUPPLY OF RAW MATERIALS. Operations in Russia, the Republic of Uzbekistan, and the Republic of Georgia entail risks. The former republics of the Soviet Union including Uzbekistan and Georgia are experiencing political, social and economic change as they obtain independence from the former central government in Moscow. Some of the republics, including Russia, Uzbekistan and Georgia, are attempting to transition from a central-controlled economy toward a market-based economy. These changes have involved, in some cases, armed conflict. The political or economic instability in these republics may continue or worsen. The supply of stable and radioactive 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." UNLESS WE ARE ABLE TO DEVELOP AND SELL NEW PRODUCTS, WE MAY BE UNABLE TO REMAIN COMPETITIVE On December 1, 1999, we sold our depleted zinc business, which business provided 21% and 35% of our revenues in fiscal 2000 and 1999, respectively. As a consequence, our operations are more heavily dependent upon our ability to develop new products using stable and radioactive isotopes, and to market and sell those products profitably. We can expect to incur significant operating losses until we are able to develop, market and sell these products successfully. 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 the ability of other suppliers who modify the chemical and physical forms of these isotopes. We may be unable to develop products that can be profitably marketed and sold. SEE "BUSINESS." BECAUSE WE DEPEND UPON FEW CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES, OUR BUSINESS MAY BE MATERIALLY AND ADVERSELY AFFECTED IF WE LOSE ANY ONE OF THESE CUSTOMERS Five customers accounted for 40.7% of our net revenues during the nine months ended January 31, 2001. 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. Present or future customers could terminate their purchasing patterns 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. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS" AND "BUSINESS." 11 IF DEMAND FOR OUR PRODUCT GROWS SUDDENLY, WE MAY LACK THE CAPACITY TO MEET DEMAND OR WE MAY BE REQUIRED TO INCREASE OUR CAPITAL SPENDING SIGNIFICANTLY We have experienced, and may again experience, periods of rapid growth that place 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, and will require us 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." WE ARE DEPENDENT UPON OUR KEY PERSONNEL FOR OUR FUTURE SUCCESS 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; and Herbert Hegener, Managing Director of Chemotrade. We have applied for $1,000,000 of key man life insurance on the lives of Messrs. Alexander and Rubizhevsky to replace a policy that has lapsed, and both are covered by employment agreements extending through September 2001 and 2002, respectively (although either individual may terminate his agreement earlier at his discretion). Mr. Hegener is covered by an employment agreement extending through December 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." BECAUSE PARTIES HAVE DEFAULTED ON CRITICAL CONTRACTUAL PAYMENTS TO US, WE MAY RUN OUT OF CAPITAL We had anticipated no need for additional financing in the fiscal year ended April 30, 2001, but we had anticipated a need for a substantial amount of financing in the fiscal year beginning May 1, 2001. The 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 led us to need additional financing sooner than we anticipated. It is possible that the following circumstances may develop and may lead to a need for further financing: o unanticipated expenses in developing our new products or in producing or marketing our existing products; o the necessity of having to protect and enforce our intellectual property rights; o technological and market developments; and o a corporate decision to expand our production capacity through capital investment or acquisition. Eagle-Picher failed to deliver silicon-28 to us by December 31, 2000, in accordance with its contractual obligation. Furthermore, 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 12 between Isonics and Eagle-Picher, which disputes are discussed in more detail below. The matter involving Eagle-Picher is currently in arbitration. In addition, a customer failed to pay approximately $218,000 due us for products sold in the quarter ended October 31, 2000, although we collected approximately $121,552 in full settlement of this latter matter. These events have resulted in a significant decrease in our working capital position. 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. (The common stock and Class B warrants we issued in the private placement are included in this Prospectus, as are the common stock and Class B warrants included in the additional 112,500 Units, which may be issuable if the bid price for our common stock does not maintain an average bid price of at least $2.00 per share for the thirty days following the date of this Prospectus.) Unless we are able to collect the amounts due us from Eagle-Picher, we will need to seek additional capital. If we are unable to secure this additional capital we may not be able to continue operations. 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 "RELATIONSHIPS WITH CERTAIN SUPPLIERS AND AVAILABILITY OF RAW MATERIALS," "MANAGEMENT'S DISCUSSION AND ANALYSIS," "BUSINESS," AND "SALE OF DEPLETED ZINC BUSINESS." WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY WHICH WOULD REDUCE OUR COMPETITIVE ADVANTAGE We rely primarily on a combination of trade secrets, confidentiality procedures, and contractual provisions to protect our technology. Despite our efforts to protect our technology, 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 to information, materials and intellectual property that we regard as proprietary, and that are protected under the laws of the United States. We may not be able to protect our proprietary interests, or our competitors may independently develop similar technology or intellectual property. If either one of these situations occurs, we may lose existing customers and our business may suffer. SEE "BUSINESS." We currently have no patents in our 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 through our exclusive licensing agreement with Yale University. This exclusive licensing agreement 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 net sales for these or of sublicensees' products derived from technology covered by the Yale patents. 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. We may not succeed in securing patents relative to these modifications, improvements and inventions. Moreover, even if we do secure patents, those patents may not adequately protect our proprietary information. 13 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 or filed by others. 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 for the use of technology we currently use, or to develop or obtain alternate technology. We may be unable to secure a license on commercially acceptable terms, if at all. Furthermore, we may not be able to develop or obtain alternate technology. If we cannot protect our technology, or if we cannot find an alternative technology, we may lose customers to our competitors. The validity of any of the patents licensed to us, or that may in the future be owned by us, may not be upheld if challenged by others in litigation. Further, our products or technologies, even if covered by our patents, may 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 proceeding 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. We may choose not to seek patent protection and may rely instead or in addition on trade secrets and other confidential information to protect our technology. We require all employees to sign intellectual property assignment and non-disclosure agreements. We may enter into agreements with some employees pursuant to which the employee is entitled to a small royalty relative to products developed by Isonics based upon the employee's inventions. In addition, we require all directors, consultants and other parties with access to proprietary information to execute confidentiality agreements. We cannot be certain that our employees, directors and consultants will honor the terms of those agreements. If an employee, director or consultant breaches the confidentiality provisions, we may lose customers to our competitors. WE FACE INTENSE COMPETITION BOTH DOMESTICALLY AND INTERNATIONALLY WHICH MAY ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS PROFITABLY We do not believe that any entity produces the complete range of stable enriched isotopes for commercial sale. The U.S. government produces isotopes, but primarily for research purposes. 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 we do. SEE "BUSINESS." Further, it is possible that future technological developments may occur. The market for our isotope products is characterized by rapidly evolving technology and continuing process development. Our future success will depend upon our ability to develop and market isotope products that meet changing customer and technological needs on a cost effect and timely basis. If we fail to anticipate the needs of our customers and our customers contract with other suppliers, our operation could be materially and adversely affected. 14 WE COULD BE SUBJECT TO ENVIRONMENTAL REGULATION BY FEDERAL, STATE AND LOCAL AGENCIES, INCLUDING LAWS THAT IMPOSE LIABILITY WITHOUT FAULT, WHICH COULD ADVERSELY AFFECT OUR WORKING CAPITAL, SHAREHOLDERS' EQUITY AND PROFITABILITY We could be 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, although we do not believe that there is any such regulation directly applicable to our current operations. While we believe that we are in compliance with all environmental regulations, if our operations change and we fail to comply with 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. The lease and this liability were assumed by the buyers of Interpro effective February 1, 2001. SEE "BUSINESS." WE ARE CONTROLLED BY ONLY A FEW OFFICERS AND DIRECTORS AND, CONSEQUENTLY, PURCHASERS OF SHARES PURSUANT TO THIS PROSPECTUS WILL HAVE VERY LITTLE ABILITY TO ELECT OR CONTROL OUR MANAGEMENT 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 38.0% of the outstanding shares of common stock as of May 10, 2001, and, accordingly, may have the ability to elect a majority of the directors of Isonics and otherwise control the company. As a result, such persons, acting together, will have the ability to substantially influence all matters submitted to stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of substantially all of our assets, and to control our management and affairs. Accordingly, such concentration of ownership may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation or takeover or other business combination involving us or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would be beneficial to other stockholders. SEE "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
NUMBER OF NEW COMMON BENEFICIAL OWNERSHIP BY DESCRIPTION STOCK SHARES DIRECTORS AND OFFICERS - ----------- -------------------- ----------------------- Current Ownership (1) N/A 50.6% Class A Warrants Exercised (2) 177,390 49.7% Class A Warrants and Class B Warrants Exercised (3) 1,707,500 43.2% Class A Warrants, Class B Warrants, and Class C Warrants 3,240,110 38.0% Exercised (3)
- ------------------ (1) The current number of common stock shares owned by directors and officers is 4,042,311. The current number of common stock shares outstanding is 8,973,788. The current number of options and warrants exercisable owned by directors and officers is 906,308. (2) Assumes 100% exercise. (3) Assumes 100% exercise; and includes up to an additional 225,000 Class B warrants that may be issued if the bid price for our common stock does not maintain an average of $2.00 or higher during the 30 day period following the date of this Prospectus. This number does not include any Class A warrants issuable upon exercise of the Underwriter warrants. 15 WE RISK EXPOSING OURSELVES TO AN ABOVE-POLICY LIMIT PRODUCT LIABILITY CLAIM, WHICH COULD ADVERSELY AFFECT OUR WORKING CAPITAL, SHAREHOLDERS' EQUITY AND PROFITABILITY 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 is a risk that our insurance would not adequately cover completely or would fail to cover a claim, in which case we may not have the financial resources to satisfy such claims, and the payment of claims would require us to use funds that are otherwise needed to conduct our business and make our products. SEE "BUSINESS." OUR COMMON STOCK IS VULNERABLE TO PRICING AND PURCHASING ACTIONS THAT ARE BEYOND OUR CONTROL AND, THEREFORE, PERSONS ACQUIRING SHARES OR WARRANTS PURSUANT TO THIS PROSPECTUS MAY BE UNABLE TO RESELL THEIR SHARES OR WARRANTS AT A PROFIT AS A RESULT OF THIS VOLATILITY The trading price of our securities has been subject to wide fluctuations in response to quarter-to-quarter variations in our operating results, our announcements of technological innovations or new products by us or our competitors, and other events and factors. The securities markets themselves 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 and developments or disputes concerning patents or proprietary rights could have a significant and adverse impact on such market prices. In addition, regulatory developments in the United States and foreign countries, public concern as to the safety of products containing radioactive compounds affect the market price of our securities. Also, 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." SEC PENNY STOCK REGULATIONS MAY LIMIT THE ABILITY TO TRADE OUR SECURITIES ON THE NASDAQ SMALL CAP MARKET 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. 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. Reasons for being unable to maintain our listing on the Nasdaq Small Cap Market include the inability to maintain a bid price for our common stock of $1.00 for the requisite period of time and the inability to maintain the minimum net tangible assets, market capitalization or net income necessary for listing, and we may not be able to maintain our listing unless we are able to increase our net tangible assets or market capitalization in the near future. SEE "MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS." 16 FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE Our stock price may decline by future sales of our shares or the perception that such sales may occur. As of April 30, 2001, approximately 4,668,840 shares of common stock held by existing stockholders constitute "restricted shares" as defined in Rule 144 under the Securities Act. The restricted 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. Approximately 98% of the restricted shares of our common stock are either eligible for sale pursuant to Rule 144 or have been registered under the Securities Act for resale by the holders. 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 cause the stock's market price to decline. SEE "SHARES AVAILABLE FOR FUTURE SALE." OUTSTANDING SERIES A PREFERRED STOCK, OPTIONS AND WARRANTS MAY MAKE IT DIFFICULT FOR US TO OBTAIN ADDITIONAL CAPITAL As of May 10, 2001, we had outstanding preferred stock convertible into, and options and warrants to purchase, an aggregate of 6,546,613 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." IF WE FAIL TO EFFECT AND MAINTAIN REGISTRATION OF THE SECURITIES COVERED BY THIS REGISTRATION STATEMENT, THE EXERCISE PRICE OF THE CLASS B WARRANTS COULD BE SIGNIFICANTLY REDUCED If we fail to maintain registration of the securities covered by this Registration Statement after June 12, 2001, during a period that the market price of our common stock is greater than the exercise price of our class B warrants, then the exercise price of the Class B warrants will be reduced to $0.75 unless we redeem any Class B warrants presented for exercise. The redemption price would be the market price minus the exercise price. If the exercise price of the Class B warrants is reduced to $0.75, the holders of the Class B warrants would be more likely to exercise their warrants, and this could potentially have a dilutive effect on the value of our common stock. PROVISIONS IN OUR CHARTER DOCUMENTS COULD PREVENT OR DELAY A CHANGE IN CONTROL, WHICH COULD DELAY OR PREVENT A TAKEOVER 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, although we do not currently intend to issue any additional series of our preferred stock. See "ISONICS' CAPITAL STOCK." 17 PROVISIONS IN OUR BYLAWS PROVIDE FOR INDEMNIFICATION OF OFFICERS AND DIRECTORS TO THE FULL EXTENT PERMITTED BY CALIFORNIA LAW, WHICH COULD REQUIRE US TO DIRECT FUNDS AWAY FROM OUR BUSINESS AND PRODUCTS 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 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. Funds paid in satisfaction of judgments, fines and expenses may be funds we need for the operation of our business and the development of our products. This could cause our stock price to drop. See "SECURITIES AND EXCHANGE COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES." OUR SHAREHOLDERS MAY NOT RELY UPON DIVIDENDS TO GENERATE INCOME 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. Because our common stock does not generate a steady stream of income for our stockholders, the only profit or gain our shareholders can hope to realize by virtue of their investment is that our stock will appreciate in value, which it may not do. See "MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS." THE TOTAL OF OUR AUTHORIZED, UNISSUED AND UNRESERVED COMMON STOCK IS INADEQUATE TO IMPLEMENT OUR LONG-TERM BUSINESS STRATEGIES As of May 10, 2001, the number of shares of common stock outstanding was 8,973,788. Including shares reserved for issuance under option plans and outstanding options, warrants and convertible securities, we have 18,396,758 shares of common stock issued or reserved for issuance. This leaves only 1,603,242 shares of our common stock remaining authorized, unissued, and unreserved. Our board of directors does not believe that this total of authorized, unissued, and unreserved shares is adequate to implement our long-term business strategies. Therefore, the board of directors intends to propose a substantial increase in our authorized capital for consideration by our shareholders at our next shareholders' meeting tentatively scheduled for either September or October 2001. However, we may not be able to obtain approval of an increase in our authorized capitalization at the upcoming shareholders' meeting and (if we are unable to increase our authorized capitalization at the next shareholders' meeting) we may be severely limited in our ability to issue equity to raise necessary working capital. FORWARD-LOOKING STATEMENTS MADE IN THIS REGISTRATION STATEMENT MAY NOT PROVE TO BE ACCURATE 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 18 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. Furthermore, 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 which 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. The factors discussed under "Risk Factors" and elsewhere in this Prospectus could affect future results, causing the results to differ materially from those expressed in the forward-looking statements in this prospectus. 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. SELLING SHAREHOLDERS AND THEIR PLAN OF DISTRIBUTION THE SELLING SHAREHOLDER. This Prospectus includes: o 337,500 shares of common stock which are already outstanding; o 675,000 Class B warrants which are already outstanding; o 675,000 shares of common stock underlying the outstanding Class B warrants; o up to an additional 112,500 shares of common stock and 225,000 Class B warrants (plus up to an additional 225,000 shares of common stock into which these Class B warrants are exercisable) which are issuable if the average bid price of our common stock does not equal or exceed $2.00 per share during the 30 days following the date of this Prospectus We issued the shares of common stock and Class B warrants in a private placement to accredited investors in December 2000. We have set forth in the following table information relative to the selling shareholders as of January 18, 2001, or such later date as the selling shareholders have provided the information. We calculated beneficial ownership based on SEC requirements, and the information we included regarding beneficial ownership is not necessarily indicative of beneficial ownership for any other purpose. Unless otherwise indicate below, each shareholder identified in the table has sole voting and investment power with respect to all shares he, she, or it beneficially owns, subject to applicable 19 community property laws. We have based the percentage calculated for each selling shareholder upon the sum of the "common stock" and "common stock Issuable Upon Exercise of warrants" columns. None of the Selling Shareholders has any material relationship with Isonics during the past three years. Furthermore, none of the Selling Shareholders owns any Series A convertible preferred stock or options or warrants to purchase our common stock except the Class B warrants purchased in the December 2000 private placement. Greenwood Partners has acted as a market maker in Isonics common stock from time to time and, therefore, as described in the table below at April 30, 2001, owns additional Class A warrants and has a short position in our common stock. We do not know when or in what amounts the Selling Shareholders may offer the shares described in this prospectus for sale. The Selling Shareholders may decide not to sell all or any of the shares that this prospectus covers. Because the Selling Shareholders may offer all or some of the shares pursuant to this offering, and because there are currently no agreements, arrangements or understandings with respect to the sale of any of the shares that the Selling Shareholders will hold after completion of the offering, we cannot estimate the number of the shares that the Selling Shareholders will hold after completion of the offering. However, for purposes of this table, we have assumed that, after completion of the offering, the Selling Shareholders will hold none of the shares that this prospectus covers.
- ------------------------ --------------------------------------------------- -------------------------------- ---------------------- NAME OF SELLING COMMON STOCK BENEFICIALLY OWNED PRIOR TO COMMON STOCK AND CLASS B COMMON STOCK TO BE SHAREHOLDER(S) OFFERING (1) WARRANTS OFFERED PURSUANT TO BENEFICIALLY OWNED THIS PROSPECTUS (2) AFTER OFFERING ASSUMING ALL SHARES OFFERED ARE SOLD ------------------ -------------------- ----------- ---------------- --------------- ----------- ---------- COMMON STOCK CLASS B WARRANTS OTHER COMMON PERCENT OWNED OPTIONS STOCK AND WARRANTS -------- --------- ---------- --------- (a) (b) (a) (b) (a) (b) - ------------------------ -------- --------- ---------- --------- ----------- ---------------- ---------------- ----------- --------- Penelope A. Collins 12,500 4,167 25,000 38,333 0 12,500 shares 4,167 shares 0 0.0% 25,000 warrants 38,333 warrants - ------------------------ -------- --------- ---------- --------- ----------- ----------------- --------------- ----------- --------- Generation Capital 50,000 16,667 100,000 33,333 0 50,000 shares 16,667 shares 0 0.0% Associates (3) 100,000 warrants 3,333 warrants - ------------------------ -------- --------- ---------- --------- ----------- ----------------- --------------- ----------- --------- Greenwood Partners, 135,000 45,000 513,790 90,000 240,740 135,000 shares 45,000 shares 2,500 2.6% L.P. (4) 270,000 warrants 90,000 warrants - ------------------------ -------- --------- ---------- --------- ----------- ----------------- --------------- ----------- --------- Edward S. Gutman (5) 25,000 8,333 50,000 16,667 0 25,000 shares 8,333 shares 0 0.0% 50,000 warrants 16,667 warrants - ------------------------ -------- --------- ---------- --------- ----------- ----------------- --------------- ----------- --------- Gutman Family 25,000 8,333 50,000 16,667 0 25,000 shares 8,333 shares 0 0.0% Foundation (5) 50,000 warrants 16,667 warrants - ------------------------ -------- --------- ---------- --------- ----------- ----------------- --------------- ----------- --------- The HRG Trust, Edward 25,000 8,333 50,000 16,667 0 25,000 shares 8,333 shares 0 0.0% S. Gutman, Trustee (5) 50,000 warrants 16,667 warrants - ------------------------ -------- --------- ---------- --------- ----------- ----------------- --------------- ----------- --------- Harvey Silverman 25,000 8,333 50,000 16,667 0 25,000 shares 8,333 shares 0 0.0% 50,000 warrants 16,667 warrants - ------------------------ -------- --------- ---------- --------- ----------- ----------------- --------------- ----------- ---------
20
- ------------------------ --------------------------------------------------- -------------------------------- ---------------------- NAME OF SELLING COMMON STOCK BENEFICIALLY OWNED PRIOR TO COMMON STOCK AND CLASS B COMMON STOCK TO BE SHAREHOLDER(S) OFFERING (1) WARRANTS OFFERED PURSUANT TO BENEFICIALLY OWNED THIS PROSPECTUS (2) AFTER OFFERING ASSUMING ALL SHARES OFFERED ARE SOLD ------------------ -------------------- ----------- ---------------- --------------- ----------- ---------- COMMON STOCK CLASS B WARRANTS OTHER COMMON PERCENT OWNED OPTIONS STOCK AND WARRANTS -------- --------- ---------- --------- (a) (b) (a) (b) (a) (b) - ------------------------ -------- --------- ---------- --------- ----------- ---------------- ---------------- ----------- --------- Wolcott Capital Corp. 25,000 8,333 50,000 16,667 0 25,000 shares 8,333 shares 0 0.0% (6) 50,000 warrants 16,667 warrants - ------------------------ -------- --------- ---------- --------- ----------- ---------------- --------------- ----------- ---------- Alan R. Silberman 15,000 5,000 30,000 10,000 0 15,000 shares 5,000 shares 0 0.0% 30,000 warrants 10,000 warrants - ------------------------ -------- --------- ---------- --------- ----------- ---------------- --------------- ----------- ----------
(1) The "common stock Beneficially Owned Prior to the Offering" does include the shares or Class B warrants issuable if the average bid price of our common stock is below $2.00 per share during the 30 days following the date of this Prospectus. Those contingent amounts offered pursuant to this Prospectus are reflected in column b for both the common stock and the Class B warrants. (2) The Selling Shareholders are offering all of the common stock and Class B warrants they acquired in the December 2000 private placement, plus any amounts they may receive if the average bid price of our common stock is below $2.00 per shares during the 30 days following the date of this Prospectus. Those contingent amounts offered pursuant to this Prospectus are reflected in column b. (3) Maximum amount that may be issued based on a 30 day average closing bid price of $1.50 per Unit (the floor price) purchased in December 2000 private placement. (4) Greenwood Partners, L.P. is a privately-held company whose controlling person is GMG & Associates, Inc., its general partner, which is owned by Gregg M. Greenberg. Greenwood Partners, L.P. is a broker-dealer registered under the Securities Exchange Act of 1934, as amended, and from time-to-time makes a market in our common stock and Class A warrants in the Nasdaq SmallCap Market. As of May 10, 2001, Greenwood Partners, L.P. had a short position of 238,616 shares of Isonics common stock. The 2,500 Other warrants are all Class C common stock warrants (trading symbol is ISONY). (5) Mr. Gutman controls both the Gutman Family Foundation and the HRG Trust. Mr. Gutman is a minority limited partner of Greenwood Partners, L.P., but does not in any manner participate in the business of Greenwood Partners, L.P. (6) Wolcott Capital Corp. is a privately-held company whose controlling person is Nicholas Ponzio, President. PLAN OF DISTRIBUTION. The Selling Shareholders may, from time to time, offer and sell the shares and Class B warrants included in this Prospectus. The term "Selling Shareholders" includes pledgees, donees, transferees or other successors in interest selling shares that they acquired after the date of this prospectus from the Selling Shareholders as a pledge, gift or other non-sale related transfer. To the extent required, we may amend and supplement this prospectus from time to time to describe a specific plan of distribution. Each Selling Shareholder will act independently in making decisions with respect to the timing, manner, and size of each sale. Each Selling Shareholder may make these sales at prices and under terms then prevailing or at prices related to the then current market price. The Selling Shareholders may also make sales in negotiated transactions, including pursuant to one or more of the following methods: o purchases by a broker-dealer as principal and resale by such broker-dealer for its own account pursuant to this prospectus; o ordinary brokerage transactions and transactions in which the broker solicits purchasers; 21 o block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; o an over-the-counter distribution in accordance with the rules of the Nasdaq SmallCap Market; and o in privately negotiated transactions. In connection with distributions of the shares or otherwise, the Selling Shareholders may: o enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the shares in the course of hedging the positions they assume; o sell the shares short and redeliver the shares to close out such short positions; o enter into option or other transactions with broker-dealers or other financial institutions which require the delivery to them of shares that this prospectus offers, which they may in turn resell; and o pledge shares to a broker-dealer or other financial institution, which, upon a default, they may in turn resell. In addition, the Selling Shareholders may sell any shares that qualify for sale pursuant to Rule 144, rather than pursuant to this prospectus. In effecting sales, broker-dealers or agents that the Selling Shareholders engage may arrange for other broker-dealers to participate. Broker-dealers or agents may receive commissions, discounts or concessions from the Selling Shareholders, in amounts that the parties may negotiate immediately prior to the sale. In offering shares that this prospectus covers, the Selling Shareholders, and any broker-dealers and any other participating broker-dealers who execute sales for the Selling Shareholders, may qualify as "underwriters" within the meaning of the Securities Act in connection with these sales. Any profits that the Selling Shareholders realize, and the compensation that they pay to any broker-dealer, may qualify as underwriting discounts and commissions. In order to comply with the securities laws of some states, the Selling Shareholders must sell the shares in those states only through registered or licensed brokers or dealers. In addition, in some states the Selling Shareholders must sell the shares only if we have registered or qualified those shares for sale in the applicable state or an exemption from the registration or qualification requirement is available and the Selling Shareholder complies with the exemption. We have advised the Selling Shareholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities of the Selling Shareholders and their affiliates. In addition, we will make copies of this prospectus available to the 22 Selling Shareholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The Selling Shareholders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against liabilities, including liabilities arising under the Securities Act. At the time a Selling Shareholder makes a particular offer of shares we will, if required, distribute a prospectus supplement that will set forth: o the number of shares that the Selling Shareholder is offering; o the terms of the offering, including the name of any underwriter, dealer or agent; o the purchase price paid by any underwriter; o any discount, commission and other underwriter compensation; o any discount, commission or concession allowed or reallowed or paid to any dealer; and o the proposed selling price to the public. We have agreed to indemnify the Selling Shareholders against claims and losses due to material misstatements or omissions made by the Company (and not by the Selling Shareholders) in this prospectus. Each of the Selling Shareholders has agreed to indemnify us against claims and losses due to material misstatements or omissions made by them. 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 traded on the over-the-counter market until July 2000. The Class A warrants have been quoted on the Nasdaq SmallCap Market since July 2000. Through May 10, 2001, Class A warrants have been exchanged for 632,610 Class B warrants and 177,390 Class A warrants remain outstanding. On December 13, 2000, 675,000 restricted Class B warrants were issued. As of May 10, 2001, 2,500 Class C warrants had been issued. Class C warrants will be issued to any person who exercises a Class B warrant before December 31, 2005. Each registered holder of a Class A warrant, Class B warrant or Class C warrant should have possession of a certificate that represents that warrant. Persons who hold their warrants in a brokerage account or otherwise in a "street name" account may ask their brokers to deliver a warrant certificate to them. REGISTERED HOLDERS. In order to exercise a warrant, you must: o be a registered holder and have possession of your warrant certificate; o complete the subscription form that is included as part of the warrant Certificate; 23 o sign the subscription form and have your signature medallion guaranteed by a broker-dealer member of the STAMP program; o 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 o 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 receive from $0.00 to a maximum of $1,028,862 from the exercise of the Class A warrants, from $0.00 to a maximum of $2,298,915 from the exercise of the Class B warrants, and from $0.00 to a maximum of $3,831,525 from the exercise of Class C warrants. If this registration statement is not effective by June 12, 2001, contractual rights may accrue to some of the Class B Warrant holders which would result in a reduction in the maximum proceeds to the Company. No proceeds will be received by the Company from the issuance of any Class C warrants. We expect that any proceeds from the 24 exercise of warrants would be spent primarily on research and development expenses and to cover any selling, general and administrative expense shortfalls. The exact amount spent on each category will depend on timing and amount raised. 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. 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 is a specialty chemical and advanced materials company that 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. RESULTS OF OPERATIONS The following table sets forth 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.
NINE MONTHS ENDED JANUARY 31 ------------------------------------------ 2001 2000 ------------------------------------------ Net revenues 100.0 % 100.0 % Cost of revenues 80.8 79.1 ------------------------------------------ Gross margin 19.2 20.9 ------------------------------------------ Operating expenses: Selling, general & Administrative 62.7 28.0 Research & development 16.1 8.3 Restructuring & office closure (0.2) 0.5 ------------------------------------------ Total operating expenses 78.6 36.8 ------------------------------------------ 25 Operating income (loss) (59.5) (15.9) ------------------------------------------ Other income (expense) net (7.4) 44.6 ------------------------------------------ Income (loss) before income taxes (66.9) 28.7 ------------------------------------------ Income tax expense (benefit) -- 4.2 ------------------------------------------ NET INCOME (LOSS) (66.9) % 24.5 % ==========================================
TWELVE MONTHS ENDED APRIL 30, ------------------------------------------------ 2000 1999 ---------------------- ----------------- 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) ---------------------- ----------------- 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) % ====================== =================
NET REVENUES Net revenues for the nine months ended January 31, 2001, were $6.323 million, a decrease of approximately 43%, from $11.115 million for the same period in the prior fiscal year. The decrease is primarily because our net revenues from isotope product sales decreased approximately $3.775 million for the nine months ended January 31, 2001. This reduction is primarily because of the lack of depleted zinc revenues after the sale of the depleted zinc business to Eagle-Picher in December 1999, and the recent acquisition of a major customer by one of our competitors which we expect will have a short-term effect until we are able to replace the revenues generated by that customer. Net revenues from contract research and development services sales decreased approximately $1.017 million for the nine months ended January 31, 2001, to $0, because of our cessation of these activities in May 2000. Depleted zinc revenues for fiscal year 1999, our last full fiscal year with depleted zinc product sales were approximately $6.0 million. Depleted zinc revenues for fiscal 2000, through December 1999, the date we sold our depleted zinc business, were approximately $2.6 million. 26 Our revenues for the nine-months ended January 31, 2001 were reduced as a result of our decision to cease shipping product to one of our customers who had failed to pay approximately $218,000 in invoices due. We did not accept any orders from this customer in the quarter ended January 31, 2001. Revenues recognized from this customer during the first six months of fiscal 2001 were approximately $300,000. We reserved $218,000 for the invoices due during the quarter ended October 31, 2000. Additionally, we had ordered, based on purchase orders placed by this customer, approximately $131,000 in product specific to this customer that was charged to cost of sales in the quarter ended October 31, 2000. We do not anticipate significant revenues from sales of silicon-28 based products in the fiscal year ended April 30, 2001. We are collaborating with academia and industry to evaluate the benefits of isotopically pure silicon-28. We believe that if evaluations demonstrate the commercial feasibility of one or more products, demand could emerge in the high-performance micro-processor segment 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. The sale of our subsidiary, Interpro, effective February 1, 2001, will not adversely affect revenues as we had ceased all revenue producing activities at Interpro effective May 1, 2000. 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 reflects both 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, 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%. 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. These domestic revenues 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 Gross margin for the nine months ended January 31, 2001, decreased to approximately 19.2% of net revenues from approximately 20.9% for the same period in the prior fiscal year. The percentage decrease is primarily because of the sales to a lost customer that carried higher margins, the write off of customer specific inventory in the amount of $131,000 and the write off of recycled water. We have significantly expanded our production capacity for oxygen-18 over the past two years by recycling water enriched with oxygen-18. We have temporarily ceased our water recycling program because of logistics problems encountered with shipping the water back to our producer in Russia. We will continue to collect recycled water until the situation is resolved, and we do not anticipate any reduction in production volumes or sales at this time as our producers have been able to compensate for the lack of recycled water. However, we have taken a charge of approximately $136,000 for the recycled water we 27 are currently holding in the United States in case the aforementioned logistical problems cannot be overcome, as we currently have no alternative use for the recycled water other than in the production of water enriched with oxygen-18. 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 have lower margins because of greater competition relative to their sale. We anticipate the dollar impact on gross margin as a result of the sale of the depleted zinc business will be approximately $1.0 million on an annual basis. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased on a dollar basis to approximately $3.968 million, or approximately 62.7% of net revenues for the nine months ended January 31, 2001, from approximately $3.117 million, or approximately 28.0% of net revenues for the nine months ended January 31, 2000. The dollar increase for the nine months ended January 31, 2001, is primarily attributable to increased usage, year-to-date, of professional services including legal, business development and accounting services, increased bad debt expense in the first two fiscal quarters resulting from the write off of $218,000 attributable to a single customer, and remediation expenses related to our Golden facility, while the percentage increase was caused by lower revenues and the 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 liability was assumed by the buyers of Interpro effective February 1, 2001. Selling, general, and administrative expenses increased on a dollar basis by approximately $55,000, from $3,643,000 in fiscal 1999, to $3,698,000, in fiscal 2000. Selling, general, and administrative expenses increased on a percentage of net revenues basis by 7.6 percentage points, from 21.4% of net revenue in fiscal 1999, to 29.1% of net revenues in fiscal 2000. 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). RESEARCH AND DEVELOPMENT 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 including the hiring of additional sales staff. 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 nine months ended January 31, 2001, research and development expenses were $1.018 million. We cannot offer any assurance that our current or future lines of business or products resulting from our research and development efforts will be profitable or generate significant revenues. 28 Research and development expenses increased by approximately $99,000, or approximately 11%, to $1.018 million for the nine months ended January 31, 2001, from $919,000 for the comparable period in fiscal 2000, while increasing on a percentage basis to approximately 16.1% of net revenues from approximately 8.3%. The dollar increase during the nine months ended January 31, 2001, was primarily because of research and development costs associated with the development of our zinc recovery and recycling project, which more than offset the decrease in silicon-28 product development expenses. The percentage increase is primarily attributable to lower revenues as described above, as well as, higher levels of spending. Our silicon-28 product development efforts have been significantly and adversely impacted by the failure of Eagle-Picher to fulfill its obligations to us. 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 may increase assuming sufficient cash remains available, but will likely continue to vary as a percentage of revenues because of the timing and amount of future revenues. Since May 1, 2000, the resources of our subsidiary, Interpro, have been focused on the recovery and recycling of zinc metal from various sources including, galvanized steel scrap, electric arc furnace dust, and brass scrap and no longer provide contract research and development. On February 1, 2001, we sold Interpro in a management buyout. As a consequence of this sale, we expect decrease in our research and development expenses of between $50,000 and $100,000 per month. As part of the Asset Purchase Agreement with Eagle-Picher, Eagle-Picher agreed to supply us with 200 kilograms of silicon-28 in 2000. The silicon-28 was to be used to further develop our semiconductor materials business. Eagle-Picher did not meet its obligation to deliver the 200 kilograms of silicon-28. We have held several discussions with Eagle-Picher regarding this and other Eagle-Picher failures to honor the terms of the supply agreement. If we are able to resolve this dispute with Eagle-Picher, it may ultimately deliver the required silicon-28 to us. If we are not able to reach an agreement with Eagle-Picher, it may refuse to deliver any silicon-28. 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 research and development programs. We believe that the development and introduction of new product applications is critical to our future success. We expect our research and development expenses to increase in the near term because of the timing of material usage and outside services. We operate no facilities of our own for research and development. All research and development work is performed by outside entities, none of which we control. Because of the uniqueness of our business, the unique chemicals and processes we deal with and the handling precautions required, these expenses are significant. The expenses should continue to vary as a percentage of revenues because of the timing and amount of our future revenue stream. 29 RESTRUCTURING AND OFFICE CLOSURE On October 31, 1998, we announced a restructuring of our operations and relocation of our headquarters from San Jose, California to Golden, Colorado, the location of our former subsidiary, Interpro. We recorded a $691,000 charge in connection with the restructuring. As of January 31, 2001, the only significant restructuring cost remaining is the lease payments on the former San Jose office. Although that space has been sublet for the remaining term of our lease, the net liability is estimated to be approximately $37,000 to 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, the amortization of the fair value of warrants issued in connection with the debt, gains or losses on the sale of lines of business, impairment write-downs related to contract research and development assets held by Interpro, and foreign currency gains and losses. Other income (expense), net decreased by approximately $5.430 million to ($468,000), for the nine months ended January 31, 2001, from other income, net of approximately $4.962 million for the comparable period of the previous fiscal year. Interest expense decreased by approximately $296,000 due to lower debt levels following the sale of our depleted zinc business. During the nine months ended January 31, 2001, we also realized a foreign currency exchange gain of approximately $151,000 due to the strengthening of the US dollar against the German Mark. These increases in other income were offset by a decrease of approximately $5.296 million, related to the initial gain recognized on the sale of the depleted zinc business to Eagle-Picher in the prior fiscal year and the reversal of $208,000 of additional gain from the depleted zinc sale recognized in our fiscal year ended April 30, 2000. Part of the consideration for the depleted zinc sale was a $1.5 million note payable in three installments of $500,000 on November 2000, 2001 and 2002. Eagle-Picher failed to make the first additional payment due November 30, 2000. We had been recognizing the contingent gain of $1.5 million on a straight-line basis over the thirty-six month period (approximately $41,667 per month), as an unaffiliated supplier performed under a contract that was assigned to Eagle-Picher. Through November 1, 2000, we had recognized $458,000 of the additional gain, $208,000 to April 30, 2000, and $250,000 to October 31, 2000. As of November 1, 2000, we ceased recognizing any additional gain and reversed the previously recognized $458,000. 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 of approximately $407,000 from ($484,000) in fiscal 1999. The decrease is primarily attributable to lower interest expense following the depleted zinc sale. Also in fiscal 2000, we recognized a gain of $110,000 in our German subsidiary 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 30 taxes due to the availability of net operating losses to offset the taxes paid. As a result, for the fiscal year ended April 30, 2000, our reported tax expense was limited to the taxes payable in Germany on the income of our Chemotrade subsidiary. The losses 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. 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 in excess of available loss carryforwards. 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. NET INCOME (LOSS) We recognized a net loss of $4,232,000, for the nine months ended January 31, 2001, and net income of $2,718,000 for the nine months ended January 31, 2000. Losses, as incurred during the current fiscal year, of this magnitude will likely continue until revenues increase from our current operations or until we generate revenues from products introduced as a result of our research and development projects. The net income recorded in the nine months ended January 31, 2000, was due to the gain recognized from the sale of our depleted zinc business to Eagle-Picher on December 1, 1999. 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 the result of the $5,296,000 gain on the sale of our depleted zinc business to Eagle-Picher in December 1999. This transaction will not recur. Without this 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 faster than we increase our selling, general and administrative expenses, research and development expense and other expenses. 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. Consequently, we anticipate that the current (2001) fiscal year's operations will result in a significant loss. The operations for fiscal 2002 will also result in a significant loss unless we are able to increase our revenues from our existing products or generate additional sales from new products we may develop. LIQUIDITY AND CAPITAL RESOURCES Our working capital and liquidity were significantly improved as a result of the sale of the depleted zinc business to Eagle-Picher on December 1, 1999. However, our liquidity has been decreasing since then as is shown by the following table: 31
DATE WORKING CAPITAL ---- --------------- January 31, 2000 $4.067 million April 30, 2000 $3.754 million July 31, 2000 $3.319 million October 31, 2000 $1.725 million January 31, 2001 $1.601 million
Our principal sources of funding have been cash from sales of lines of business, borrowed funds, and sales of preferred stock. We used cash in operations of approximately $3.505 million and $2.904 million during the nine months ended January 31, 2001, and 2000, respectively. Our investing activities used cash of $35,000, and provided cash of approximately $6.710 million for the nine months ended January 31, 2001, and 2000, resulting from the purchase of fixed assets and sale of the depleted zinc business to Eagle-Picher, respectively. Financing activities generated cash of $896,000 and $318,000 for the nine months ended January 31, 2001, and 2000, respectively. Cash provided by financing activities during the nine months ended January 31, 2001, resulted primarily from the issuance of units, comprised of one share of common stock bundled with two Class B warrants for cash of $675,000. Cash provided by financing activities during the nine months ended January 31, 2000, 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 $513,000 and repayments of debt of $1.494 million were the primary uses of cash during the nine-month period ended January 31, 2000. At January 31, 2001, we had approximately $741,000 of cash and cash equivalents, a decrease of approximately $2.645 million, compared to $3.385 million as of April 30, 2000. At January 31, 2001 we had positive working capital of $1.601 million, a decrease of $2.153 million from April 30, 2000. The decrease is largely attributable to funding our net loss with our existing working capital. Two events significantly and adversely impacted our cash and working capital position at January 31, 2001. Firstly, we still had not collected the $218,000 in receivables from our delinquent customer and we had purchased $131,000 of specialized product based on purchase orders placed by this customer that we wrote off. In April 2001 we reached a settlement with this customer who paid us $122,000. The second adverse event was Eagle-Picher's failure to make the annual installment payment of $500,000 due November 30, 2000, related to the sale of our depleted zinc business. o As a result of the sale of our depleted zinc business in December 1999 that provided us with cash proceeds of $6,730,000, we improved our cash position at April 30, 2000, by $2,933,000 from April 30, 1999. Despite the overall increase our cash balances, we used cash in our operations of approximately $4,327,000 during fiscal 2000. We generated cash from operations of approximately $357,000 during fiscal 1999. Financing activities provided cash of $545,000 in fiscal 2000, generated by the proceeds from the issuance of common stock, preferred stock and borrowings of approximately $2,476,000 of which $1,931,000 was used to pay our line of credit and other borrowings. 32 The primary factor resulting in our net decrease in cash during the fiscal year ended April 30, 1999, was the cash payments for the acquisition of Chemotrade. During fiscal 1999, we paid the sellers of Chemotrade approximately $1,600,000 in cash comprised of the initial cash payment of $546,000, the first note installment of approximately $930,000 and transaction costs. These funds were obtained primarily from borrowings under our line of credit. At April 30, 1999, we 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 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: o 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; o issued 46,667 units in satisfaction of all current and future obligations under the Isoserve royalty agreement; o extended the payment due date for the remaining balance on the Chemotrade acquisition note to July 2000; and o extended the payment due date for 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, from Coast Business Credit ("Coast"). This facility was repaid, in full, in December 1999 with funds made available by our sale of assets to Eagle-Picher. We have had no subsequent relationship with Coast. Chemotrade has one unsecured revolving line of credit for 400,000 DM (approximately $186,000) that we have not utilized to date. 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 we are able to increase our revenues to exceed our cash out-flow (assuming we are able even to increase our revenues). We cannot offer any assurance that we will be able to do so in the near term. We have sufficient cash available to fund our working capital requirements until August 31, 2001. Isonics is considering alternatives to raise additional capital. We expect the sale of our Interpro subsidiary will reduce our cash outflow by approximately $100,000 per month and the transfer of liabilities to the purchasers has improved our working capital position. 33 BUSINESS 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. Today our isotope business addresses the material needs of two primary markets: life sciences (including healthcare) and semiconductor materials. While we currently focus 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 industrial applications, primarily standards. We believe our core competency is our ability to identify, develop, source, and commercialize products and services based on isotopically engineered materials. We are an advanced materials and technology company that 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. Most of our radioisotopes, however, are man-made. Stable isotopes as distinguished from radioisotopes are not radioactive. We are a value-added reseller of stable and radioactive isotopes. Several manufacturers, located primarily in republics that once were part of the Soviet Union, produce these isotopes. The isotopes are sold in the form of common chemical compounds. For example, oxygen-18 is sold as water, and carbon-13 is sold as carbon dioxide. In order to develop 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 number is derived from 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. 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. Eliminating these variations by using a single enriched isotope (i.e. an isotopically pure substance) increases thermal conductivity and optical transparency, and thus improves 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 semiconductors in the computer industry, and for use as targets to produce radioisotopes for the life sciences and other industries. 34 Enriched stable isotopes may be thought of as extremely pure materials. Not only are these isotopes chemically pure, but they frequently consist 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 as distinguished from normal (i.e., 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, but not limited to: energy generation; medical research, diagnostics, and drug development; product tagging and stewardship; semiconductors; and optical materials. We have successfully developed and commercialized several isotope products (notably, even-numbered cadmium isotopes for use with helium-cadmium lasers) and intend to promote the emergence and growth of new stable isotope applications. The 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, radioisotopes have to be made from a target material, usually in a nuclear reactor or a cyclotron, and must generally be used immediately. A nuclear reactor or a cyclotron generates the appropriate form of radiation required to convert the target material into the desired radioisotope. Using state-of-the-art technology, we supply 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 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 in 1998 added radioisotopes to our available products. As a result of the sale of our depleted zinc business in December 1999, (see "SALE OF DEPLETED ZINC BUSINESS - DISPUTES WITH EAGLE-PICHER,") 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) to focus on one specific application - the recovery and recycling of zinc metal from various sources. See "REORGANIZATION AND SUBSEQUENT SALE OF INTERPRO SUBSIDIARY." Previously Interpro was a contract research and development and materials processing company developing new, lower cost technologies to better meet our then existing customers' needs. On February 1, 2001, we sold Interpro and intellectual property related to zinc recovery operations to a management group. This transaction relieved us of a negative cash flow of approximately $100,000 per month, as well as approximately $700,000 of liabilities. As further consideration for the transaction, we retained a 25% interest in the entity, which now owns Interpro. 35 Chemotrade is headquartered in Dusseldorf, Germany, and its subsidiary is located in Leipzig, Germany. Chemotrade is a value-added re-seller of stable and radioactive isotopes. It supplies radioactive isotopes for pharmaceutical and industrial research as well as for industrial and medical imaging, calibration sources and for brachytherapy applications. Additionally, Chemotrade supplies various stable isotope labeled compounds for pharmaceutical research and drug design, as well as oxygen-18 for use in producing a radioisotope used in positron emission tomography. Chemotrade's market is primarily Europe but sales are also made to North America and Asia. Prior to June 1998, substantially all of our net revenues in any particular period were attributable to a limited number of customers and sales of depleted zinc and other stable isotopes. We have historically operated with little backlog. With the acquisition of Chemotrade we added radioisotopes to 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. For example, before our sale of our depleted zinc business to Eagle-Picher, depleted zinc orders typically were for $500,000 to $1,000,000 each and we averaged about ten sales per year. Radioisotope sales can be for as much as $500,000 each, and we currently average four to six of these sales annually. SALE OF DEPLETED ZINC BUSINESS- DISPUTES WITH EAGLE-PICHER On December 1, 1999, we sold our depleted zinc business to Eagle-Picher Technologies, LLC for $8.2 million, of which $6.7 million was paid on December 1, 1999. Three additional payments of $500,000 each were and 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 unaffiliated supplier has performed as required, and that Eagle-Picher has no cause for its non-payment. We have demanded payment from Eagle-Picher, but Eagle-Picher made an unacceptable counteroffer. Additionally, as of December 1, 1999, 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, were contingent upon the delivery of silicon-28 by Eagle-Picher by December 31, 2000. In addition to its refusal to pay the aforementioned $500,000 due November 30, 2000, Eagle-Picher did not deliver 200 kilograms of silicon-28, meeting the specifications as set forth in our agreement, by December 31, 2000. We know that Eagle-Picher's silicon-28 production facility in Oklahoma has encountered 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. Eagle-Picher exercised its warrant, under a net exercise provision in the warrant agreement, and received 3,130,435 shares of our common stock, in March 2000. Because Eagle-Picher exercised its 36 warrant pursuant to the terms of the net exercise provision, Eagle-Picher did not pay cash to exercise the warrant. Eagle-Picher disputed our calculation and believed we should have issued to it an additional 155,279 shares of common stock. We believed Eagle-Picher's calculation to have been 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 because of its failure to execute the required subscription agreement. On January 26, 2001, our Board of Directors authorized us to cancel Eagle-Picher's common stock shares and return those shares to the "authorized, unissued" category. We cancelled the shares on February 20, 2001. On February 8, 2001, Eagle-Picher informed us that they would be seeking damages, in excess of $10,000,000, for alleged misrepresentations regarding the status of the depleted zinc business at the time of the sale. We believe these allegations to be groundless, and we believe we made full and complete disclosure to Eagle-Picher at the time of the sale. We notified Eagle-Picher of our intention to pursue the dispute resolution process as set forth in the agreement with Eagle-Picher to address these and other related matters in December 2000. The dispute resolution process consists of three phases. The first phase was a series of negotiations between designated members of senior management of the two companies. Several meetings were held in December 2000 and January 2001. No resolution was reached. The second phase was mediation. Eagle-Picher notified us of its desire to mediate this dispute on January 18, 2001. A mediation session was held on January 26, 2001. Again, no resolution was reached. The third phase is binding arbitration. On March 26, 2001, we filed for binding arbitration. We are claiming damages against Eagle-Picher of $75,000,000. An arbitration hearing will be scheduled for later this year. We have been informed by our legal counsel that it will likely take a minimum of six-to-nine months to complete the arbitration phase, but that the time period could be significantly longer. As a result of Eagle-Picher's breaches and defaults, we have not received the 200 kilograms of silicon-28 meeting the specifications set forth in the agreement. 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 Management's Discussion and Analysis in the section titled, "LIQUIDITY AND CAPITAL RESOURCES." We have identified potential alternative suppliers of silicon-28. We have not placed any orders with these suppliers because of the cost involved. At an expected cost of approximately $25.00 per gram, 200 kilograms would cost approximately $5.0 million. We currently do not have sufficient cash to make such a purchase and we expect these other suppliers to require us to prepay them for any silicon-28 we order. We do not expect to make such purchases until we can negotiate acceptable payment terms or until we obtain sufficient financing. REORGANIZATION AND SUBSEQUENT SALE OF INTERPRO SUBSIDIARY On April 30, 1998, we purchased all of the outstanding capital stock of Interpro from a previously unaffiliated corporation (Metallurgy International, Inc.). Interpro was a materials processing and contract 37 research and development company. Through December 1, 1999, Interpro performed key steps in our depleted zinc manufacturing process. We acquired Interpro to assure future availability of this critical manufacturing technology, and to provide an infrastructure platform for performing value-added processing of other isotopes. Interpro had also jointly developed new, lower-cost technologies to enable its customers to better meet the various metallurgical and mineral processing needs. 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 one of our subsidiaries, Interpro, to focus on 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 believed the market potential for this, and related processes, was significant. Second, the profound and lengthy slump in the mineral processing and mining industries significantly eroded Interpro's historical customer base. We continued to meet the demands of a few remaining customers through various sub-contractor relationships. We also kept the physical infrastructure in place at our Golden, Colorado location in case the market conditions warranted a reentry into Interpro's historical markets. We used a significant portion of this infrastructure in our zinc recovery and recycling project. In January 2001, we acquired the patent rights related to the recovery and recycling of zinc processes from three unaffiliated parties. A total of 75,000 shares of our common stock valued at $131,000 were issued for these rights. On February 1, 2001, we sold Interpro and transferred the patent rights for the zinc recovery process to a management group. The management group consists of Dr. Robert H. Cuttriss, formerly president of the subsidiary, James E. Alexander, president, chief executive officer, and chairman of the board of directors of Isonics Corporation, and Boris Rubizhevsky, senior vice president and director of Isonics Corporation. The entity buying Interpro is Interpro Zinc, LLC. Each of the three aforementioned individuals owns 25% of Interpro Zinc, LLC. Isonics Corporation owns the remaining 25%. Each individual contributed $100,000 to Interpro Zinc LLC to continue the development of the zinc recovery technology. Interpro Zinc, LLC has informed us that they will be actively seeking further investment to continue their development and commercialization efforts. We have signed a cooperation agreement with Interpro Zinc, LLC to continue leasing office, laboratory, and storage space at our current location. This agreement expires December 31, 2001. We anticipate relocating to another facility, possibly in the Denver area, later this calendar year. At this time we cannot determine what effect, if any, this will have on our operations. We realized a gain from the sale of our Interpro subsidiary of $59,000, representing the net liabilities at the date of disposition. We believe our cash outflow will be reduced by approximately $100,000 per month as Interpro Zinc, LLC has assumed all liabilities and obligations associated with our former subsidiary. Interpro Zinc, LLC has also assumed Dr. Cuttriss' employment agreement that extended through September 2003. From May 1, 2000, through January 31, 2001, Interpro did not engage in any revenue producing activities. We have no intention of returning to the contract research and development activities that Interpro engaged in prior to May 1, 2000. 38 DISTRIBUTION METHOD We operate sales offices in Columbia, Maryland; Dusseldorf, Germany; and Leipzig, Germany. We also identify customers through industry sales journals and many customers come to us through word of mouth referral. There are a limited number of suppliers in the isotope industry and, therefore, most customers are aware of the products and services we offer. Customers directly place the orders and we either ship directly to the customer through our sales offices or the product is shipped directly from the supplier. SIGNIFICANT CUSTOMERS At January 31, 2001, five customers accounted for 85.6% of total net accounts receivable. Three of these customers, plus two others, accounted for approximately 40.7% of net revenues during the nine months ended January 31, 2001. A different customer accounted for approximately 10% of net revenues during the nine months ended January 31, 2000. COMPANY STRATEGY We believe our strength lies in 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 strength is reflected in management's experience in taking depleted zinc from a cost prohibitive concept to a successful commercial reality. 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 minimizing capital costs. This strategy involves: o focusing on development of high value-added products, which products should give us a competitive advantage in large or growing markets; o leveraging research and development expenditures through collaborations, government programs, and corporate and academic partnerships; o 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 Isonics-owned isotope production facilities when markets are better established and the optimum production technology has been determined; o obtaining value-added processing technology through sub-contract manufacturing agreements, joint ventures, and acquisitions of strategically important technologies and companies; and o developing a time-balanced product pipeline to provide a continual supply of new business opportunities. 39 PRODUCTS In fiscal 1999, our revenues were generated from a broad range of sources, including depleted zinc sales, radioisotopes sales and other stable isotopes sales, and from contract research and development activities. In fiscal 2000, this trend continued as our revenues were again generated from a broad range of sources, including depleted zinc sales, radioisotopes sales, oxygen-18 and other stable isotopes sales. Our contract research and development revenues came from the operations of our former subsidiary, Interpro. As described above, we reorganized Interpro in May of 2000 (which eliminated research and development activities) and we sold Interpro to a management group effective February 1, 2001. 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. From time to time we consider building additional isotope separation facilities in the United States or Western Europe, but we have no set plans to do so. However, we currently have neither the capital nor know-how to do so, but it is an integral aspect of our stated strategic plans. 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 stable isotopes including carbon, nitrogen, hydrogen (deuterium), oxygen, and other elements, into thousands of different chemical compounds. SILCs allow researchers to investigate living systems, determine the chemical structure of important biological compounds, design new drugs, and measure extremely low levels of environmental toxins. We believe that greater availability and lower cost of stable isotopes, and advances in instrumentation to detect stable isotopes will continue to increase the demand for SILCs. Our products are typically simple compound SILCs that are used by our customers to synthesize more complex and higher-value SILCs. We market primarily deuterium, carbon-13 and nitrogen-15 to our customers for this purpose. We anticipate that this practice of supplying simple compound SILCs will continue in the immediate future. 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 one day may 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, although it does not so mandate today. RATIONAL DRUG DESIGN. Drugs historically were designed using a screening process in which prior experience was employed to determine what chemicals might work to treat a 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 is designed to affect. This approach is known as 40 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 demand, in turn, is expected to accelerate as regulatory approval is awarded in other countries. Many other tests based on the same principles as DBTs are in various stages of development worldwide. We supply stable isotope raw material to companies developing DBT chemicals. While these sales are 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 isotopes are used may be 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 foreign countries where we might seek to market our products. Consequently, new products cannot be introduced commercially until after approval which may or may not be granted after several years. 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. These complete radioisotopes are in turn used 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 a large body of data and experience will ensure a strong market for these products. Importantly, we also supply some of the basic stable isotope products used to make the compounds of these competing technologies. MEDICAL IMAGING AND THERAPY. Radioisotopes have been used for years in the diagnosis and treatment of many medical conditions. 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 facilitate disease detection and stage determination, followed by therapy selection, administration and monitoring. Several classes of chemical compounds ranging from monoclonal antibodies to peptides 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 the increased supply of new isotopes combined with the ongoing development of highly specific biochemical therapies represents a major growth opportunity in this market segment. 41 POSITRON EMISSION TOMOGRAPHY ("PET"). Although this very powerful nuclear medicine imaging technology has been available for over 25 years, its complexity and cost until recently had relegated PET 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. We believe PET studies are growing at rates of approximately 20 to 50% annually worldwide. Oxygen-18, a rare stable isotope of oxygen, is used to produce the radioisotope, fluorine-18, which is the source of the positrons tracked by the PET imaging equipment. Demand for oxygen-18 is currently greater than the supply. Of the three producers of oxygen-18 in the world today, we believe we are the second largest. 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. Although there is currently little FDA oversight affecting the raw material suppliers, it is likely that FDA regulation will increase in the next few years. It is not immediately apparent what implications this regulation may have for us. BRACHYTHERAPY. Cancer therapy continues to evolve to more effectively target specific types of cancer. 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, Inc., and others) already offer, or have plans to offer, brachytherapy products for the treatment 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 need to be calibrated using standards of known radiation strength and type in order to ensure their accuracy. These standards derive 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. 42 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 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 cause deleterious side effects. Creating the product with chemicals made with specific ratios of stable isotopes results in a unique, easily identified tag. Because the tag is also chemically identical to the otherwise fungible chemical, the tag should be free of the undesirable side effects that plague tags comprised of extraneous material. To date, we have not had significant demand for stable isotopes for these applications. We believe, however, that the demand for isotopes suitable will increase. Products such as perfumes may be ideally suited for product tagging. 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. Similarly, product tagging may be utilized where information regarding the manufacture and distribution of a chemical is important. Ammonium nitrate, for example, is a common fertilizer. When combined with fuel oil, however, 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 develop over time. INDUSTRIAL APPLICATIONS AND BASIC RESEARCH 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. In addition, we 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. Similarly, scientists continue to study the best ways to minimize the dangers associated with these materials. We provide rare radioisotope standards to entities that research these issues. 43 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 on 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--, 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. A significant body of research, generated over the last twenty years, supports the thesis that isotopically pure semiconductor materials have superior thermal conductivity properties compared to natural, multi-isotopic materials. Additionally, we believe this solution (i.e., utilizing isotopically pure semiconductor materials to manage operating temperatures) is compatible with virtually every other heat management solution currently implemented or envisioned to date. Critically, 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% natural abundance) and silicon-30 (3% natural abundance). In 1997, we began a program to introduce 99.9% isotopically pure silicon-28 as a superior substitute 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. These efforts culminated in our acquiring exclusive rights to two Yale University patents. SEE "PATENTS AND PROPERTY RIGHTS." 44 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 support 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. The manufacture of bulk wafers requires substantially more material than we could economically acquire from our existing suppliers however. Our efforts to secure an unlimited, U.S.-based, economical supply of silicon-28 culminated with the December 1999 signing of an agreement with Eagle-Picher to provide silicon-28 to us on an exclusive basis. The initial 200-kilogram delivery was scheduled for delivery by December 31, 2000. Eagle-Picher failed to make timely delivery of this amount. We have other sources available for supplying silicon-28. SEE "SALE OF DEPLETED ZINC BUSINESS - DISPUTE WITH EAGLE-PICHER" AND "MANUFACTURING AND SUPPLY" and "LEGAL PROCEEDINGS." 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. We are currently in dispute with Eagle-Picher and it now appears that their technology may not be successful. We have, in addition, worked with Silex Systems, Ltd., North Ryde, Australia, which is developing a different silicon isotope separation process. We believe these companies, among others, will be able to supply all the silicon-28 that we may require, although none of these facilities has yet commenced commercial production. We also believe that once sufficient orders have been placed for pure silicon-28 bulk wafers, 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. We anticipate very little revenue from silicon-28 based products in fiscal 2001, as we are still developing this business. Nonetheless, if we are able to successfully complete our development efforts and market silicon-28 based products, we project significant revenues in subsequent fiscal years. We are also 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. ZINC RECOVERY AND RECYCLING BUSINESS OPPORTUNITY Through Interpro, our former subsidiary, we pursued a business opportunity to develop an economic zinc recovery and recycling technology, which technology 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. This recovery and recycling technology avoids most of the disadvantages of conventional processes, is applicable to a wide range of zinc-bearing scrap, dust and sludge, and may enhance the value of the associated materials in other zinc-bearing waste streams. For various economic factors discussed above in "MANAGEMENT'S DISCUSSION AND ANALYSIS" and elsewhere herein, we sold our Interpro subsidiary effective 45 February 1, 2001. We received a 25% interest in the purchaser and, therefore, still retain an interest should the purchaser's research and development of zinc recovery prove to be successful. RESEARCH AND DEVELOPMENT Consistent with our product development strategy, we are seeking to identify and evaluate new stable and radioactive isotope products and potential markets for economic and technical feasibility. We will, in addition, continue funding 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 was the production of high chemical-purity silicon-28 silane gas and silicon-28 epitaxial wafers. The second project was the recovery and recycling of zinc from various sources such as scrap metals, including galvanized steel and brass, and electric arc furnace dust. The zinc recovery program was canceled in conjunction with the sale of our former subsidiary to Interpro Zinc, LLC. We have postponed the construction of the Golden, Colorado, silane gas processing facility due to Eagle-Picher's inability to supply silicon-28. We will continue to use outside sources to perform processing as required for our needs until circumstances and financing warrants proceeding with our contemplated facility. SEE "ISOTOPICALLY PURE SEMICONDUCTOR MATERIALS" above. 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 continues through the current (2001) fiscal year. The carbon-13 separation project did not produce the desired results and ended in February 1999. We completed the depleted zinc project in November 1998. SILICON-28. To expand our capacity and to ensure product quality, we attempted to build our own silane gas facility in Golden, Colorado, which we have postponed as discussed above. We believed this facility would 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, and for the foreseeable future, however, unaffiliated contractors will continue to perform this work for us on a sub-contract basis. 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. The Southern Methodist University Program 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. The North Carolina State University Program will model and build power semiconductor devices and determine the effect of silicon-28 epitaxial layers on the device's temperature distribution. Additionally, we entered into a Cooperative Research & Development Agreement with Lawrence Berkeley Laboratory in Berkeley, California, to study the properties of various silicon isotopes. This agreement is part of a U.S. Department of Energy program to re-deploy Russian nuclear weapons 46 technology to commercial applications. Delays within the Department of Energy have pushed the start of this program to our fiscal year 2002. We also supplied silicon-28 silane gas to ATMI, Inc. in Danbury, Connecticut, and will participate in their Office of Naval Research 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. This agreement reflects our effort 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 have an oral agreement with Voltaix, Inc. of North Branch, New Jersey to act as a distributor of our products for the ion implantation industry. The first product 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. Because we sold our Interpro subsidiary effective February 1, 2001, we do not expect to incur additional research or development expenses relating to zinc recovery and recycling, and we are no longer involved in this or any related activities. COMPETITION Many of our potential competitors, are larger and have significantly greater financial, technical, marketing and other resources than us. Some of our competitors may form partnerships or alliances with large pharmaceutical or electronics companies, with the resulting entity possessing greater market strength than we have. We face competition relative to many of our products, including: STABLE ISOTOPE LABELED COMPOUNDS AND DIAGNOSTIC BREATH TEST PRODUCTS. Several companies compete with us for a piece of the stable isotope labeled compounds market. We will have additional competitors if we offer diagnostic breath test products and additional stable isotope label compounds 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 stable isotope labeled compounds and diagnostic breath test 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, a specific type of diagnostic breath test. Several companies in Europe have also received regulatory approval for diagnostic breath tests. Our principal current competitors and potential competitors also include: MassTrace, euriso-top, Aldrich Chemicals, Icon Services, Omicron, C/D/N Isotopes and Martek Biosciences. SEMICONDUCTOR MATERIALS. Although we have not yet identified significant competitors in the semiconductor markets, numerous companies in the United States and throughout the world are currently manufacturing semiconductor materials and are working to improve the thermal conductivity and other beneficial characteristics of semiconductor materials. Many of these companies are larger than Isonics and 47 have significantly greater financial resources at their disposal. Given the size and importance of these potential markets, we anticipate that substantial competition will emerge as the markets develop. ZINC RECOVERY AND RECYCLING. Other companies have attempted over the last twenty years 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 at their disposal. The companies' attempts have proven 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. Because we sold our Interpro subsidiary, we are no longer competing directly in the area of zinc recovery and mining. SUMMARY. Many of the areas in which we either compete or intend to compete are rapidly evolving. Competition may develop a patentable product or process that may prevent us from competing in our intended markets. While we expect to compete primarily on the basis of product performance, proprietary position and price, in many cases the first company to introduce a product to the market will obtain at least a temporary competitive advantage over subsequent market entrants. MANUFACTURING AND SUPPLY We obtain stable isotopes from a variety of isotope sources, primarily located in Russia or other former Soviet republics. We may invest in our own isotope production facilities in the future upon our determining the optimum production technology for a given isotope or family of isotopes. Other 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. We entered into an agreement in July 1996, with Techsnabexport, a Russian government-based foreign trade organization, and the Electro-Chemical isotope enrichment plant located in Siberia, Russia to supply depleted zinc for resale to end users. As a result of the sale of the depleted zinc operations to Eagle-Picher, we assigned this contract to Eagle-Picher. To increase capacity and to geographically diversify our production of carbon and silicon isotopes, on December 1, 1999, we entered into a Supply Agreement with Eagle-Picher Technologies, LLC. Pursuant to the terms of the Supply Agreement Eagle-Picher must supply us with enriched stable isotopes of silicon and carbon. Eagle-Picher has defaulted on this agreement and we have invoked the dispute resolution process set forth under out contract. SEE "SALE OF DEPLETED ZINC BUSINESS - DISPUTE WITH EAGLE-PICHER." We have historically depended on a limited number of suppliers and processors for most of our manufacturing processes. Except for our agreement with Eagle-Picher (which is in default), we do not have any written agreements with our suppliers and processors. Although we attempt to reduce our dependence on our suppliers, 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 it may not in fact do so. 48 GOVERNMENT REGULATION Regulation by government authorities in the United States and other countries is a significant consideration in the research, development, production, distribution and marketing of our products we must follow. In order to clinically test, manufacture, distribute, market and sell products, we must follow safety and other standards established by applicable regulatory authorities. We may be 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, and the use, storage and disposal of hazardous or potentially hazardous substances used in connection with our research, development and manufacturing activities. The regulations potentially material to our business are summarized below. FDA REGULATION We are not currently subject to any FDA regulation because we do not currently manufacture any Diagnostic Breath Tests, drug products or other medical devices. Our customers may in many cases be subject to FDA regulation. However, if we test, manufacture, market, distribute, export or sell diagnostic products or medical devices in the future, we will also likely be subject to extensive regulation nationally and internationally. We have not yet determined from what specific countries, other than the United States, we might seek regulatory approvals to market such products, though we anticipate seeking approval in Europe and Japan. We intend to develop products that are subject to rigorous pre-clinical and clinical testing both domestically and internationally. Because of these regulatory hurdles, products developed by us may not meet the requisite standards to receive marketing approval. Nor is there any guarantee that such approval 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 Our carbon 13 based proposed 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 application, implicates a lengthy, more burdensome procedure that would likely require clinical studies. Together with the FDA review of the Pre-Market Approval, this application 49 process may take three-to-five years before commercial marketing can occur. Of course, we do not know whether the FDA will determine that any future product we develop will have an intended use and characteristics that qualifies the product for commercial distribution for clinical use under 510(k) Pre-Market Notification. Thus, Pre-Market Approvals 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 such product is under active development. We believe that any Diagnostic Breath Test instruments we develop in the future will be eligible for marketing under a 510(k) Pre-Market Notification, but that the substrate would require approval of a New Drug Application. We believe that clinical studies would be required to obtain FDA approval of the 510(k)/New Drug Application for the Diagnostic Breath Test instrument/substrate and would be conducted under an investigational device exemption approved by the FDA. An investigational device exemption normally restricts the transfer of an investigational device to a limited number of institutions for a limited number of investigators. The FDA may not allow us to conduct such clinical studies. Furthermore, such studies may not provide the data necessary to obtain the approval of the 510(k)/New Drug Application for any Diagnostic Breath Test or other product that we may develop. Moreover, the FDA may not provide the necessary approval of the 510(k)/New Drug Application in a timely manner, if at all. In addition, use of Diagnostic Breath Tests and other diagnostic products that we develop may be subject to regulation under the Comprehensive Laboratory Improvement Act of 1986. Under this Act, 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 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. We may not obtain such complexity level determination in a timely manner, if at all. Failure to obtain the requisite complexity level may 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. Development of a drug product for use in humans is a multi-step process. First, laboratory and animal testing establish reasonable safety and potential efficiency of the experimental product for testing in humans. After 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 accumulated clinical evidence is submitted to the FDA as part of a new drug application. Approval of the New Drug Application is necessary before a company may market the product. The approval process can be lengthy, frequently taking one, two or more years after submission. Timely approval depends in part upon the speed of the FDA's application review and the time required for the company to provide satisfactory answers or additional data when specified by the FDA. A New Drug Application may not be approved in a timely manner, if 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 50 obtaining FDA approval for a new product generally requires substantial funding. We cannot now say that we will have the funds to pursue such approval. CURRENT GOOD MANUFACTURING PRACTICES AND OTHER CONTROLS The FDA also has extensive regulations concerning manufacturing of regulated products in accordance with current good manufacturing practices. 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 current good manufacturing practices and we will have to ensure, compliance by our third-party manufacturers. Continued compliance with such practices is required to market both drugs and medical devices once they are approved. Failure to comply with the current good manufacturing practices regulations or other applicable legal requirements can lead to the seizure of non-complying 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. OTHER GOVERNMENT REGULATION The import, export, handling, transportation, sale, storage and other activities undertaken in connection with our non-medical products are subject to, or potentially subject to, significant federal, state, local and foreign government controls pertaining to hazardous chemicals, 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. We are not currently engaged in any activities that may require us to incur significant expenses related to environmental compliance. 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 regulations in the shipping and packaging of the stable isotope chemicals. We must also comply with Department of Transportation regulations when packaging material kept in inventory for domestic shipment. As required under federal and state law, we have prepared Material Safety Data Sheets, which are enclosed with each product shipment. We must periodically update these Data Sheets based on new literature reports. The shipments received at our Columbia, Maryland facility are subject to Federal and State regulations pertaining to hazardous chemicals and hazardous waste disposal. These shipments are stored in an area of the facility designated for such materials. We believe we are in compliance, in all material respects, with applicable federal and state environmental regulatory requirements. The shipments from Russian manufacturing sources now enter the U.S. duty free (without tariff). If the shipments become subject to tariff, we may not be able to sell the imported products. Further, the products may cease to be commercially viable because of these increased tariff costs. The Nuclear Regulatory Commission has authority to regulate importation and exports of deuterium containing chemicals whose ratio of deuterium atoms to hydrogen atoms exceed 1:5,000. At 51 present, the deuterium containing compounds that we import do not require any special licenses or importation authorization. The Nuclear Regulatory Commission regulates exports of deuterium containing chemicals under general license. We will not be able to ship these chemicals to countries that require a special license for such shipments. None of these countries represents significant current or expected future markets for our products. Our facilities and employees must also comply with environmental and other regulations concerning our operations. 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 have potential military, nuclear power or nuclear weapons purposes. These controls include export license requirements or other restrictions. We may be unable to obtain or maintain such licenses. Further, the failure to obtain or maintain such licenses, or comply with other restrictions that might be placed on such manufacturing and exports, may have a material adverse effect on us and our operations. PRODUCT LIABILITY AND INSURANCE Our business exposes us to substantial product, environmental, occupational and other liability risks. These risks are inherent in product research and development, manufacturing, marketing, distribution, and in the use of our products and operations. We have product liability insurance in order to protect ourselves from such potential exposures. Adequate insurance coverage, however, may not be available at an acceptable cost, if at all. Furthermore, a product liability or other claim could materially and adversely affect our business or financial condition. The terms of our customer agreements 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 file suit against us based on product liability, breach of warranty or other claims. The foregoing contract clauses might effectively limit our liability in any such actions. EMPLOYEES As of May 10, 2001, we had 14 full and part-time employees. Four of our employees have Ph.D.s in scientific or engineering disciplines. Approximately four employees are involved in research and product development, two in sourcing, and eight in business development and administration. Still an employees' responsibilities may also encompass areas other than his or her primary area of responsibility. We consider our relations with our employees to be good. None of our employees is covered by a collective bargaining agreement. PROPERTIES We relocated our headquarters to Golden, Colorado in December 1998, into facilities leased by Interpro. This lease expires in June 2002. Following the sale of Interpro in February 2001, we entered into a cooperation agreement with Interpro Zinc, LLC that allows us to continue to use the facility for a total cost to us of approximately $2,500 per month through December 31, 2001. 52 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 involved in an arbitration matter pending before the American Arbitration Association in Dallas, Texas (the "AAA") involving our dispute with Eagle-Picher. We filed this arbitration demand on March 26, 2001, and Eagle-Picher filed a competing claim. These competing claims have been consolidated into a single proceeding (No. 71Y1980017501) before the AAA in which Eagle-Picher is the claimant, and we are the respondent and counter-claimant. The matter derives from the Asset Purchase Agreement between Eagle-Picher and the Company dated November 30, 1999 and completed on December 1, 1999 which contemplated the completion of a number of different transactions as discussed above. Eagle-Picher has claimed that the Company failed to disclose that a principal purchaser of depleted zinc had advised the Company that it did not intend to purchase further depleted zinc from the Company after the expiration of the then-existing purchase order. Subsequently, Eagle-Picher negotiated a termination of this then-existing purchase order with this purchaser. The Company has denied any liability to Eagle-Picher, and has affirmatively stated that, in any event, it had fully disclosed the status of the arrangement with the purchaser to Eagle-Picher, and that no action taken or omitted by the Company has resulted in any damages to Eagle-Picher. Eagle-Picher has claimed damages of up to $10,000,000. Our claim for damages against Eagle-Picher includes a number of separate components, resulting under the Asset Purchase Agreement and the Supply Agreement. These components are generally as follows: o Eagle-Picher has failed to pay us $500,000 that was due November 30, 2000, under the Asset Purchase Agreement for the sale of our depleted zinc business. We have also claimed anticipatory breach of two additional $500,000 payment obligations due November 30, 2001 and 2002, respectively. o Eagle-Picher has failed to deliver to us 200 kilograms of silicon-28 on or before December 31, 2000, as required by the Asset Purchase Agreement. We gave Eagle-Picher the 30 days notice of this failure, and, after Eagle-Picher failed to cure its default during that period, cancelled a warrant to purchase 4,000,000 shares issued to Eagle-Picher and also cancelled the underlying shares. o Eagle-Picher has wrongfully refused to honor a purchase order for 300 kilograms of silicon-28 which we submitted under Eagle-Picher's agreement to supply silicon-28 to us "commencing upon [Eagle-Picher]'s completion of the delivery requirements" for the 200 kilograms of silicon-28. In addition, we are claiming anticipatory breach of the ten-year supply agreement for future years. 53 We are claiming damages against Eagle-Picher of $75,000,000. We are also claiming that the warrant we had issued to Eagle-Picher and the shares of common stock underlying the warrant have been properly cancelled. Eagle-Picher has denied our claims. Discovery has not yet commenced in this arbitration proceeding. Consequently, it is premature for us to predict any likely outcome. We intend to vigorously defend against Eagle-Picher's claim and to prosecute our own claims against Eagle-Picher until successfully resolved or a settlement is reached. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. MANAGEMENT IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the names and ages of Isonics' Directors and Executive Officers, and the positions held by each such person as of April 30, 2001. Each of the directors holds office for a term of one year or until the next annual shareholders' meeting which is scheduled for October 2001, and until the earlier of his or her successor's election and qualification, or until his or her death, resignation or removal. Each officer serves at the discretion of the Board.
NAME AGE POSITION - ---- --- -------- James E. Alexander 52 President, Chief Executive Officer, Treasurer, Chief Financial 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 and Secretary Brantley J. Halstead* 43 Chief Financial Officer, Vice President, Finance 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) 58 Director
- ------------------ * Resigned effective May 1, 2001. (1) Member of the Compensation Committee. (2) Member of the Audit Committee. JAMES E. ALEXANDER is our co-founder. He has served as our President, Chief Executive Officer and as a director since our inception. Mr. Alexander 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 in the aircraft engine and nuclear power divisions, most recently as 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. 54 BORIS RUBIZHEVSKY is a co-founder of Isonics and has been Senior Vice President and a director since our inception. Mr. Rubizhevsky became Vice Chairman in March 1997 and has worked exclusively for Isonics during this time. 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. DANIEL J. 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. From May 1988 through March 1991, Dr. Grady served as Software Engineer Manager, Nuclear Medicine for General Electric in England. From October 1984 through May 1988, he served as Clinical Applications Manager for General Electric 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. STEPHEN J. BURDEN joined us in January 1997 as Director of Research & Development. He was promoted to Vice President, Semiconductor Materials effective January 1, 1999. From 1993 to 1997, 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. BRANTLEY J. HALSTEAD, who resigned his positions effective May 1, 2001, joined us as Chief Financial Officer in February 1999 and was promoted to Vice President, Finance effective January 30, 2000. Prior to joining Isonics, Mr. Halstead was Chief Financial Officer of OZO Diversified Automation, Inc. from September 1997 through January 1999. From 1988 to 1997, Mr. Halstead was a management consultant, 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. HERBERT HEGENER is a co-founder of Chemotrade and has served as its President since its formation in 1991. From 1988 to 1991, Mr. Hegener was with Medgenix Deutschland GmbH-Dusseldorf, Germany. He was Medgenix Deutschland's Managing Director when he left Medgenix Deutschland to found Chemotrade. 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. LINDSAY A. 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 55 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. RICHARD PARKER has served as a director since August 1998. Mr. Parker is presently Vice-President of Distribution Sales for Cypress Semiconductor and has held that position since December 1997. Previously, Mr. Parker was Director of Sales for Cypress from April 1984 to December 1997. Prior to joining Cypress, he held various sales and marketing management positions at Fairchild Semiconductor from 1973 to 1984. He received a Bachelors degree in Education from the University of North Dakota. LARRY J. 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. He left Citicorp to become Senior Vice President of Inco Venture Capital. Mr. Wells is also 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 of May 10, 2001, we had 14 employees. There were and are no family relationships among the officers, directors or any person chosen by Isonics 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 information regarding the ownership of the our common stock as of May 10, 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.
BENEFICIAL OWNERSHIP -------------------- BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF TOTAL - ---------------- ---------------- ---------------- James E. Alexander (1) 1,954,167 21.7% Boris Rubizhevsky (2) 1,697,161 18.8% Stephen J. Burden (3) 289,880 3.1% Daniel J. Grady (4) 243,309 2.6% Brantley J. Halstead (5) 106,000 1.2% Herbert Hegener (6) 48,600 0.5% 56 Lindsay Gardner (7) 299,761 3.3% Richard Parker (8) 50,000 0.6% Larry Wells (9) 117,241 1.3% All executive officers and directors as a group (9 persons). The address 4,806,119 49.4% for all of the above directors and executives officers is: 5906 McIntyre Street, Golden, CO 80403 Richard Grossman (10) 1,948,927 21.6% Anfel Trading (11) 687,902 7.4%
- ----------------------- (1) Includes: (i) 25,000 shares of common stock underlying options that are currently exercisable; (ii) 45,455 shares of common stock held in the name of The James & Carol Alexander Family Foundation; (iii) 500,000 shares held by wife Carol; (iv) 4,000 shares held by son Benjamin Alexander; and (v) 4,000 shares held by son Jonathan Alexander. (2) Includes: (i) 1,573,872 shares of common stock held jointly with wife Nancy Eiden Rubizhevsky; (ii) 22,500 shares of common stock underlying options that are currently exercisable; (iii) 35,456 shares of common stock underlying 35,456 warrants to purchase common stock of Isonics; (iv) 33,333 shares of common stock held by wife Nancy Eiden Rubizhevsky; (v) 16,000 shares of common stock held by son Zachary Rubizhevsky; and (vi) 16,000 shares of common stock held by son Ryan Rubizhevsky. (3) Includes 192,887 shares of common stock underlying options of which 143,596 vested as of May 10, 2001 and which are currently exercisable. (4) Includes 222,965 shares of common stock underlying stock options that are currently exercisable. (5) Includes 90,000 shares of common stock underlying options that are currently exercisable. Mr. Halstead has resigned effective May 1, 2001. (6) Includes 35,000 shares of common stock underlying warrants that are currently exercisable. (7) Includes 50,000 shares of common stock underlying stock options that are currently exercisable. (8) Includes 50,000 shares of common stock underlying stock options that are currently exercisable. (9) Includes 40,000 shares of common stock underlying stock options that are currently exercisable. Also includes 77,241 shares owned by Daystar Partners, L.P. of which an affiliate owned by Mr. Wells, and in which Mr. Wells owns a 9.9% equity interest. (10) Includes beneficial ownership of the following shares: (i) 41,274 shares of common stock underlying 20,000 shares of Series A preferred stock and 21,274 warrants owned of record and beneficially by Richard Grossman; (ii) 41,274 shares of common stock underlying 20,000 shares of Series A preferred stock and 21,274 warrants owned of record and beneficially by Orin Hirschman (of which shares Mr. Grossman disclaims beneficial ownership); (iii) 1,141,916 shares of common stock underlying 553,334 shares of Series A preferred stock and 588,582 warrants owned of record and beneficially by Adam Smith Investment Partners, L.P.; (iv) 233,887 shares of common stock underlying 113,334 shares of Series A preferred stock and 120,553 warrants owned of record and beneficially by Adam Smith Investments, Ltd.; and (v) 531,850 shares of common stock underlying 531,850 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. (11) Includes 354,568 shares of common stock underlying 354,568 warrants. The principal executive offices of Anfel Trading Ltd. are c/o M. Andre Zolty, 24 Route De Malagnou, 1208 Geneva, Switzerland. Andre Zolty is the principal and controlling shareholder of Anfel Trading Ltd. and may be deemed to beneficially own these shares. The Series A convertible preferred stock consists of 1,830,000 shares issued with a liquidation preference and conversion right of $1.50 per share. Through May 10, 2001, 866,334 shares of Series A preferred stock have elected to convert into common stock. The conversion right of the preferred stock is on a one-for-one basis. The Series A preferred stock is entitled to dividends or distributions equal to the 57 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, Isonics 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 and unless Isonics 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 Isonics' shareholders. We know of no plans or arrangement that will result in a change of control at Isonics. 58 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 upon a review of the copies of such reports furnished to us and based upon written representations that no other reports were required, all Section 16(a) filing requirements applicable to Isonics' officers, directors and greater than ten percent beneficial owners were complied with exception (or in addition) to the following during the fiscal year ended April 30, 2000 and subsequently: 1. Mr. Rubizhevsky filed a Form 4 in February 2000, reporting a purchase that took place in July 1999. Mr. Rubizhevsky also filed a Form 4 after April 10, 2000 to report a sale of 1,000 shares made in March 2000. 2. Mr. Parker filed a Form 3 in February 2000. He became subject to the Section 16(a) reporting requirements when he became a director of Isonics in August 1998. 3. Dr. Cuttriss and his affiliate, Metallurgy International, Inc., jointly filed a Form 3 in February 2000. Dr. Cuttriss became subject to the Section 16(a) reporting requirements when he became an executive officer of Isonics in May 1998. A joint filing of two Form 4s was also made in February 2000 reporting transactions that occurred in July 1999 and September 1999, which Dr. Cuttriss amended in May 2000. Dr. Cuttriss and Metallurgy International are no longer affiliates of Isonics effective January 31, 2001. 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 59 filed a Form 4 reporting the exercise. Eagle-Picher has also not yet filed an amendment to its Schedule 13D reporting this exercise. In February 2001 we cancelled the shares (subsequent to canceling the warrant) and we have notified Eagle-Picher of the cancellation. Eagle-Picher has not filed any report with the Securities and Exchange Commission regarding the cancellation of the shares. 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 transfer of 536,000 shares in June 2000. Mr. Alexander transferred 500,000 of these shares to his wife who continues to own these shares. 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 of Isonics common stock 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. Subsequently, Isonics received an opinion of counsel in which counsel opined 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." Dr. Cuttriss is no longer an affiliate of Isonics and, therefore, is no longer subject to the reporting requirements of Section 16(a), effective January 31, 2001. 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 executive officer earned salary and bonus compensation exceeding $100,000 during any of those years. This includes all compensation paid to each by Isonics and any subsidiary. 60
ANNUAL COMPENSATION LONG-TERM ------------------- COMPENSATION AWARDS ------------------------ AWARDS PAYOUT ------ ------ ($) SECURITIES RESTRICTED UNDERLYING NAME AND FISCAL ($) ($) ($) OPTIONS & LTIP ALL OTHER PRINCIPAL POSITION YEAR SALARY BONUS OTHER(a) AWARDS SARS (#) PAYOUT COMPENSATION - ------------------ ---- ------ ----- -------- ------ -------- ------ ------------ James E. Alexander 1998 204,870 0 60,553(g) 0 0 0 0 President & CEO 1999 200,000 50,000 35,016(g) 0 25,000(k) 0 0 2000 212,000 172,549(e) 39,280(h) 0 0 0 0 Boris Rubizhevsky 1998 176,975 0 25,946(g) 0 0 0 0 Senior Vice President 1999 184,100 45,000 25,404(g) 0 22,500(l) 0 0 2000 191,000 147,670(f) 28,185(i) 0 0 0 0 Daniel J. Grady 1998 125,603 0 0 0 0 0 0 Vice President 1999 127,188 16,000 0 0 15,625(m) 0 0 2000 125,000 10,271 23,833(j) 0 0 0 0 Stephen J. Burden, 1998 N/A N/A N/A N/A N/A N/A N/A Vice President (b) 1999 0 0 0 0 121,458(n) 0 0 2000 125,000 0 23,452 0 0 0 0 Robert H. Cuttriss 1998 N/A N/A N/A N/A N/A N/A N/A President of Interpro (c) 1999 92,872 80,000 0 0 20,000(o) 0 0 2000 104,815 0 3,144 0 0 0 0 Brantley J. Halstead, 1998 N/A N/A N/A N/A N/A N/A N/A Vice President (d) 1999 22,182 0 0 0 116,000(p) 0 0 2000 102,000 16,000 3,870 0 25,000(q) 0 0
- ------------------ (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. Effective February 1, 2001, Dr. Cuttriss is no longer an executive officer of Isonics. (d) Mr. Halstead became an officer of Isonics in February 1999, upon his joining Isonics as Chief Financial Officer. Mr. Halstead was promoted to Vice President, Finance in January 2000. Mr. Halstead resigned effective May 1, 2001. (e) Mr. Alexander's amount includes $133,451 for forgiveness of a loan owed to Isonics, 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 Isonics, 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 Isonics' 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 Isonics' 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 Isonics' 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 delaying salary in March and April 1999, and are currently exercisable at $1.4375 per share and expire April 26, 2004. 61 (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 65,000 have vested as of May 10, 2001, 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 65,000 have vested as of May 10, 2001. 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. As a result of Mr. Halstead's resignation, his options expire unless exercised by August 1, 2001. (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. As a result of Mr. Halstead's resignation, his options expire unless exercised by August 1, 2001. 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 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 and Isonics has continued that 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 of the Directors made on January 30, 2000, both Mr. Alexander and Mr. Rubizhevsky received salary increases commencing February 1, 2000, equal to 20% of their current salary, $240,000, and $216,000, respectively. The salary increases were granted in recognition of their performance for Isonics and the fact that neither Mr. Alexander nor Mr. Rubizhevsky had received salary increases in approximately two and one-half years. Under the agreements, 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 62 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 provide 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 is covered by an employment agreement extending through September 2001. Dr. Cuttriss and Isonics agreed to a cancellation of his previous employment agreement (which extended through September 2003) in connection with our sale of our Interpro subsidiary to a management group that included him. 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, and he resigned effective May 1, 2001. 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. Although this plan has been terminated, 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. 63 (d) 1998 Employee Stock Purchase Plan. The Stock Purchase Plan authorized employee purchase of up to 200,000 shares of Isonics common stock. The directors approved this plan in August 1998. Shareholders approved it in October 1998. As of May 10, 2001, options to purchase a total of 294,583 shares, 269,500 shares, and 358,769 shares respectively, were outstanding under the Executives' Plan, Employees' Plan, and 1996 Stock Option Plan, and options to purchase 705,417, 230,500, 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. No executive officers named in the compensation table exercised options or stock appreciation rights 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.
NUMBER OF PERCENT OF TOTAL SECURITIES OPTIONS/ STOCK UNDERLYING APPRECIATION RIGHTS OPTIONS/STOCK GRANTED TO APPRECIATION EMPLOYEES IN EXERCISE PRICE NAME AND PRINCIPAL POSITION RIGHTS GRANTED (#) FISCAL YEAR ($/SH) EXPIRATION DATE --------------------------- ------------------ ----------- ------ --------------- 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) Brantley J. Halstead 25,000 28.7% $7.3125 January 2005 Vice President (b)
- ------------------ (a) Does not include 33,333 warrants obtained in a private transaction completed in July 1999 and exercised in March 2000. (b) Mr. Halstead resigned effective May 1, 2001. 64 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 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.
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE- UNDERLYING UNEXERCISED MONEY OPTIONS/STOCK SHARES OPTIONS/STOCK APPRECIATION APPRECIATION RIGHTS AT ACQUIRED ON VALUE RIGHTS AT APRIL 30, 2000 APRIL 30, 2000 NAME AND PRINCIPAL POSITION EXERCISE (#) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - --------------------------- ------------ -------- ------------------------- ------------------------- 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 (d) Brantley J. Halstead 0 0 86,000/55,000 $321,125/$140,938 Vice President (e)
- ----------------- (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. (d) Dr. Cuttriss is no longer an executive officer of Isonics as a result of our sale of our Interpro subsidiary to a management group including him as of February 1, 2001. Dr. Cuttriss resigned effective January 31, 2001. (e) Mr. Halstead resigned effective May 1, 2001. 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 Isonics' directors 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, we agreed to compensate non-employee directors $2,000.00 for attending Board of Directors' meetings in person, and $500.00 for attending Board of Directors' meetings telephonically beginning January 1, 2000. 65 The 1998 Directors' Plan authorized each person serving as a member of the Board who is not an employee of Isonics to receive options to purchase 20,000 shares of Isonics common stock when such person accepts his position as a Director and to receive an additional option to purchase 10,000 shares when such person is re-elected as a Director provided such person is not an Isonics employee. 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, we granted options to purchase 10,000 shares to each of Ms. Gardner and Messrs. Parker and Wells following their re-election as directors at our annual meeting of shareholders. These options are exercisable at $2.1875 per share through October 10, 2005. As of May 10, 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. 66 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We provide the following information regarding transactions among officers, directors and significant shareholders of Isonics during the most recent two fiscal years and during the subsequent fiscal year. SALE OF INTERPRO SUBSIDIARY Effective February 1, 2001, we sold our wholly-owned International Process Research Corporation subsidiary, to a limited liability company, Interpro Zinc LLC, in a management buy-out. Robert H. Cuttriss, Ph.D. (formerly an executive officer of Isonics) is the manager of Interpro Zinc LLC and a 25% owner. James E. Alexander (president, chief executive officer, and a director of Isonics) and Boris I. Rubizhevsky (senior vice president and a director of Isonics) are also 25% owners of Interpro Zinc and participated in the purchase of our Interpro subsidiary. Mr. Alexander and Mr. Rubizhevsky advised our board that they do not intend to participate actively in Interpro Zinc's activities. As a part of the transaction, Interpro Zinc assumed approximately $700,000 in liabilities associated with the operations of the Interpro subsidiary and agreed to indemnify us against any contingent liabilities related to the Interpro site in Golden. Isonics also transferred patent rights and other intellectual property related to the recovery of zinc. In exchange, Isonics acquired a 25% interest in Interpro Zinc. The disinterested directors of Isonics approved the transaction after receiving advice from management not participating in the transaction, as well as independent consultants, and believes that the transaction was fair and reasonable to, and in the best interests of, Isonics and our shareholders. CORPORATE LOANS TO OFFICERS On March 1, 2001, we advanced $50,000 each to our president, Mr. Alexander, and our senior vice president, Mr. Rubizhevsky. On April 1, 2001, we advanced an additional $50,000 to each of them. On April 30, 2001, Isonics Corporation accepted a payment of $100,000 from each of these two officers in full repayment of the principal amounts due. In each case, Mr. Alexander and Mr. Rubizhevsky also paid Isonics interest on the amount previously advanced at 6.6% per annum. During the fiscal years ended April 30, 1998, 1999 and 2000, we had loans outstanding to Messrs. Alexander and Rubizhevsky. 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 the applicable 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 67 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.
JAMES E. ALEXANDER BORIS RUBIZHEVSKY PRESIDENT & CEO SENIOR VICE PRESIDENT --------------- -------------------- 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 January 31, 2001 $0.00 $0.00
- ----------------- (a) Includes interest accrued and paid. Amounts are aggregated. CORPORATE LOANS FROM OFFICERS AND EMPLOYEES During the fiscal years ended April 30, 1998, 1999 and 2000, Isonics' officers, directors and employees loaned Isonics funds. The following schedule summarizes these borrowing and repayments.
BALANCE AS OF FY 1998 FY 1998 BALANCE AS OF NAME AND PRINCIPAL POSITION MAY 1, 1997 BORROWINGS (a) REPAYMENTS (a) APRIL 30, 1998 - --------------------------- ----------- ---------- ---------- -------------- 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
- ----------------- (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. 68 (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.
BALANCE AS OF FY 1999 FY 1999 BALANCE AS OF NAME AND PRINCIPAL POSITION MAY 1, 1998 BORROWINGS (a) REPAYMENTS (a) APRIL 30, 1999 - --------------------------- ----------- ---------- ---------- -------------- James E. Alexander President & CEO................... $0.00 $0.00 $0.00 $0.00 Boris Rubizhevsky Senior Vice President............. $0.00 $44,290.20 $0.00 $44,290.20 Daniel J. Grady Vice President.................... $0.00 $47,100.00 $47,100.00 $0.00 Stephen J. Burden Vice President.................... $0.00 $0.00 $0.00 $0.00 Lindsay Gardner Director.......................... $0.00 $0.00 $0.00 $0.00 Jacques J. Delente................ $0.00 $93,000.00 $48,000.00 $45,000.00
- ----------------- (a) Includes interest accrued and paid through April 30, 1999. Amounts are aggregated.
BALANCE AS OF FY 2000 FY 2000 BALANCE AS OF NAME AND PRINCIPAL POSITION MAY 1, 1999 BORROWINGS (a) REPAYMENTS (a) APRIL 30, 2000 - --------------------------- ----------- ---------- ---------- -------------- James E. Alexander President & CEO................. $0.00 $0.00 $0.00 $0.00 Boris Rubizhevsky Senior Vice President (b)....... $44,290.20 $8,858.04 $53,214.24 $0.00 Daniel J. Grady Vice President.................. $0.00 $0.00 $0.00 $0.00 Stephen J. Burden Vice President (c).............. $0.00 $57,500.00 $57,500.00 $0.00 Lindsay Gardner Director........................ $0.00 $0.00 $0.00 $0.00 Jacques J. Delente.............. $45,000.00 $13,500.00 $58,500.00 $0.00
- ----------------- (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 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 the second private placement 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 paid all monies owed to Mr. Hegener in December 1999 69 and 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. There are no monies currently owed to Mr. Hegener. All monies owed were repaid in December 1999. We do not currently believe Chemotrade will meet the net earnings level required under the acquisition agreement for Chemotrade that would trigger additional purchase consideration. 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 May 10, 2001, there were outstanding 8,973,788 shares of common stock and 963,666 shares of Series A convertible preferred stock, together with a probable obligation to issue up to an additional 112,500 shares to the accredited investors in the December 2000 private placement if our common stock does not maintain a price of $2.00 per share following the date of this prospectus. options issued pursuant to our employee benefit plans to purchase a total of 922,852 shares, and warrants to purchase a total of approximately 5,000,000 shares of common stock. As a result of those securities and other securities issuable or reserved for issuance, Isonics only has approximately 1,471,000 unreserved shares available for issuance. This does not include 3,130,435 shares conditionally issued in the name of Eagle-Picher pursuant to an exercise of a warrant to purchase 4,000,000 shares that we have subsequently canceled effective February 20, 2001, since Eagle-Picher failed to deliver 200 kilograms of silicon-28 meeting specifications to us by December 31, 2000. SEE "BUSINESS." Our board of directors does not believe that this total of authorized, unissued, and unreserved shares is adequate to implement our long-term business strategies. Therefore, the board of directors intends to propose a substantial increase in our authorized capital for consideration by our shareholders at our next shareholders' meeting tentatively scheduled for October 2001. We may not be able to obtain approval of an increase in our authorized capitalization from our shareholders at the meeting when held. 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. 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 from assets legally available at such times and in such amounts as the Board of Directors may from time to time determine. 70 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. Generally, a "listed company" is a company that is traded on the NYSE, AMEX or NASDAQ-NMS. 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 Isonics' liquidation, dissolution or winding up, the remaining assets legally available for distribution to shareholders, after payment of claims or creditors and payment of liquidation preferences, if any, on outstanding preferred stock, are distributable ratably among the holders of the common stock and any participating preferred stock outstanding at that time. Each outstanding share of common stock is fully paid and nonassessable. PREFERRED STOCK The Board of Directors is authorized, subject to any limitations prescribed by California law, to provide for the issuance of shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the rights, preferences and privileges of the shares of each unissued series and any qualifications, limitations or restrictions thereon, and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding), without any further vote or action by the shareholders. The Board of Directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of common 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 convertible preferred stock. This preferred stock may be converted at any time prior to redemption 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 price is subject to standard dilution adjustments such as stock splits or stock dividends. The conversion price is also subject to adjustment if we sell shares of our common stock at less than $1.50 per share or if we sell any securities convertible into or exercisable for common stock if the price per share of conversion or exercise is less than $1.50. The Series A convertible preferred stock is entitled to receive dividends on a share-for-share basis with the shares of common stock. 71 SUMMARY OF DIFFERENCES BETWEEN THE CLASS A, CLASS B AND CLASS C WARRANTS
CLASS A WARRANTS CLASS B WARRANTS CLASS C WARRANTS (ISSUABLE ONLY UPON THE EXERCISE OF CLASS B WARRANTS) 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 Each person exercising a Class Each person exercising a A warrant will receive one B warrant will receive one Class C warrant will receive share of common stock and one share of common stock and one one share of common stock Class C warrant if exercised Class C warrant before 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 warrants at a price of $0.10 warrants at a price of $0.10 per warrant on not less than per warrant, on or after May 1, per warrant on not less than 30 days' prior written notice 2001, on not less than 30 days' 30 days' prior written notice if the average price of the prior written notice if our if our common stock trades at common stock has been at least common stock trades at or above or above $3.75 per share $14.50 per share (subject to $3.75 per share (subject to (subject to adjustment) for adjustment) for at least 20 adjustment) for any 20 of 30 any 20 of 30 consecutive consecutive trading days consecutive trading days ending trading days ending not more ending within three days prior not more than three days before than three days before the to the date on which notice of the notice of redemption is notice of redemption is redemption is given. deposited in the United States deposited in the 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 subject to similar dilution subject to similar dilution is subject to adjustment in a adjustment provisions adjustment provisions number of circumstances Ability to Trade The Class A warrants have A public market may develop for A public market may develop historically traded on the the Class B warrants. There for the Class C warrants. Over-the-Counter Bulletin can be no assurance that a There can be no assurance that Board, and on the Nasdaq market for the Class B warrants a market for the Class C SmallCap Market since July will develop or, if it warrants will develop or, if it 2000. There can be no develops, will continue. We develops, will continue. We assurance that the market have applied for trading on the have applied for trading on will continue. Nasdaq SmallCap Market. the Nasdaq SmallCap Market. Registration The Class A warrants are The Class B warrants are The Class C warrants are also registered under the registered under the 1934 registered under the 1934 Act. Securities Exchange Act of Act. 1934, as amended. 72 Warrant holders are not Holders of Class A warrants Holders of Class B warrants are Holders of Class C warrants shareholders are not considered to be not considered to be Shareholders are not considered to be Shareholders of Isonics, and of Isonics, and do not have the Shareholders of Isonics, and do not have the right to vote right to vote at shareholders' do not have the right to vote at shareholders' meetings or meetings or to receive dividends at shareholders' meetings or to receive dividends when and when and if declared. to receive dividends when and if declared. if declared.
THE DILUTION PROVISIONS FOR THE CLASS A, CLASS B AND CLASS C WARRANTS PROVIDE THAT THE NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE AND THE EXERCISE PRICE ARE SUBJECT TO ADJUSTMENT IN THE EVENT OF STOCK SPLITS, STOCK DIVIDENDS, REORGANIZATION OR RECLASSIFICATION, MERGER OR CONSOLIDATION If we fail to effect an maintain registration of the securities covered by this Registration Statement by June 12, 2001, the exercise price of the Class B warrants will be significantly reduced to $0.75 pursuant to the terms in the Subscription Agreement. If the exercise price of the Class B warrants is reduced to $0.75, the holders of the Class B warrant would be more likely to exercise their warrants, and this could potentially have a dilutive effect on the value of our common stock. 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. After April 30, 2001, upon exercise, the warrant holder would receive one Class A redeemable common stock warrant and one share of common stock. After September 21, 2001, upon exercise, the warrant holder would receive one share of common stock. 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, 2,500 Class C warrants have been issued and only 1,305,110 Class B warrants have been issued, of which 675,000 are restricted and only 630,110 are 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 73 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.
QUARTER ENDED ------------- JULY 31, 2000 OCT. 31, 2000 JAN. 31, 2001 APR. 30, 2001 ------------- ------------- ------------- ------------- Common Stock (ISON) High 7.0625 4.0000 2.6250 1.6250 Low 3.3750 1.4375 1.0625 0.8125 QUARTER ENDED ------------- JULY 31, 1999 OCT. 31, 1999 JAN. 31, 2000 APR. 30, 2000 ------------- ------------- ------------- ------------- Common Stock (ISON) High 3.6250 2.1250 10.5000 17.9375 Low 1.8750 0.8750 1.2500 5.5625 QUARTER ENDED ------------- JULY 31, 1998 OCT. 31, 1998 JAN. 31, 1999 APR. 30, 1999 ------------- ------------- ------------- ------------- Common Stock (ISON) High 2.7188 1.9063 2.0000 3.5625 Low 1.6563 1.0313 0.7813 1.4375
As of May 10, 2001, there were approximately 740 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, we do not anticipate paying 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 decline if substantial amounts of shares are sold in the public market or if the market perceives that such sales could occur. A decline in the market price could adversely affect holders of the stock and could also harm our ability to raise capital through equity 74 securities sales. The securities that may be sold from time to time under this prospectus represent a market overhang. As of April 30, 2001, we had outstanding options and warrants for the purchase of up to approximately 5,000,000 shares of common stock at an average price of approximately $2.78 per share, representing approximately 36.0% of our outstanding shares of common stock on a fully-diluted basis. Additionally, we have 963,666 shares of Series A convertible preferred stock outstanding convertible to 963,666 shares of our common stock. The sum of these convertible securities represents approximately 43% 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 could then 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 the accredited investors who purchased in December 2000 the private placement 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. Virtually all of the common stock underlying the convertible securities outstanding at that time were registered effective October 10, 2000. Awareness of the existence of these registration rights could lead to a perception that sales of the shares subject to the registration rights could occur, which could materially and adversely affect our stock price or could impair our ability to obtain capital through sales of equity securities. In addition, shares we have issued in private transactions over the past two years will become eligible for sale in the public market under SEC Rule 144. Some of the shares underlying options and warrants 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, restricted shares that do not exceed the greater of: (i) 1% of the then outstanding shares of common stock; and (ii) an amount equal to the average weekly trading volume in the common stock during the four calendar weeks preceding the sale. SECURITIES AND EXCHANGE COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Isonics' Articles of Incorporation require it to indemnify its officers, directors, employees and agents against liabilities incurred by them in those capacities if they acted in good faith and reasonably believed their conduct was consistent with Isonics' best interests. 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. 75 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 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., Greenwood Village, 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. You may read and copy any document we have filed with the SEC in its public reference room at 450 Fifth Street N.W. Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-432-0330. The SEC maintains a World Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding companies, including those that Isonics files electronically with the SEC. We also furnish Annual Reports to our shareholders that contain audited financial information. This prospectus is part of a registration statement we have filed with the SEC relating to this exchange offer and our common stock described in this prospectus. As permitted by the SEC rules, this prospectus does not contain all of the information contained in the registration statement, accompanying exhibits and schedules we file with the SEC. You may refer to the registration statement, 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. 76 ISONICS CORPORATION AND SUBSIDIARIES Index to Consolidated Financial Statements
PAGE ---- Report of Independent Certified Public Accountants F-2 Consolidated Financial Statements for the Years Ended April 30, 2000 and 1999 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 through F-16 Condensed Consolidated Financial Statements for the Nine Months Ended January 31, 2001 and 2000 Condensed Consolidated Balance Sheets F-17 Condensed Consolidated Statements of Operations F-18 Condensed Consolidated Statements of Cash Flows F-19 Notes to Condensed Consolidated Financial Statements F-20 through F-22
Financial Statements to be inserted. 77 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 provision covers 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 Isonics' bylaws 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. 78 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 Isonics' directors, officers, or employees 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. We are not aware of any litigation or threatened litigation or other proceeding involving an Isonics' director, officer or employee pursuant to which an individual is seeking indemnification. Section 317 of the California Code and the Bylaws of Isonics provide for the indemnification of officers, directors and other corporate agents in terms sufficiently broad to indemnify such persons, under certain circumstances, for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. 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:
DOCUMENT EXHIBIT NUMBER - -------- -------------- Underwriting Agreement............................................................... 1.01 Registrant's Certificate of Incorporation............................................ 3.01 Registrant's Bylaws.................................................................. 3.02 Form of Indemnity Agreement.......................................................... 10.09
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. The Selling Shareholders will pay only those expenses directly related to the transfer of their securities. All amounts are estimates except for the Securities and Exchange Commission registration fee and the NASD filing fee. 79 Securities and Exchange Commission registration fee.................................. $1,125 NASD filing fee...................................................................... 0 Accounting fees and expenses......................................................... 20,000 Legal fees and expenses.............................................................. 25,000 Printing fees and expenses........................................................... 10,000 Blue-sky fees and expenses........................................................... 8,000 Transfer agent and registrar fees and expenses....................................... 5,000 Miscellaneous........................................................................ Fees to be paid by Selling Security Holders.......................................... Fees to be paid by Isonics........................................................... Total................................................................................ $69,125
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. Although this plan has been terminated, 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. 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. 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. 80 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. Shareholders approved it in October 1998. As of May 10, 2001, options to purchase a total of 294,583 shares, 269,500 shares, and 358,769 shares respectively, were outstanding under the Executives' Plan, Employees' Plan, and 1996 Stock Option Plan, and options to purchase 705,417, 230,500, 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. (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 as additional compensation or in the form of bonuses. (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, and no advertising or public solicitation was involved in any of the transactions. (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. This sale 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 ten 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 81 not involving a public offering and for transactions with accredited investors only. No advertising or public solicitation was involved in these transactions. (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. This sale occurred on December 1, 1999. The securities sold consists of one restricted warrant (a warrant to purchase 4,000,000 shares of restricted common stock issued at an exercise price of $3.75 per share). (b) UNDERWRITERS AND OTHER PURCHASERS. No underwriters, agents, or placement agents participated in the private placement. (c) PURCHASE PRICE. The warrant was issued to a single accredited investor as consideration for the purchase of 200 kilograms of silicon-28 pursuant to an Asset Purchase Agreement executed between Isonics and Eagle-Picher Technologies, LLC, an accredited investor. The warrant and underlying shares were subsequently cancelled. (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. No advertising or public solicitation was involved in these transactions. (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 resulted in Eagle-Picher acquiring 3,130,435 shares of our common stock. We have subsequently canceled the shares because of Eagle-Picher's failure to deliver 200 kilograms of silicon-28 to us. 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. This sale of securities occurred on July 29, 1999. The securities sold include: 82 (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; (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; (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; (iii) 330,000 Units were issued to accredited investors in settlement of debt obligations; and (iv) 500,000 warrants were issued to a single accredited investor as compensation pursuant to an investment banking agreement. (c) CONSIDERATION RECEIVED. The Units were sold for a purchase price of $1.50 per Unit. 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. No advertising or public solicitation was involved in any of the transactions. (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. 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. 83 (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. No advertising or public solicitation was involved in any of the transactions. (e) TERMS OF CONVERSION OR EXERCISE. Not applicable. (f) USE OF PROCEEDS. Not applicable. JUNE 1998 INTERPRO ACQUISITION (a) SECURITIES SOLD. 353,982 shares of common stock. (b) NAMES OF PRINCIPAL UNDERWRITERS. None. (c) CONSIDERATION RECEIVED. The shares issued were partial consideration for Isonics' acquisition of all of the outstanding shares of International Process Research Corporation ("Interpro"), which does business as Colorado Minerals Research Institute, and which is a contract research and development, and materials processing company located in Golden, Colorado. A single corporate 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). No advertising or public solicitation was involved in any of the transactions. (e) TERMS OF CONVERSION OR EXERCISE. Not applicable. (f) USE OF PROCEEDS. Not applicable. 84 ITEM 27 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits Pursuant to Item 601 of Regulation S-B:
EXHIBIT NUMBER TITLE - ------- ----- 1.01 Form of Underwriting Agreement. (1) 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. (8) 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. Previously filed. 10.01 Registrant's 1996 Stock Option Plan. (1)(2) 10.02 Form of Employment Agreement between the Registrant and certain officers of the Registrant. (1)(2) 10.03 Registrant's 1996 Executives Equity Incentive Plan. (1)(2) 10.04 Registrant's 1996 Equity Incentive Plan. (1)(2) 10.05 Memorandum of Agreement between Electrochemical Plant, AO Techsnabexport, Co., Ltd. and Registrant. (1) 10.06 Option Agreement between the Registrant and Yale University. (1) 10.07 Office Lease Agreement between Paulsen Properties and the Registrant dated as of January 1, 1996, as amended. (1) 10.08 Letter from Yale University to Registrant dated February 10, 1996. (1) 10.09 Form of Indemnity Agreement entered into by Registrant with each of its directors and investors. (2) 10.10 Stock Purchase Agreement, dated as of April 30, 1998, among Isonics Corporation, a California corporation, Metallurgy International, Inc., a Nevada corporation, and International Process Research Corporation, a Colorado corporation. (3) 10.10.1 Escrow Agreement, dated as of May 15, 1998, among Isonics Corporation, a California corporation, Metallurgy International, Inc., a Nevada corporation, Robert H. Cuttriss (as Agent), and Colorado Business Bank, as Escrow Agent. (3) 10.11 Registration Rights Agreement dated as of September 27, 1996 by and between Registrant and certain investors. (1) 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. 85 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 Transfer and Trust Company, Inc. (8) 10.28 Stock Purchase Agreement dated February 1, 2001, by and between Isonics Corporation and Interpro Zinc, LLC. (9) 10.29 Joint R&D Project Agreement, dated April 21, 1999, by and between Silex Systems Limited and Isonics Corporation. Filed herewith. 10.30 Contribution to "Corporate Research - ECE/Baliga" fund dated December 30, 1999, from Isonics Corporation to North Carolina State University. Filed herewith. 10.31 Sponsored Research Agreement, dated December 15, 1999, by and between Isonics Corporation and Southern Methodist University. Filed herewith. 10.32 Stevenson-Wydler Cooperative Research and Development Agreement, dated November 9, 1999, by and between Ernest Orlando Lawrence Berkeley National Laboratory and Isonics Corporation (with attached Project Letter Agreement). Filed herewith. 10.33 Memorandum of Agreement, dated July 1996, by and among Electrochemical Plant, AO Techsnabexport Co., Ltd. and A & R Materials, Inc. Filed herewith. 23.10 Consent of independent accountants. Filed herewith. 23.11 Consent of Arter & Hadden, LLP (see exhibit 5.01). Previously filed. 24.01 Power of Attorney. Previously filed.
- ------------------ (1) Incorporated herein by reference to exhibit filed with Isonics' Registration Statement on Form SB-2 ("Registration Statement") (Commission file No. 333-13289) in which this exhibit bears the same number except exhibit 3.01, which was numbered 3.03 in that registration statement. (2) Items that are management contracts or compensatory plans or arrangements required to be filed as exhibits pursuant to Item 13(a) of Form 10-KSB. (3) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531), dated May 15 and filed May 27, 1998, and incorporated herein by reference. (4) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531), dated July 29 and filed August 12, 1999, and incorporated herein by reference. (5) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531) dated December 1, 1999, and filed December 10, 1999, and amendment thereto filed February 10, 2000, and incorporated herein by reference. (6) Confidential treatment obtained. 86 (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. (8) Filed with Isonics' registration statement on Form S-4 (File No. 333-37696) or the amendments thereto, and incorporated herein by reference. (9) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531) dated February 1, 2001, and incorporated herein by reference. 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 relative to alleged securities act violations (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, the Registrant will submit to a court of appropriate jurisdiction the question of whether such indemnification is against public policy and will be governed by the final adjudication of such issue. 87 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 May 29, 2001. ISONICS CORPORATION By: /s/ James E. Alexander ------------------------ James E. Alexander, PRESIDENT 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.
/s/ James E. Alexander President, Chief Executive Officer, Chief May 29, 2001 - ---------------------- Operating Officer, Principal Accounting James E. Alexander Officer and Director and as Attorney-in- fact for Boris Rubizhevsky, Lindsay A. Gardner, Richard L. Parker and Larry J. Wells (all directors)
88 ISONICS CORPORATION AND SUBSIDIARIES Index to Consolidated Financial Statements
PAGE ---- Report of Independent Certified Public Accountants F-2 Consolidated Financial Statements for the Years Ended April 30, 2000 and 1999 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 Nine Months Ended January 31, 2001 and 2000 Condensed Consolidated Balance Sheets F-17 Condensed Consolidated Statements of Operations F-18 Condensed Consolidated Statements of Cash Flows F-19 Notes to Condensed Consolidated Financial Statements F-20
F-1 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 ISONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
APRIL 30, --------------------- 2000 1999 ------- ------- 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 ======= =======
See Notes to Consolidated Financial Statements. F-3 ISONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED APRIL 30, ----------------------- 2000 1999 -------- -------- 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
See Notes to Consolidated Financial Statements. F-4 Isonics Corporation and Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands, except share amounts)
PREFERRED STOCK COMMON STOCK SHAREHOLDER ------------------ -------------------- NOTES DEFERRED (ACCUMULATED SHARES AMOUNT SHARES AMOUNT RECEIVABLE COMPENSATION DEFICIT) TOTAL --------- ------ ---------- ------ ----------- ------------ ------------ ------- BALANCES, May 1, 1998 ......... -- $ -- 5,714,250 $5,289 $ (337) $ -- $ (1,511) $3,441 Issuance of common stock for Chemotrade acquisition ................... -- -- 357,730 894 -- -- -- 894 Issuance of common stock in lieu of salaries ........... -- -- 118,182 130 -- -- -- 130 Conversion of debt into common stock .................. -- -- 127,209 191 -- -- -- 191 Exercise of stock options and warrants .................. -- -- 290,389 147 (130) -- -- 17 Fair value of warrants issued with debt .............. -- -- -- 144 -- -- -- 144 Interest on notes receivable from stockholders, net of repayments .................... -- -- -- -- (2) -- -- (2) Net loss ...................... -- -- -- -- -- -- (2,521) 2,521) --------- ------ ---------- ------ ------- -------- ---------- ------ BALANCES, April 30, 1999 ...... -- -- 6,607,760 6,795 (469) -- (4,032) 2,294 Issuance of preferred stock ... 1,830,000 2,745 -- -- -- -- -- 2,745 Exercise of stock options and warrants .................. -- -- 3,918,986 81 -- -- -- 81 Fair value of warrants issued for debt restructuring ................. -- -- -- 157 -- -- -- 157 Fair value of stock issued for services as deferred compensation ......... -- -- 25,000 153 -- (153) -- -- Amortization of deferred compensation .................. -- -- -- -- -- 3 -- 3 Shares issued under Employee Stock Purchase Program ....................... -- -- 13,723 13 -- -- -- 13 Repayment of notes receivable from stockholders, net of interest ...................... -- -- -- -- 34 -- -- 34 Repayment of notes receivable and accrued interest with common stock ......................... -- -- (72,538) (435) 435 -- -- -- Net income .................... -- -- -- -- -- -- 2,689 2,689 --------- ------ ---------- ------ ------- -------- ---------- ------ BALANCES, April 30, 2000 ...... 1,830,000 $2,745 10,492,931 $6,764 $ -- $ (150) $ (1,343) $8,016 ========= ====== ========== ====== ======= ======== ========== ======
See Notes to Consolidated Financial Statements. F-5 Isonics Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
YEAR ENDED APRIL 30, --------------------- 2000 1999 ------- ------- 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 ======= =======
See Notes to Consolidated Financial Statements. F-6 Isonics Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Isonics Corporation develops and markets 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. 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. Performing ongoing credit evaluations of our customers' financial condition mitigates credit risk and we generally do not require collateral. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. We perform periodic assessments to determine the existence of obsolete, slow moving and non-salable inventories, and record provisions to reduce such inventories to net realizable value when necessary. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using the straight-line method over three-to-seven years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the lease term. GOODWILL Goodwill resulted from the acquisitions of Isoserve, Inc. and Chemotrade. We evaluate goodwill for impairment by comparing the unamortized balance of goodwill to the undiscounted future cash flows of the related assets. We modify or adjust goodwill if impairment is indicated. Based upon our most recent evaluation, we believe that no impairment of goodwill exists as of April 30, 2000; however, with the sale of the depleted zinc business to Eagle-Picher on December 1, 1999, unamortized goodwill of $112,000 related to the Isoserve, Inc. acquisition was charged against the gain on the sale of the product line. The goodwill resulting from the Chemotrade acquisition is being amortized on a straight-line basis over twenty years. 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. F-7 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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):
YEAR ENDED APRIL 30, -------------------- 2000 1999 ------ ------ 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 ====== =====
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):
APRIL 30, -------------- 2000 1999 ---- ---- Finished goods .......... $139 $420 Work in process ......... 127 -- Raw materials ........... -- 231 ---- ---- $266 $651 ==== ====
F-8 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Property and equipment consists of the following (in thousands):
APRIL 30, --------------------- 2000 1999 ------- ------- 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 ======= =======
Goodwill related to acquisitions consists of the following (in thousands):
APRIL 30, ------------------ 2000 1999 ------ ------ 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 ====== ======
Accrued liabilities consist of the following (in thousands):
APRIL 30, -------------------- 2000 1999 -------- -------- Compensation ...................... $ 68 $ 391 Interest .......................... -- 68 Customer advances and deposits .... 194 97 Restructuring costs ............... 47 61 Other ............................. 282 419 ------ ------ $ 591 $1,036 ====== ======
Supplemental disclosure of non-cash investing and financing activities (in thousands):
APRIL 30, -------------- 2000 1999 ---- ---- 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 $ --
Supplemental disclosures of cash flow information (in thousands):
APRIL 30, -------------- 2000 1999 ---- ---- Cash paid during the period for: Interest .......................... $388 $475 Income taxes ...................... $433 $227
F-9 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3--ACQUISITIONS On July 21, 1998, we acquired all of the outstanding shares of Chemotrade and a subsidiary, which was owned by two shareholders. Chemotrade is engaged in the distribution, development, and manufacturing of stable and radioisotopes. The purchase was effective June 1, 1998, the date control was transferred, and our financial statements include the results of Chemotrade's operations from June 1, 1998. Pro forma results of operations for 1999 have not been presented as the pro forma amounts would not have been materially different than those reported. The consideration paid for Chemotrade and the allocation of the purchase price consisted of the following (in thousands): Cash ............................................................... $ 546 357,730 shares of common stock issued to sellers ................... 894 Notes payable ...................................................... 1,750 Liabilities assumed ................................................ 1,598 ------ Total consideration ................................................ $4,788 ====== Allocated as follows: Current assets (net book value of $1,311) .......................... $1,311 Fixed assets and other long-term assets (net book value of $92) .... 92 Goodwill ........................................................... 3,385 ------ Total consideration ................................................ $4,788 ======
The first note of $934,000 bore interest at 2% per month and was paid in August 1998, and the second note of $816,000 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 for $8,230,000, including $1,500,000 due in equal installments on November 30, 2000, 2001 and 2002. 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. NOTE 5--INCOME TAXES Deferred tax assets (liabilities) are comprised of the following (in thousands):
APRIL 30, 2000 1999 ------- ------- 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 $ -- ======= =======
F-10 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income tax expense (benefit) consists of the following (in thousands):
APRIL 30, ------------------ 2000 1999 ------ ------ Current Federal ............ $ 640 $ -- State .............. 98 -- Foreign ............ 31 171 ----- ----- 769 171 Deferred Federal ............ (640) -- State .............. -- -- ----- ----- (640) -- ----- ----- $ 129 $ 171 ===== =====
A reconciliation of our effective tax rate to the federal statutory tax rate of 34% follows (in thousands):
APRIL 30, --------------------- 2000 1999 ------- ------- Expected tax (benefit) at federal statutory rate ............ $ 958 $ (799) State taxes net of federal benefit .......................... 98 (104) Foreign income taxed at different rates ..................... (77) 26 Non-deductible expenses ..................................... 67 84 Utilization of previously unrecognized net operating loss and tax credit carryforwards ................................ (115) -- Change in valuation allowance ............................... (802) 1,097 Other ....................................................... -- (133) ------- ------- $ 129 $ 171 ======= =======
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. F-11 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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 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 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, our board of directors adopted the Executive and Incentive Stock Option Plans authorizing the granting of up to 570,000 and 150,000 incentive and nonqualified stock options to our key employees, directors, or consultants. Incentive stock options are granted at a price not less than fair market value, and nonqualified stock options are granted at a price not less than 85% of the fair market value. Options are exercisable when vested, typically over five years, and expire ten years after the date of grant. As of April 30, 2000, options to purchase a total of 488,408 shares were outstanding under the Executive and Incentive Stock Option Plans. EMPLOYEE STOCK PURCHASE PLAN The employee stock purchase plan has reserved 200,000 shares of our common stock for sale to all permanent employees who have met minimum employment criteria. Employees who do not own 5% or more of the outstanding shares are eligible to participate through payroll deductions. At the end of each offering period, shares are purchased by the participants at 85% of the lower of the fair market value of our Common Stock at the beginning or the end of the offering period. As of April 30, 2000, 13,723 shares have been issued under the plan. F-12 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PRO FORMA DISCLOSURE OF COMPENSATION EXPENSE UNDER SFAS NO. 123 The exercise price of options granted generally approximates the fair market value per share of our stock on the date of grant. Accordingly, no compensation cost has been recognized for grants from the plans made to employees or directors. Had compensation cost for grants to employees and directors been determined based on the fair value of the options at the grant dates consistent with SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, our results of operations and per share amounts for the years ended April 30, 2000 and 1999, would have been changed to the pro forma amounts indicated below.
2000 1999 ----------- ------------ 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)
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.
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE --------- -------- 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 =========
The weighted average fair value of options granted during the years ended April 30, 2000 and 1999 was $5.78 and $1.56, respectively. The following information applies to options outstanding at April 30, 2000:
WEIGHTED WEIGHTED AVERAGE WEIGHTED RANGE OF AVERAGE REMAINING AVERAGE EXERCISE NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE PRICE OUTSTANDING PRICE LIFE (YEARS) EXERCISABLE PRICE - -------------- ----------- -------- ------------ ----------- -------- $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 ========= =======
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. F-13 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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:
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE --------- -------- 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 ==========
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. We have reserved shares of common stock for issuance as follows:
APRIL 30, 2000 --------- 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 =========
F-14 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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):
2000 1999 -------- -------- 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
A summary of our operations by geographic area is presented below (in thousands):
2000 1999 -------- -------- 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
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. 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):
YEAR ENDING APRIL 30, 2001.................. $ 163 2002.................. 40 2003.................. 16 2004.................. 8 -- ----- $ 227 =====
F-15 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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-16 ISONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS
(UNAUDITED) JANUARY 31, 2001 ---------------- CURRENT ASSETS: Cash and cash equivalents ................................... $ 741 Accounts receivable (Net of allowance of $287) .............. 1,231 Income taxes receivable ..................................... 566 Inventories ................................................. 83 Prepaid expenses and other current assets ................... 84 Deferred income taxes, current .............................. 419 ------- Total current assets ........................................ 3,124 ------- LONG-TERM ASSETS Property and equipment, net ................................. 216 Goodwill, net ............................................... 2,935 Other assets ................................................ 164 ------- Total long-term assets ...................................... 3,315 ------- TOTAL ASSETS ................................................ $ 6,439 ======= CURRENT LIABILITIES: Notes payable and line of credit ............................ $ 18 Accounts payable ............................................ 730 Accrued liabilities ......................................... 769 Income taxes payable ........................................ 6 ------- Total current liabilities ................................... 1,523 ------- SHAREHOLDERS' EQUITY: Class A Preferred Stock--no par value. 10,000,000 shares authorized; 980,333 shares issued and outstanding ........... 1,471 Common stock--no par value. 20,000,000 shares authorized; 12,075,056 shares issued and outstanding .................... 9,113 Deferred compensation ....................................... (93) Accumulated deficit ......................................... (5,575) ------- Total shareholders' equity .................................. 4,916 ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................. $ 6,439 =======
See notes to condensed consolidated financial statements. F-17 ISONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
NINE MONTHS ENDED JANUARY 31, ----------------------- 2001 2000 -------- -------- Net revenues ............................................. $ 6,323 $ 11,115 Cost of revenues ......................................... 5,112 8,792 -------- -------- Gross margin ............................................. 1,211 2,323 Operating expenses: Selling, general and administrative ...................... 3,968 3,117 Research and development ................................. 1,018 919 Restructuring and office closure ......................... (11) 60 -------- -------- Total operating expenses ................................. 4,975 4,096 -------- -------- Operating loss ........................................... (3,764) (1,773) -------- -------- Other income (expense): Foreign exchange ......................................... 87 (64) Interest expense ......................................... (29) (325) Gain (loss) on sale of depleted zinc business ............ (208) 5,255 Interest income and other, net ........................... (318) 96 -------- -------- Total other income (expense), net ........................ (468) 4,962 -------- -------- Loss before income taxes ................................. (4,232) 3,189 Income tax expense (benefit) ............................. -- 471 -------- -------- NET INCOME (LOSS) ........................................ $ (4,232) $ 2,718 ======== ======== NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS .... $ (5,385) $ 2,718 ======== ======== NET INCOME (LOSS) PER SHARE--BASIC Net income (loss) per share .............................. $ (0.66) $ 0.41 Shares used in computing basic per share information ..... 8,098 6,610 NET INCOME (LOSS) PER SHARE--DILUTED Net income (loss) per share .............................. $ (0.66) $ 0.31 Shares used in computing diluted per share information ... 8,098 8,906
See notes to condensed consolidated financial statements. F-18 ISONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED JANUARY 31, --------------------- 2001 2000 ------- ------- Net cash used in operating activities ........................................... $(3,505) $(2,904) CASH FLOWS FROM INVESTING ACTIVITIES: Sale of depleted zinc business .................................................. 6,730 Purchases of property and equipment ............................................. (35) (20) ------- ------- Cash provided by (used in) investing activities ................................. (35) 6,710 CASH FLOWS FROM FINANCING ACTIVITIES: Net change in line of credit .................................................... -- (513) Proceeds from issuance of notes payable ......................................... -- 75 Repayments of notes payable ..................................................... (3) (1,494) Proceeds from issuance of common stock .......................................... 899 -- Proceeds from issuance of Class A Preferred Stock ............................... -- 2,250 ------- ------- Cash provided by financing activities ........................................... 896 318 ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: ........................... (2,644) 4,124 Cash and cash equivalents at beginning of period ................................ 3,385 452 ------- ------- Cash and cash equivalents at end of period ...................................... $ 741 $ 4,576 ======= ======= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest ........................................................................ $ 1 $ 252 Income taxes .................................................................... $ -- $ 53 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 .......................... -- 245 Class A Preferred Stock converted into Common Stock ............................. 1,275 -- Common Stock issued for patent rights ........................................... 131 -- Retirement of Common Stock by shareholders to pay off subscriptions ................................................................... 275
See notes to condensed consolidated financial statements. F-19 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The accompanying condensed consolidated financial statements of Isonics Corporation and Subsidiaries as of January 31, 2001, and for the nine months ended January 31, 2001, and 2000, 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. NET INCOME (LOSS) PER SHARE Net income (loss) per share is based on the weighted average number of common shares and potentially dilutive securities outstanding during the period. Potentially dilutive securities consist of the incremental common shares issuable upon conversion of preferred stock (using the "if converted" method) and shares issuable upon the exercise of stock options and warrants (using the "treasury stock" method). Potentially dilutive securities are excluded from the computation of net income (loss) per share if their effect is anti-dilutive. As of January 31, 2000, a total of approximately 1,513,000 outstanding stock options and warrants were excluded from the diluted net income per share calculation, as their inclusion would have been anti-dilutive and 4,000,000 warrants were excluded from the calculation, as the issuance of these warrants was contingent upon the delivery of silicon-28 per the terms of our agreement with the Eagle-Picher. As of January 31, 2001, a total of 5,742,947 outstanding stock options and warrants, and 980,333 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 and 3,130,435 shares of Common Stock were excluded as the issuance of this Common Stock is contingent upon the delivery of silicon-28 per the terms of our agreement with Eagle-Picher. On November 16, 2000, the Emerging Issues Task Force issued EITF 00-27, "Application of EITF Issue 98-5, `Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,' to Certain Convertible Instruments." Issue 1 of EITF 00-27 requires the use of an effective conversion price in determining the value of a conversion feature contained in a convertible equity instrument. The consensus opinion for this issue is retroactive for instruments issued after May 20, 1999 and is to be applied in the quarter that includes November 16, 2000. In July 1999, we issued 1,830,000 units consisting of one share of preferred stock and one warrant to purchase a share of our common stock. In applying the requirements of EITF 00-27, we determined the value of the conversion feature contained in our preferred stock to be $1,152,900. Accordingly, we recognized a deemed dividend in the nine-month period ended January 31, 2001 for value of this conversion feature. The following table reconciles the amounts used in the per share computations (in thousands):
2001 2000 -------- -------- Numerator Net income (loss) .................................................. $ (4,232) $ 2,718 Deemed dividend attributable to preferred stock issued July 1999 ... (1,153) -- -------- -------- Net income (loss) attributable to common shareholders .............. $ (5,385) $ 2,718 ======== ======== Denominator Weighted average shares of common stock outstanding ................ 11,228 6,610 Less: weighted average shares contingently issued .................. (3,130) -- Shares used for net income (loss) per share - basic ................ 8,098 6,610 Dilutive effect of stock options and warrants ...................... -- 466 Dilutive effect of convertible preferred stock ..................... -- 1,830 -------- -------- Shares used for net income (loss) per share - diluted .............. 8,098 8,906 ======== ========
F-20 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During the nine month period ended January 31, 2001, we issued the following shares of Common Stock:
DESCRIPTION NUMBER OF COMMON STOCK SHARES ----------------------------- Balance as of April 30, 2000.......................................... 10,492,931 Exercise of options for cash.......................................... 202,412 Conversion of Class A Preferred Stock................................. 849,667 Issuance for services................................................. 4,000 Surrender of Warrants for Common Stock................................ 99,332 Issuance for patent rights............................................ 75,000 Private placement for cash............................................ 337,500 ESPP issuances........................................................ 14,214 ---------- Balance as of January 31, 2001........................................ 12,075,056 ==========
On February 20, 2001, we canceled the 3,130,435 shares of Common Stock issued to Eagle-Picher as described in the paragraph titled "SALE OF DEPLETED ZINC BUSINESS--DISPUTES WITH EAGLE-PICHER," under "MANAGEMENT'S DISCUSSION AND ANALYSIS." As of February 26, 2001, we had 8,961,288 shares of our Common Stock outstanding. INVENTORIES Inventories consist of (in thousands):
JANUARY 31, 2001 ---------------- Finished goods........................................................ $ 83 Work in progress...................................................... -- ---- Total inventories..................................................... $ 83 ====
SIGNIFICANT CUSTOMERS At January 31, 2001, five customers accounted for 85.6% of total net accounts receivable. Three of these customers, plus two others, accounted for approximately 40.7% of net revenues during the nine months ended January 31, 2001. A different customer accounted for approximately 10% of net revenues during the nine months ended January 31, 2000. SEGMENT INFORMATION (IN THOUSANDS)
NINE MONTHS ENDED JANUARY 31, ----------------------- 2001 2000 -------- -------- Segment revenues: Isotope products ....................................... $ 6,323 $ 10,098 Contract research and development services and other ... -- 1,017 -------- -------- Total .................................................. $ 6,323 $ 11,115 ======== ======== Segment operating (loss) income: Isotope products ....................................... $ (3,764) $ (1,387) Contract research and development services and other ... -- (386) -------- -------- Total .................................................. $ (3,764) $ (1,773) ======== ========
JANUARY 31, 2001 ---------------- Total Assets: Isotope products ....................................... $6,209 Contract research and development services and other ... 230 ------ Total .................................................. $6,439 ======
F-21 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A summary of operations by geographic area is as follows:
NINE MONTHS ENDED JANUARY 31, ----------------------- 2001 2000 -------- -------- Net revenues: United States .............. $ 1,947 $ 3,904 Germany .................... 4,376 7,211 -------- -------- Total ...................... $ 6,323 $ 11,115 ======== ======== Operating (loss) income: United States .............. $ (3,639) $ (1,982) Germany .................... (125) 209 -------- -------- Total ...................... $ (3,764) $ (1,773) ======== ========
JANUARY 31, 2001 ---------------- Total Assets: United States ........... $4,746 Germany ................. 1,693 ------ Total ................... $6,439 ======
F-22 EX-10.29 2 a2050556zex-10_29.txt EXHIBIT 10.29 EXHIBIT 10.29 SILEX SYSTEMS LIMITED AND ISONICS CORPORATION JOINT R&D PROJECT AGREEMENT ANDERSEN LEGAL Lawyers A member firm of Andersen Worldwide SC Level 12 141 Walker Street North Sydney NSW 2060 Tel: +61 2 9964 6600 Fax: +612 9964 6650 DX 1085 Sydney Ref: CGC:SIL063/07 TABLE OF CONTENTS
CLAUSE Page No 1. DEFINITIONS AND INTERPRETATION............................................. 1 1.1 DEFINITIONS........................................................... 1 1.2 INTERPRETATION........................................................ 4 1.3 SCHEDULES............................................................. 4 2. THE PROGRAM................................................................ 4 2.1 PURPOSE............................................................... 4 2.2 SCOPE OF PROGRAM...................................................... 4 2.3 AMENDMENT TO SCOPE OF PROGRAM......................................... 5 2.4 THIRD PARTY RESEARCHERS............................................... 5 2.5 INTERIM REPORTING..................................................... 5 2.6 FINAL REPORT.......................................................... 6 3. PROVISION OF INFORMATION AND INSPECTIONS................................... 6 3.1 PROVISION OF INFORMATION BY ISONICS................................... 6 3.2 PROVISION OF INFORMATION BY SILEX..................................... 7 3.3 CONTINUING OBLIGATIONS................................................ 7 3.4 FULL ACCESS........................................................... 7 3.5 INSPECTIONS AND DISCUSSIONS........................................... 8 4. FUNDING.................................................................... 8 4.1 ALLOCATION OF FUNDING................................................. 8 4.2 RIGHT TO INSPECT BOOKS................................................ 9 4.3 THIRD PARTY FUNDING................................................... 9 4.4 REFUND TO SILEX....................................................... 10 5. INTELLECTUAL PROPERTY RIGHTS AND MATERIALS................................. 10 5.1 OWNERSHIP............................................................. 10 5.2 THE TECHNOLOGY OF EACH PARTY.......................................... 10 5.3 THE YALE PATENTS...................................................... 11 6. CONFIDENTIALITY............................................................ 11 6.1 CONFIDENTIALLY OBLIGATIONS............................................ 11 6.2 PUBLIC ANNOUNCEMENTS.................................................. 11 6.3 DISCLOSURE REQUIRED BY LAW............................................ 11 7. FUTURE CONDUCT AND RELATIONSHIP............................................ 12 7.1 FUTURE JOINT EFFORTS.................................................. 12 7.2 RIGHT TO USE RESULTS.................................................. 12 7.3 USE OF EACH PARTY'S NAME.............................................. 12 8. TERM AND TERMINATION....................................................... 13 8.1 TERM.................................................................. 13 8.2 COMMON TERMINATION RIGHTS............................................. 13 8.3 SURVIVAL.............................................................. 14 9. GENERAL.................................................................... 14 9.1 ENTIRE AGREEMENT...................................................... 14
ii 9.2 AMENDMENT............................................................. 14 9.3 WAIVER................................................................ 14 9.4 SEVERANCE............................................................. 14 9.5 GOVERNING LAW......................................................... 14 9.6 ASSIGNMENT............................................................ 15 9.7 FURTHER ASSURANCES.................................................... 15 9.8 COUNTERPARTS.......................................................... 15 9.9 NOTICES............................................................... 15
THIS AGREEMENT is made on 21 April 1999. PARTIES: SILEX SYSTEMS LIMITED (ACN 003 372 067) of 95 Epping Road, North Ryde, NSW 2113 (Silex); and ISONICS CORPORATION of 5906 McIntyre Street, Golden, CO 30403, United States of America (Isonics). RECITALS A. Silex has developed a process with which it seeks to separate isotopes by laser excitation. B. Isonics is a specialty chemical and advanced materials company which develops, commercializes and markets stable and radioisotope-based products. C. The parties have agreed to enter into this research and development agreement to jointly explore the technical and commercial benefits of using isotopically enriched silicon in the manufacture of semi-conductors and/or other electronic components. OPERATIVE PROVISIONS 1. DEFINITIONS AND INTERPRETATION 1.1 Definitions In this agreement, including the recitals, unless the context otherwise requires: Business Day means a day on which the banks are open for the conduct of normal business in Sydney (Australia) and Golden, Colorado (USA) excluding Saturdays, Sundays and public holidays. Confidential Information means any and all information including the Information, engineering or other technical or commercial information or know-how, information concerning Intellectual Property Rights of a party, internal management information and financial information which the parties provide to each other and which: (a) is of a confidential nature; and (b) if disclosed: (i) in writing, is marked as confidential; or (ii) other than in writing, is declared to be confidential at the time of disclosure and summarized in a writing, which writing is: 2 (A) marked as confidential; and (B) sent to the receiving party within one month of disclosure. Confidential Information does not mean or include information which: (c) was previously known to the other party without an obligation of confidentiality; or (d) is or becomes publicly available other than through a breach by the other party of its obligations under this or any other agreement; or (e) is developed by or on behalf of the receiving party independent of any information furnished under this agreement; or (f) is received from a third party whose disclosure does not violate any confidentiality agreement or obligation. Defaulting Party is defined in clause 8.2. Information means all information or know how (including technical and scientific information and know how), whether or not in Material Form and whether or not existing at the date of this agreement, relating to the Program or the subject matter (including contents) of this agreement. Intellectual Property Rights means all registered or unregistered statutory or other proprietary rights in respect of copyright, trade marks, service marks, designs, patents, circuit layout rights, Confidential Information, and any rights to registration of such rights whether created before, on or after the date of this agreement. Investigation means the investigations of the technical and commercial benefits of using isotopically enriched silicon in the manufacture of semi-conductors and/or other electronic components conducted by or on behalf of the parties as part of the Program. Isonics Technology means any technology created or owned by Isonics and relating to the development, commercialization and marketing of stable and radioisotope-based products. Item means each of the following items of research to be undertaken as part of the Program as described in schedule 3: (a) with respect to silicon-28 which is enriched to 99.9% and using thin films: (i) hall mobility as a function of temperature for n and p type silicon thin films (2 Items); (ii) thermal conductivity of undoped silicon thin films at room temperature and liquid nitrogen temperature (2 Items); 3 (iii) basic transistor characteristic of a FET made with a silicon-28 epi wafer (1 Item); (iv) basic transistor characteristics of a FET made with a silicon-28 SOI wafer (1 Item); and (b) with respect to silicon-28 enriched to each of 99.9%, 99.0% and 98.0% and using thick (80 - 100u) films: (i) hall mobility as a function of temperature of n and p type silicon thick films (6 Items); (ii) thermal conductivity of undoped silicon thick films at room temperature and liquid nitrogen temperature (6 Items); and (c) with respect to silicon-28 enriched to 99.0%o and using a bulk single crystal sample obtained from Oak Ridge National Laboratory, thermal conductivity at room temperature and liquid nitrogen temperature (2 Items). Material Form, in relation to Information, includes any form (whether visible or not) of storage from which the Information can be reproduced, and any form in which the Information is embodied or encoded. Notice includes all notices, consents, requests, waivers, demands or other communications by a party to the other party permitted or required by this agreement. Program means the research and development program outlined in schedules 2 and 3. Quarter means the period of three consecutive months commencing on 1 July 1999, 1 October 1999 and 1 January 2000. Report means a detailed, progress report containing the results of the Investigations up to the point in time at which it is prepared. SILEX Technology means the technology for the separation of isotopes by laser excitation which Silex has developed. Technical Information means the physical copies of the Reports, and the data therein which results from the Investigations and the Program. Technical Information does not mean or include: (a) any Intellectual Property Rights of a party; nor (b) any information that was in existence before the date of this agreement. Terminating Party is defined in clause 8.2. Yale Patents means the United States patent numbers 5, 144, 409 and 5, 442,191 registered in the name of Yale University and licensed to Isonics. 4 1.2 Interpretation In this agreement, including the recitals, unless the contrary intention appears: (a) the singular includes the plural and vice versa; (b) a reference to any one of an individual, corporation, partnership, joint venture, association, authority, trust or government includes (as the context requires) any other of them; (c) the table of contents and headings are for convenience only and do not affect interpretation; (d) a reference to $ or dollars is a reference to an amount in the currency of the United States of America; (e) a reference to a recital, clause, schedule or annexure is to a recital, clause (including sub-clause, paragraph, sub-paragraph or further subdivision of a clause), schedule or annexure of or to this agreement, and a reference to a paragraph is to a paragraph in a schedule; and (f) including and similar expressions are not and must not be treated as words of limitation. 1.3 Schedules The schedules form part of this agreement. 2. THE PROGRAM 2.1 Purpose (a) The purpose of the Program is for the parties to jointly explore the technical and commercial benefits of using isotopically enriched materials in the manufacture of semi-conductors and/or other electronic components. (b) Isonics is responsible for, and must undertake or procure the undertaking of, the tasks set forth in schedules 2 and 3. 2.2 Scope of Program The Program will investigate and assess: (a) the scientific and technical benefits of using isotopically enriched silicon in the manufacture of semi-conductors and other electronic components; (b) the potential commercial applications of, and benefits of using, enriched silicon; 5 (c) the potential market for enriched silicon isotopes (including an assessment of the size and existence of such a market); and (d) those parties which are likely to be interested in sourcing enriched silicon and applying it in the conduct of their business, to allow the parties to fully appreciate the feasibility of using isotopically enriched silicon in the manufacture of products and devices. 2.3 Amendment to scope of Program The parties may agree to expand the Program to include an investigation and assessment of the scientific and technical benefits of using isotopically enriched materials other than silicon in: (a) the manufacture of products and devices; and (b) medical diagnostics, imaging and therapy, and drug development. 2.4 Third Party Researchers When engaging a third party (including researchers) to conduct part of, or otherwise participate in, the Investigations: (a) Isonics must use that third party identified in schedule 2 in respect of a particular aspect of the Program, or an equally competent organization to the relevant third party identified in schedule 2; and (b) if the third party engaged is not that person identified in schedule 2, Isonics must promptly notify Silex of the identity of the third party actually engaged. 2.5 Interim Reporting Isonics must: (a) prepare three Reports for Silex, each of which: (i) contains the detailed results of the research and Investigations conducted up to the date of the Report; (ii) details the current status of the Program and the Investigations undertaken by Isonics; (iii) articulates clearly and fully the results of the research conducted into the Items since execution of this agreement or completion of the previous Report (as the case may be) and its interpretation of those results and their implications; 6 (iv) summarizes all relevant Information learnt or obtained by Isonics since execution of this agreement or completion of the previous Report (as the case may be); and (v) is written in English; and (b) deliver one of those Reports to Silex on the 21st day of the month immediately preceding the first month of a Quarter, or on such other dates as the parties may reasonably agree upon (having regard to the progress of the Investigations). 2.6 Final Report On 21 March 2000 or on such other date as Silex may reasonably agree with Isonics (having regard to the likely date of completion of all the Investigations), Isonics must: (a) prepare a detailed final report which: (i) contains the detailed technical results of all research and Investigations conducted during the Program and all other information which a person would reasonably require to allow it to assess: (A) the technical benefits of, and estimated costs resulting from the use of, isotopically enriched silicon in any commercial application; (B) the potential commercial applications of isotopically enriched silicon (and other agreed materials); and (C) the size and scope of the market for isotopically enriched silicon (and other agreed materials) in any commercial application; (ii) clearly and fully articulates the result of all research conducted in respect of the Items and Isonics' interpretation of those results and their implications; and (iii) is written in English; and (b) deliver that report to Silex. 3. PROVISION OF INFORMATION AND INSPECTIONS 3.1 Provision of Information by Isonics Isonics must provide to Silex: (a) a copy of all Information which it has in its possession or which is known to it, other than information restricted by confidentiality agreements, and which is part of the program or the Items under investigation, within the later of: 7 (i) 23 April 1999; and (ii) five Business Days after execution of this agreement; and (iii) five Business Days after receipt of funds by Isonics; (b) a copy of all Information which it receives or which becomes known to it, and which is part of the Program or the Items under investigation. For the avoidance of doubt, Isonics is not required to disclose any information about the Isonics Technology which is not part of the Program or is not generally known. 3.2 Provision of Information by Silex Silex must provide to Isonics: (a) a copy of all Information which it has in its possession or which is known to it, other than information restricted by confidentiality agreements, and which is part of the Program or the Items under investigation, within five Business Days after execution of this agreement; and (b) a copy of all Information which it receives or which becomes known to it, and which is part of the Program or the Items under investigation. For the avoidance of doubt, Silex is not required to disclose any information about the SILEX Technology which is not part of the Program or is not generally known. 3.3 Continuing obligations The parties must provide one another with regular updates on, and keep one another fully informed of, the progress of the Investigations and the Program. 3.4 Full access Subject to: (a) confidentiality obligations each party may have; and (b) the dispensation from providing Confidential Information respectively set forth in clauses 3.1 and 3.2, neither party must do, or omit to do, anything which will or may preclude the other party from obtaining full, complete and unfettered access to Information to which it is entitled under this agreement. 8 3.5 Inspections and discussions (a) Isonics will permit, and will use its reasonable efforts to ensure that any third party who performs services (including research) for it under the Program will permit, Silex (by its authorized representatives) to: (i) attend during normal business hours and on reasonable notice at any of the premises (including laboratories) where any Investigations are being performed; (ii) discuss the progress of those Investigations and related research openly and candidly with the persons (including scientists) who are providing the services (including conducting the research); and (iii) otherwise make contact, and correspond, with those third parties. (b) Any attendances, discussions or contact by Silex pursuant to clause 3.5 (a) will be arranged through Isonics. 4. FUNDING 4.1 Allocation of Funding (a) Silex will provide $200,000 towards the costs of the Program in schedules 2 and 3 and, to that end, Silex must transfer to Isonics by wire transfer: (i) $50,000 upon the signing of this agreement; (ii) $50,000 within five Business Days after receipt by Silex of all of the Information which Isonics is required to provide pursuant to clause 3.1(a); (iii) three further installments of $25,000 each, one of which is payable: (A) on the first day of each Quarter if it receives a Report on the 21st day of the month immediately preceding that Quarter; or (B) five Business Days after receipt of a Report by Silex if the Report is received on another date agreed by the parties as contemplated by clause 2.5(b); and (iv) $25,000 on 1 April 2000 if Silex receives the final report referred to in clause 2.6 on 21 March 2000, or otherwise five Business Days after it receives that final report, and 9 Isonics will fund the balance of the costs of the Program in schedules 2 and 3 unless additional funding is obtained pursuant to clause 4.3. (b) Schedule 4 specifies the dates on which a Report must be provided to Silex and the date for transfer of moneys by wire transfer by Silex if the parties do not agree to amend those dates in accordance with clause 2.5(b). (c) For the avoidance of doubt, the aggregate maximum amount payable by Silex to Isonics in relation to the Program is $200,000 (unless Silex agrees to contribute a higher sum). (d) Silex acknowledges that some of the costs of the Program (including, in particular, the acquisition of certain testing materials) were incurred by Isonics prior to execution of this agreement. (e) On the date of transfer of funds by Silex to Isonics, Silex will fax to Isonics a copy of the document which evidences that the telegraphic transfer has occurred. Isonics acknowledges that there may be a lapse of two or three Business Days between the date of telegraphic transfer of funds by Silex and the date of receipt of those funds by Isonics. 4.2 Right to inspect books Within five Business Days after a request is made by Silex, Isonics must provide to Silex evidence of all of the costs incurred in connection with the Program up to the date of provision of that evidence. 4.3 Third party funding (a) Isonics may accept additional funding towards the cost of the Program from third parties. (b) The provision of funding by a third party pursuant to clause 4.3(a) will not in any way affect Silex' rights under this agreement or in respect of the Program. (c) Within five Business Days after agreeing the terms on which a third party will contribute towards the costs of the Program pursuant to clause 4.3(a), Isonics must notify Silex of: (i) the identity of that third party; and (ii) the basic terms of the arrangement between Isonics and that third party 4.4 Refund to Silex (a) If, at the termination or expiry of this agreement or the Program, Isonics has not: (i) conducted research in respect of an Item; or 10 (ii) reported the results of its research into each Item to Silex (as contemplated by clause 2.5), then Isonics must pay $10,000 to Silex for each Item on which it has not so conducted research or reported. (b) Payment under clause 4.4(a) must be made to Silex within 10 Business Days after the termination or expiry of this agreement or the Program (as the case may be). 5. INTELLECTUAL PROPERTY RIGHTS AND MATERIALS 5.1 Ownership (a) Subject to clause 5.1(b), the parties will own the Technical Information jointly as tenants-in-common. (b) For the avoidance of doubt, the reference to joint ownership of Technical Information set forth in clause 5.1(a) is only to joint ownership of the physical copies of Reports and of the data contained therein. It does not refer to ownership of any Intellectual Property Rights. (c) Any Intellectual Property Rights created by a party: (i) in connection with the Program; or (ii) based on the Information or the results of the Investigations or the Program, will be the sole property of that party. 5.2 The Technology of Each Party (a) Any right, title or interest which either party acquires pursuant to clause 5.1 does not extend to the technology of the other party. Accordingly, Isonics will not own or acquire any right, title or interest in or to the SILEX Technology and Silex will not own or acquire any right, title or interest in or to any of the Isonics Technology. (b) Neither party must: (i) do or cause to be done any act which in any way impairs, or intends to impair, any part of the other party's full, valid and exclusive ownership of all right, title and interest in and to the technology of the other party; or (ii) represent in any way to any person that it has any ownership or other rights or interest in the technology of the other party. 11 5.3 The Yale Patents (a) Any right, title or interest which Silex acquires pursuant to clause 5.1 does not extend to the Yale Patents. Accordingly, Silex will not own or acquire any right, title or interest in or to the Yale Patents. (b) Silex must not: (i) do or cause to be done any act which in any way impairs, or intends to impair, any part of Isonics' right, title and interest in and to the Yale Patents; or (ii) represent in any way to any person that it has any ownership or other rights or interest in the Yale Patents. 6. CONFIDENTIALITY 6.1 Confidentiality Obligations (a) Each of the parties must treat as confidential, in the same manner as it treats its own confidential information of like kind, but using no less than a reasonable standard of care, the Confidential Information of the other party. (b) A party may only use the other party's Confidential Information for the purposes of performing its rights and obligations under this agreement. (c) A party must not, without the prior written consent of the other party, disclose that other party's Confidential Information to any person other than to the first party's personnel to the extent that those persons require the Confidential Information in order to carry out the first party's rights and obligations under this agreement. (d) Each party must ensure that each of its employees and agents engaged in the Program agrees to be bound by, and complies with, the confidentiality obligations set out in this clause 6.1. 6.2 Public announcements Subject to clause 6.3, no public announcements or communications relating to the negotiations of the parties or the existence, subject matter or terms of this agreement may be made or authorized by or on behalf of a party without the prior written approval of the other party (such approval not to be unreasonably withheld or delayed). 6.3 Disclosure required by law Nothing in this agreement will preclude a party from disclosing any Confidential Information which is required to be disclosed by law or under the rules of any stock exchange by which the party is bound to comply provided that the party: 12 (a) notifies the other party that the Confidential Information is required to be disclosed as soon as reasonably possible after discovering that requirement; and (b) provides all reasonable assistance to the other party (at that other party's expense) in opposing any subpoena or other process pursuant to which the Confidential Information is required to be disclosed. 7. FUTURE CONDUCT AND RELATIONSHIP 7.1 Future joint Efforts (a) The parties may (but need not) combine their efforts: (i) to conduct any additional research which they consider necessary or desirable having regard to the results of the Program; or (ii) to seek to commercially exploit the outcome of the Investigations and the Program. (b) Any future arrangement between the parties will only arise if they are able to agree in writing to terms relating to that future arrangement. 7.2 Right to use Results (a) Either party may at any time use the results of the Program or any part of the Investigation in any way it determines including to establish a business which will commercially exploit enriched silicon and/or other materials. (b) Nothing in this agreement gives a party any right, title or interest in or to any business or venture which the other party may establish pursuant to clause 7.2(a). Each party acknowledges and agrees that it will have no claim against the other party in respect of any such venture or the profit derived by the other party from any such venture. (c) Neither party will unlawfully use or infringe the Intellectual Property Rights of the other party. (d) Subject to clause 6, each party may discuss the Information and the results of the Program with third parries without obtaining the prior consent of the other party. 7.3 Use of Each Party's name Each Party must obtain the other party's prior written consent to use the other party's name or to refer to the other party in connection with the Program, the Investigations or the subject matter of this agreement. 13 8. TERM AND TERMINATION 8.1 Term This Agreement: (a) commences upon execution by both parties; and (b) terminates eighteen months thereafter, unless earlier terminated as set forth below. 8.2 Common Termination Rights A party (Terminating Party) may terminate this agreement by written notice to the other party (Defaulting Party) if: (a) the Defaulting Party: (i) commits a breach of; or (ii) is in default under, a material term of this agreement and that breach or default, if capable of being remedied, is not remedied by the Defaulting Party within 30 Business Days after a notice specifying the breach is served upon the Defaulting Party by the Terminating Party; (b) the Defaulting Party repeatedly or persistently breaches, or is repeatedly or persistently in default under, any of the provisions of this agreement; (c) the Defaulting Party infringes any Intellectual Property Rights of the Terminating Party; (d) an order is made to wind up the Defaulting Party or the Defaulting Party goes into liquidation whether voluntarily or otherwise; (e) the Defaulting Party makes an assignment for the benefit of, enters into an arrangement or composition with its creditors, or has an administrator appointed to it; (f) the Defaulting Party ceases to carry on business or ceases to be able to pay its debts as and when they fall due; or (g) the Defaulting Party has a receiver, receiver and manager, manager or administrator appointed over it or any material part of its assets or operations. Termination pursuant to clauses 8.2(b) to 8.2(g) (inclusive) will be effective 30 Business Days after notice is given by the Terminating Party. 14 8.3 Survival Clauses 1.1, 1.2, 4.4, 5, 6, 7.2, 7.3 and 9 survive termination or expiration of this agreement. 9. GENERAL 9.1 Entire agreement (a) This agreement constitutes the entire agreement between the parties in relation to its subject matter. No understanding, arrangement or provision not expressly set out in this agreement will bind the parties. Accordingly all correspondence, negotiations and other communications between the parties in relation to the subject matter of this agreement which precede this agreement are SUPERSEDED by and merged in it. (b) Notwithstanding clause 9.1(a), all confidentiality agreements executed by the parties survive execution of, and are not fettered or amended in any way by, this agreement. 9.2 Amendment This agreement may only be amended in writing signed by all the parties and not in any other manner. 9.3 Waiver (a) The failure by any party at any time to enforce any of its powers, remedies or rights under this agreement will not constitute a waiver of those powers, remedies or rights or affect the party's rights to enforce those powers, remedies or rights at any time. (b) Any single or partial exercise of any power, remedy or right does not preclude any other or further exercise of it or the exercise of any other power, remedy or right under this agreement. 9.4 Severance If any provision of this agreement is prohibited, invalid or unenforceable in any jurisdiction, that provision will, as to that jurisdiction, be ineffective to the extent of the prohibition, invalidity or unenforceabihty without invalidating the remaining provisions of this agreement or affecting the validity or enforceability of that provision in any other jurisdiction. 9.5 Governing Law This agreement is governed by the law in force in Colorado, United State of America and the parties submit to the non-exclusive jurisdiction of the courts of Colorado, 15 United State of America and all courts competent to hear appeals from those in respect of all proceedings arising in connection with this agreement. 9.6 Assignment No party may assign or transfer any of its rights or obligations under this AGREEMENT without the prior written consent of the other party. 9.7 Further assurances Each party must do, sign, execute and deliver and must procure that each of its employees and agents does, signs, executes and delivers all deeds, documents, instruments and acts reasonably required of it or them by Notice from another party effectively to carry out and give full effect to this agreement and the rights and obligations of the parties under it. 9.8 Counterparts This agreement may be executed in any number of counterparts and all of those counterparts taken together constitute one and the same instrument. 9.9 Notices Schedule 1 applies to Notices. 16 SCHEDULE 1 NOTICES 1. Delivery A Notice must be in writing and delivered on a Business Day, sent by prepaid mail (airmail if overseas) or by facsimile to the address or facsimile number of the recipient party set out in paragraph 3 or to such other address or facsimile number as that party may from time to time notify the other parties for the purposes of this schedule. 2. Receipt A Notice given in accordance with paragraph 1 will be treated as having been received: (a) if it is delivered before 5:00pm on a Business Day, at the time of delivery otherwise at 9:00am on the next following Business Day; (b) on the third Business Day (or seventh Business Day if sent overseas) after posting; and (c) if sent by facsimile, upon production of a correct and complete transmission report by the machine from which the facsimile was sent which indicates that the facsimile was sent in its entirety to the facsimile number of the recipient notified for the purposes of this paragraph (but if the communication is not completed by 5:00pm on a Business Day, at 9:00am on the next following Business Day). 3. Addresses for Notices For the purposes of this schedule, the address and facsimile details of each party are as follows: Silex Attention: Dr Michael Goldsworthy Address: Building 64, Lucas Heights Science & Technology Centre New Illawarra Road, Lucas Heights, NSW, 2234, Australia Facsimile: + 61 2 9717 3689 Telephone: + 612 9717 3589 (this is included for information purposes only) Isonics Attention: Dr Stephen Burden Address: 5906 McIntyre Street, Golden, CO 80403, United States of America Facsimile: + 1303 279 7300 Telephone: + 1 303 279 7900 (this is included for information purposes only) 17 SCHEDULE 2 ISONICS PROGRAM (Clause 1.1)
TASKS SCHEDULED TO COMPLETE ESTIMATED COSTS ON OR BEFORE (USD) - ------------------------------------------------------------ --------------------- --------------- THIN FILMS 1. Purchase 1 kg of 99.9% enriched silicon-28 as April 1999 $115,000 material tetrafluoride 2. Transform silicon-28 tetrafluoride to silane and May 1999 $30,000 labour complete conversion and purification of 1kg of starting material (Voltaix) 3. Manufacture epi wafers for thermal conductivity, June 1999 $35,000 labour carrier mobility, and transistor test specimens (Lawrence Semiconductor Research Laboratory) 4. Measure carrier mobility of thin epi films (Lawrence July 1999 None to Program Berkeley Laboratory, UC San Diego) 5. Measure thermal conductivity of 10 to 25 micron thick July 1999 None to Program epi films (Bell Laboratories, SMU, UCLA). 6. Measure basic CMOS transistor characteristics (UC July 1999 None to Program Berkeley) 7. Measure basic CMOS transistor characteristics using SOI July 1999 None to Program wafers (MIT)
18
TASKS SCHEDULED TO COMPLETE ESTIMATED COSTS ON OR BEFORE (USD) - ------------------------------------------------------------ --------------------- --------------- THICK EPI FILMS & BULK WAFERS 1. Purchase 4.5 kg of 99.9% enriched silicon-28 as April 1999 $125,000 material tetrafluoride 2. Manufacture 3 kgs of 99.9% silicon-28 trichlorosilane June 1999 $100,000 labour and equipment (Voltaix) 3. Determine maximum thickness of epitaxial layer possible May 1999 $25,000 material and labour (Epitronics & Mattson Technology are possible vendors) 4. Manufacture thick epi layers with 99.9%, 99.0% and July 1999 $30,000 labour 98.0% silicon-28 enrichments 5. Purchase sample of 99.0% single crystal silicon-28 from May 1999 $25,000 material Oak Ridge National lab 6. Write report on results of Oak Ridge sample July 1999 None to Program 7. Fabricate thick epi specimens August 1999 $20,000 labour 8. Measure thermal conductivity (Bell Laboratories) December 1999 None to Program 9. Measure carrier mobility (Lawrence Berkeley Laboratory) December 1999 None to Program 10. Program Completion 0- Write Final report February 2000 None to Program $20,000 RESERVE $525,000 PROJECT COSTS ========
19 SCHEDULE 3 ISONICS PROGRAM Deliverable Items (Clause 1.1) A. Silicon-28 thin films which are enriched to 99.9% 1. Hall mobility as a function of temperature for n-type silicon thin films 2. Hall mobility as a function of temperature for p-type silicon thin films 3. Thermal conductivity of undoped silicon thin films at room temperature 4. Thermal conductivity of undoped silicon thin films at liquid nitrogen temperature 5. Basic transistor characteristic of a FET made with a silicon-28 epi wafer 6. Basic transistor characteristics of a FET made with a silicon-28 SOI wafer B. Silicon-28 thick (80 - 100u) films 7. Hall mobility as a function of temperature for n-type silicon thick films using 99.9% enriched silicon-28 8. Hall mobility as a function of temperature for n-type silicon thick films using 99.0% enriched silicon-28 9. Hall mobility as a function of temperature for n-type silicon thick films using 98.0% enriched silicon-28 10. Hall mobility as a function of temperature for p-type silicon thick films using 99.9% enriched silicon-28 11. Hall mobility as a function of temperature for p-type silicon thick films using 99.0% enriched silicon-28 12. Hall mobility as a function of temperature for p-type silicon thick films using 98.0% enriched silicon-28 13. Thermal conductivity of undoped silicon thick films at room temperature using 99.9%a silicon-28. 14. Thermal conductivity of undoped silicon thick films at room temperature using 99.0% silicon-28. 15. Thermal conductivity of undoped silicon thick films at room temperature using 98.0% silicon-28. 16. Thermal conductivity of undoped silicon thick films at liquid nitrogen temperature using 99.9% silicon-28. 17. Thermal conductivity of undoped silicon thick films at liquid nitrogen temperature using 99.0% silicon-28. 18. Thermal conductivity of undoped silicon thick films at liquid nitrogen temperature using 98.0% silicon-28. 20 C. Bulk crystal sample of Silicon-28 enriched to 99.0% obtained from Oak Ridge National Laboratory 19. Thermal conductivity at room temperature. 20. Thermal conductivity at liquid nitrogen temperature. 21 SCHEDULE 4 SCHEDULED DATES (Clause 4.2) Subject to the right of the parties to agree alternative dates for delivery of the Reports pursuant to clauses 2.5(b) and 2.6, the dates on which reports are to be provided to Silex and installments are to be telegraphically transferred by Silex are as follows:
DATE EVENT - --------------------------- ---------------------------------------------------------------- Upon execution of this Silex wire transfers $50,000 to Isonics (clause 4.1(a)(i)(A)) agreement On the later of 23 April Isonics to provide information to Silex (clause 3.1(a)) 1999 and within five Business Days after execution Within five Business Silex wire transfers $50,000 to Isonics (clause 4.1(a)(i)(B)) Days later 21 June 1999 Isonics provides a Report to Silex (clause 2.5(b)) 1 July 1999 Silex wire transfers $25,000 to Isonics (clause 4.1(i)(B)) 21 September 1999 Isonics provides a Report to Silex (clause 2.5(b)) 1 October 1999 Silex wire transfers $25,000 to Isonics (clause 4.1(i)(B)) 21 December 1999 Isonics provides a Report to Silex (clause 2.5(b)) 1 January 2000 Silex wire transfers $25,000 to Isonics (clause 4.1(i)(B)) 21 March 2000 Isonics provides final report to Silex (clause 2.6) 1 April 2000 Silex wire transfers $25,000 to Isonics (clause 4.1(i)(C))
22 EXECUTED as an agreement. EXECUTED by SILEX SYSTEMS LIMITED: /s/ Michael Goldsworthy /s/ Chris Wilks - ---------------------------------- ---------------------------------- Michael Goldsworthy Chris Wilks Managing Director Director EXECUTED by ISONICS CORPORATION in the manner required by its by-laws: /s/ James E. Alexander /s/ Stephen J. Burden - ---------------------------------- ---------------------------------- James E. Alexander Stephen J. Burden President Vice President, Electronic Materials EX-10.30 3 a2050556zex-10_30.txt EXHIBIT 10.30 EXHIBIT 10.30 [North Carolina State University Letterhead] December 30, 1999 Dr. Stephen J. Burden Vice President, Semiconductor Materials Isonics 5906 McIntyre St Golden, CO 80403 Re: GIFT # 990027689 Dear Dr. Burden: On behalf of the College of Engineering, I would like to thank Isonics for the very generous gift of $50,000. In accordance with your instructions, we have deposited your contribution in the Corporate Research - ECE / Baliga fund. An official receipt is enclosed for your records. Your company's support helps us maintain and build upon the tradition of excellence in engineering education for which NC State prides itself. Thank you again for your generosity and for your confidence in our academic programs. If I can ever be of assistance to you here in the College of Engineering, please do not hesitate to call or write. Sincerely, /s/ Ben H. Hughes Ben H. Hughes Executive Director of Development and College Relations BHH/saw Enclosure Date: December 30, 1999 Gift # 990027689 Donor ID:9900004673 Gift Amount: $50,000.00 North Carolina Engineering Foundation, Inc. Corporate Research-ECE/Baliga Please consult your tax advisor and I.R.S. form 1040 for gifts of Cash and listed securities; and I.R.S. form 8283 for non-cash gifts. Any goods or services which you may have received in consideration of this contribution are considered insubstantial under I.R.S. regulations. IF you have any questions regarding this receipt, please call (919) 515-7827. IF you or your spouse work for a matching gift company, you could double or triple your gift to NC State! Please contact your personnel office for information on how to initiate a match. Isonics Corporation 5906 McIntyre St Golden CO 80403 PLEASE DETACH AND RETAIN FOR YOUR RECORDS. Name: Isonics Corporation ID# 9900004673 Preferred Address: 5906 McIntyre St Golden CO 80403 Home Ph# (303) 279-7900 Bus. Ph# (303) 279-7900 Employer's Address: Occupation/position/title: Spouse's Name: Your gift may be matched by: EX-10.31 4 a2050556zex-10_31.txt EXHIBIT 10.31 EXHIBIT 10.31 SPONSORED RESEARCH AGREEMENT THIS AGREEMENT, executed this 15th day of December, 1999, by and between Isonics Corporation, a Corporation existing under the laws of the State of California ("Sponsor"), located at 5906 McIntyre Street, Golden, Colorado 80403, and Southern Methodist University, a non-profit educational corporation of the State of Texas, United States of America, by and through its office of Research Administration ("University'), located in University Park, Dallas, Texas. WHEREAS, the research program contemplated by this Agreement is of mutual interest and benefit to University and to Sponsor, will further the instructional and research objectives of University in a manner consistent with its status as a non-profit, tax-exempt, educational corporation and may derive benefits for both Sponsor and University through inventions, improvements, and/or discoveries; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereto agree to the following: ARTICLE 1 DEFINITIONS As used herein, the following terms shall have the following meanings: 1.1 "Project" shall mean the description of the project as described in Appendix A hereof, under the direction of Dr. Peter Raad as principal investigator. 1.2 "Contract Period" is 01 January 2000 through 31 December 2000. 1.3 "University Intellectual Property" shall mean individually and collectively all inventions, improvements and/or discoveries which are conceived and/or made by one or more employees of University in performance of Project. 1.4 "Joint Intellectual Property" shall mean, individually and collectively, all inventions, improvements and/or discoveries which are conceived and/or made jointly by one or more employees of University and by one or more employees of Sponsor in performance of Project. ARTICLE 2 RESEARCH WORK 2.1 University shall commence the performance of Project promptly after the effective date of this Agreement, and shall use reasonable efforts to perform such Project substantially in accordance with the terms and conditions of this Agreement. Anything in this Agreement to the contrary notwithstanding, Sponsor and University may at any time amend Project by mutual written agreement. 2.2 In the event that the Principal Investigator becomes unable or unwilling to continue Project, and a mutually acceptable substitute is not available, University and/or Sponsor shall have the option to terminate said Project. ARTICLE 3 FIXED-COST STANDARD RESEARCH AGREEMENT Page 1 May, 1996 REPORTS AND CONFERENCES 3.1 Written program reports shall be provided periodically by University to Sponsor as set forth in Appendix A. 3.2 During the term of this Agreement, representatives of University will meet periodically with representatives of Sponsor at times and places mutually agreed upon to discuss the progress and results, as well as ongoing plans, or changes therein, of Project to be performed hereunder. ARTICLE 4 COSTS, BILLINGS, AND OTHER SUPPORT 4.1 It is agreed to and understood by the parties hereto that, subject to Article 2, total costs to Sponsor hereunder shall be fixed as set forth on Appendix A, which shall include all expenses except those which may be independently authorized by Sponsor in writing subsequent to the execution of this Agreement. 4.2 University shall retain title to any equipment purchased with funds provided by Sponsor under this Agreement. 4.3 University represents that it has used its best efforts to determine the actual costs for completion of the Project, as set forth in Appendix A. However, any funds which Sponsor commits to pay hereunder to University for the Project which remain unexpended upon the completion of the Project shall belong to University. 4.4 Anything herein to the contrary notwithstanding, in the event of early termination of this Agreement by Sponsor pursuant to Articles 2 and 9 hereof, Sponsor shall pay all costs accrued by University as of the date of termination, including non-cancellable obligations, which shall include all non-cancellable contracts and fellowships or postdoctoral associate appointments called for in Appendix A, incurred prior to the effective date of termination. After termination, any obligation of Sponsor for fellowships or postdoctoral associates hereunder shall end no later than the end of University's academic year following the effective date of Sponsor's termination of this Agreement. ARTICLE 5 PUBLICITY Sponsor will not use the name of University, or the name of any member of University's Project staff, in any publicity, advertising, or news release without the prior written approval of an authorized representative of University. University shall have the right to acknowledge Sponsor as sponsor, the Principal Investigator, the nature of the research, and the dollar value of the award in normal University records and reports. Beyond that, University will not use the name of Sponsor, or any employee of Sponsor, in any publicity without the prior written approval of Sponsor. FIXED-COST STANDARD RESEARCH AGREEMENT Page 2 May, 1996 ARTICLE 6 NON-DISCLOSURE 6.1 Anything in this Agreement to the contrary notwithstanding, any and all knowledge, know-how, practices, processes, and other information (hereinafter referred to as "Confidential Information") disclosed or submitted in writing or in other tangible form which is designated as Confidential Information, and labeled "Confidential", to either party by the other shall be received and maintained by the receiving party in strict confidence and shall not be disclosed to any third party. Furthermore, neither party shall use said Confidential Information for any purpose other than those purposes specified in this Agreement. The parties may disclose Confidential Information to their employees requiring access thereto for the purposes of this Agreement; provided, however, that prior to making any such disclosures each such employee shall be apprised of the duty and obligation to maintain Confidential Information in confidence and not to use such information for any purpose other than in accordance with the terms and conditions of this Agreement. Neither party will be held financially liable for any inadvertent disclosure, but each will agree to use its reasonable efforts not to disclose any designated Confidential Information. 6.2 Nothing contained herein will in any way restrict or impair either party's right to use, disclose, or otherwise deal with any Confidential Information which at the time of its receipt: (a) Is generally available in the public domain, or thereafter becomes available to the public through no act of the receiving party; (b) Was independently known prior to receipt thereof, or made available to such receiving party as a matter of lawful right by a third party; (c) Is required by government regulation, by law or by a court of competent jurisdiction to be disclosed, provided that the disclosing party is given adequate written notice to allow it to protest such disclosure; or (d) Has already been developed by the receiving party independently of the disclosing party's confidential information. 6.3 The above obligations relating to Confidential Information shall be in effect for a period of one (1) year from the termination of this Agreement. ARTICLE 7 PUBLICATIONS Sponsor recognizes that under University policy, the results of Project must be publishable and agrees that Principal Investor or researcher(s) engaged in Project shall be permitted to present at symposia, national or regional professional meetings, and to publish in journals, theses or dissertations, or otherwise of their own choosing, methods and results of Project; provided, however, that Sponsor shall have been furnished copies of any proposed publication or presentation at least forty-five (45) days in advances of the submission of such proposed publication or presentation to a journal, editor, or other third party. Sponsor shall have thirty (30) days after receipt of said copies to object to such proposed presentation or proposed publication because there is patentable subject matter which needs protection and/or there is Confidential Information of Sponsor contained in the proposed publication or presentation, other than University Intellectual Property. In the event that Sponsor makes such objection, the parties shall negotiate an acceptable version and the Principal Investigator and/or researcher(s) shall refrain from making such publication or presentation for a maximum of six (6) months from the date of FIXED-COST STANDARD RESEARCH AGREEMENT Page 3 May, 1996 receipt of such objection in order for University to file patent application(s) with the United State Patent and Trademark Office and/or foreign patent office(s) directed to the patentable subject matter contained in the proposed publication or presentation, pursuant to Article 8. ARTICLE 8 INTELLECTUAL PROPERTY 8.1 All rights and title to University Intellectual Property created solely by the University under Project shall belong to University and shall be subject to the terms and conditions of this Agreement. 8.2 University will promptly notify Sponsor of any University Intellectual Property or Joint Intellectual Property conceived and/or made during the Contract Period under Project. If Sponsor directs that a patent application or application for other intellectual property protection be filed, University shall promptly prepare, file, and prosecute such U.S. and foreign application in University's name. Sponsor shall bear all costs incurred in connection with such preparation, filing, prosecution, and maintenance of U.S. and foreign application(s) directed to said University Intellectual Property or Joint Intellectual Property. Sponsor shall cooperate with University to assure that such application(s) will cover, to the best of Sponsor's knowledge, all items of commercial interest and importance. While University shall be responsible for making decisions regarding scope and content of application(s) to be filed and prosecution thereof, Sponsor shall be given an opportunity to review and provide input thereto. University shall keep Sponsor advised as to all developments with respect to such application(s) and shall promptly supply to Sponsor copies of all papers received and filed in connection with the prosecution thereof in sufficient time for Sponsor to comment thereon. 8.3 University and Sponsor agree to comply with all United States Export Control Laws, and exportation of unclassified technical data in the furtherance of a manufacturing license or technical assistance agreement must be approved in writing by the Office of Defense Trade Controls. ARTICLE 9 GRANT OF RIGHTS Pursuant to Article 8.2, University grants Sponsor the first option, at Sponsor's sole selection, for either a non-exclusive, royalty-free license or, for consideration, an exclusive license with a right to sub license on terms and conditions to be mutually agreed upon. The option shall extend for a time period of one (1) year from the date of termination of this Agreement. ARTICLE 10 TERM AND TERMINATION 10.1 This Agreement shall become effective upon the date first hereinabove written and shall continue in effect for the full duration of the Contract Period unless sooner terminated in accordance with the provisions of this Article. The parties hereto may, however, extend the term of this Agreement for additional periods as desired under mutually agreeable terms and conditions which the parties reduce to writing and sign. Either party may terminate this Agreement upon ninety- (90) days' prior written notice to the other. In the event that Sponsor terminates this Agreement prior to the end of the term of this Agreement, for any reason other than University's breach of this Agreement, Sponsor shall continue to be obligated to pay to University the amounts set forth in Article 4. FIXED-COST STANDARD RESEARCH AGREEMENT Page 4 May, 1996 10.2 In the event that either party hereto shall commit any breach of or default in any of the terms or conditions of this Agreement, and also shall fail to remedy such default or breach within ninety (90) days after receipt of written notice thereof from the other party hereto, the party giving notice may, at its option and in addition to any other remedies which it may have at law or in equity, terminate this Agreement by sending notice of termination in writing to the other party to such effect, and such termination shall be effective as of the date of the receipt of such notice. 10.3 Subject to Article 9, termination of this Agreement by either party for any reason shall not affect the rights and obligations of the parties accrued prior to the effective date of termination of this Agreement. No termination of this Agreement, however effectuated, shall affect the Sponsor's rights and duties under Article 8 hereof, or release the parties hereto from their rights and obligations under Articles 4, 5, 6, 7, 8, 9, 10, and 15. ARTICLE 11 INDEPENDENT CONTRACTOR In the performance of all services hereunder: (a) University shall be deemed to be and shall be an independent contractor and, as such, University shall not be entitled to any benefits applicable to employees of Sponsor; and (b) Sponsor shall be deemed to be and shall be an independent contractor and, as such, Sponsor shall not be entitled to any benefits applicable to employees of University. (c) Neither party is authorized or empowered to act as agent for the other for any purpose and shall not on behalf of the other enter into any contract, warranty, or representation as to any matter. Neither shall be bound by the acts or conduct of the other. ARTICLE 12 FORCE MAJEURE In the event of circumstances beyond the reasonable control of either or both parties, including but not limited to proven illness of Principal Investigator, riots, strikes, Acts of God, or the exercise of authority of either the federal or state governments or any political subdivision thereof, which prevent the performance of the obligations of this Agreement by either party, this Agreement may be modified by mutual consent of the parties or shall otherwise become null and void. ARTICLE 13 GOVERNING LAW This Agreement shall be governed and construed in accordance with the laws of the State of Texas and the United States of America. This Agreement shall be deemed fully performable in Dallas County, State of Texas, United States of America. ARTICLE 14 FIXED-COST STANDARD RESEARCH AGREEMENT Page 5 May, 1996 ASSIGNMENT This Agreement shall not be assigned by either party without the prior written consent of the parties hereto. Any unauthorized assignment shall be null and void. ARTICLE 15 AGREEMENT MODIFICATION Any agreement to change the terms of this Agreement in any way shall be valid only if the change is made in writing and approved by mutual agreement of authorized representatives of the parties hereto. ARTICLE 16 MISCELLANEOUS PROVISIONS 16.1 NOTICES. Notices, invoices, communications, and payments hereunder shall be deemed made if given by registered or certified U.S. mail, postage prepaid, and addressed to the party to receive such notice, invoice, or communication at the address given below, or such other address as may hereafter be designated by notice in writing: Sponsor: Steve Burden Vice President, Semiconductor Materials Isonics Corporation 5906 McIntyre Street Golden, Colorado 80403 University: Dr. Larry Smith, Director Research Administration Southern Methodist University P.O. Box 750302 Dallas, Texas 75275 Technical Matter: Dr. Peter Raad, Professor Department of Mechanical Engineering School of Engineering & Applied Sciences P.O. Box 0335 Southern Methodist University Dallas, Texas 75275 16.2 DEBT AND DEBARMENT CERTIFICATIONS. By signing this Agreement, Sponsor certifies that his or her institution or company is not delinquent on any federal debt, and neither the institution or company, nor its principals are presently debarred, suspended, proposed for debarment, declared ineligible, or voluntarily excluded from covered transactions by any United States governmental department or agency. 16.3 EXPORT OF TECHNOLOGY. Sponsor shall be solely responsible for obtaining any and all clearances and permits which are required by the treaties, laws, and regulations of the United States in the event the transfer of the technology which is the subject of this Agreement from University to Sponsor, or from Sponsor to a third party is subject to federal laws and regulations regarding the export of technology from the United States. Sponsor further agrees to indemnify, defend, and hold harmless University, its Trustees, officers, employees, agents, and representatives, including the Principal FIXED-COST STANDARD RESEARCH AGREEMENT Page 6 May, 1996 Investigator and researcher(s), against all claims, suits, administrative actions, fines, penalties, and damages assessed or made against any of the parties hereby released as the result of Sponsor's intentional or negligent acts or omissions related to the failure to comply with local, state or U.S. federal law. The parties agree to advise each other promptly of the existence of any claims made against University which Sponsor has agreed to indemnify herein. 16.4 SEVERABILITY. If any provision of this Agreement is determined to be invalid or unenforceable in whole or in part, such invalidity or unenforceability shall attach only to such provision or part thereof and the remaining part of such provision and all other provisions hereof shall continue in full force and effect. 16.5 CONFLICT OF INTEREST. Except as set forth herein, Sponsor represents and warrants that no Trustee, officer, employee, student or agent of University has been or will be employed, retained, or paid a fee, or otherwise has received or will receive any personal compensation or consideration by or from Sponsor or any of Sponsor's directors, officers, employees, or agents in connection with the obtaining, arranging, or negotiation of this Agreement. 16.6 HEADINGS. Paragraph headings are for reference and convenience only and shall not be determinative of the meaning or the interpretation of the language of this Agreement. 16.7 ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement between Sponsor and University with respect to the subject matter hereof and cancels and supersedes any prior understandings and agreements with respect to the subject of this Agreement. 16.8 WAIVER. No waiver of any breach of any provision of this Agreement shall operate as a waiver of any other or subsequent breach thereof or of the provision itself, or of any other provision. No provision of this Agreement shall be deemed to have been waived unless such waiver be in writing and signed by the party waiving the same, with the signature on behalf of University being that of a vice president of University. 16.9 AUTHORITY TO SIGN. The individuals executing this Agreement on behalf of the parties hereby represent and warrant that they have full power and authority to execute this Agreement on behalf of the institution they are representing. IN WITNESS WHEREOF, the parties have caused these presents to be executed in duplicate as of the day and year first above written. SPONSOR: By: /s/ Steven J. Burden ----------------------------- Name: Steven Burden Title: Vice President Semiconductor Materials Date: FIXED-COST STANDARD RESEARCH AGREEMENT Page 7 May, 1996 SOUTHERN METHODIST UNIVERSITY By: /s/ Ross C. Murfin ----------------------------- Ross C. Murfin Provost & Vice President for Academic Affairs Date: 1/10/00111 /s/ Dr. Larry Smith - -------------------------------- Dr. Larry Smith Director of Research Administration PRINCIPAL INVESTIGATOR By: /s/ Peter Raad ----------------------------- Name: Peter Raad Title: Professor Date: 1/6/2000 FIXED-COST STANDARD RESEARCH AGREEMENT Page 8 May, 1996 Proposal Budget Peter Raad pg 1 of 5 SMU# 992932 01 NOV 1999 - 31 OCT 2000 Isonics Corp. "APPENDIX A"
Sub- Description Sub-Totals Agency SMU Total Code Budget Budget Budget - ---- ----------------------------------- ---------- ------ -------- -------- 6112 Faculty, Extra Compensation 0 0 0 6131 Exempt Staff, Base Compensation 0 0 0 6165 Graduate Research Asst 15,000 0 15,000 6181 Post Doctoral Employee, base pay 0 0 0 ----------------------------------- ---------- ------- ------- -------- Total Salaries 15,000 0 15,000 6201 Emp Ben, FT Faculty @20.4% 0 0 0 6203 Emp Ben, FT Exempt Staff, 22.8% 0 0 0 6207 Emp Ben, Post Doctoral, 10.7% 0 0 0 6210 Emp Ben, Graduate Res Asst, 32% 4,800 0 4,800 ----------------------------------- ---------- ------- ------- -------- Total Employee Benefits 4,800 0 4,800 Total Salaries & Benefits 19,800 0 19,800 6330 Lab Supplies 5,000 0 5,000 6600 Travel - domestic 4,500 0 4,500 ----------------------------------- ---------- ------- ------- -------- Subtotal Direct Costs 29,300 0 29,300 8240 Equipment 60,000 0 60,000 Misc. supplies & materials ----------------------------------- ---------- ------- ------- -------- Total Direct Costs 89,300 0 89,300 7600 On campus F&A - agency @45% 11,025 0 11,025 ----------------------------------- ---------- ------- ------- -------- Total Project Costs 100,325 0 100,325
pg 2 of 5 APPENDIX "A" A PROPOSAL TO ISONICS CORPORATION for a Grant in Support of THERMAL PROPERTY MEASUREMENTS AND MODELING OF ISOTOPICALLY-PURE SEMICONDUCTOR MATERIALS Submitted by SOUTHERN METHODIST UNIVERSITY Dallas, Texas 75275 for the Mechanical Engineering Department December, 1999 Starting Date: January 1, 2000 Budgeted Proposal Duration: 12 months Total Budgeted Expenditures: $100,325 Peter E. Raad, Ph.D., P.E. Professor and Associate Dean Voice: (214) 768-3043 FAX: (214) 768-3845 Email: praad@seas.smu.edu [PHOTO] pg 3 of 5 APPENDIX "A" INTRODUCTION The high rate of innovation in electronics and telecommunications has raised expectations for higher performance and functionality. Most advances have evolved from smart engineering and efficient manufacturing practices. Equally substantial gains can result from the introduction of innovative materials. Indeed, miniaturization and performance requirements have forced the use of existing materials beyond initially envisioned ranges and have spurred the development of specialty materials. Knowledge of material properties is fundamental to the design process, especially for electronic and telecommunication devices, where performance depends heavily on electro-thermal interactions. With the advent of the higher performance submicron devices and the associated management difficulties, came the realization that bulk and thin-film thermal properties differ markedly. However, since no universal behavior is expected for these differences and since they cannot be predicted from theory, the properties of each material must be measured separately. Also, as thin films are typically layered and deposition techniques differ by manufacturer, it is important to measure the interface resistance of stacked layers. This proposal is aimed at assessing the thermal properties of isotopically pure semiconductors, such as silicon (Si-28) developed and produced by Isonics Corporation. Isotopically pure silicon has better thermal conductivity than natural silicon, which implies that heat can be removed more effectively. Substantial reductions in operating temperatures would make heat sinks and on-board fans practical far beyond 2001, thus removing a major industry roadblock. As semiconductor manufacturers design chips at higher densities and smaller line widths to increase speed and reduce costs, heat build-up has become a critical problem. Isotopically pure silicon has a superior ability to transfer heat. This improved property should result in the near term in lower reject rates and a higher number of high performance chips. GENERAL AND SPECIFIC OBJECTIVES The general objective of this research project is to investigate numerically and experimentally the thermal behavior of isotopically pure semiconductor materials, such as Silicon-28, with the goal of assessing any performance advantages that these materials can exhibit over their natural counterparts. The research will be conducted in close collaboration with Isonics Corporation to ensure that the specific work objectives enumerated below adapt to unexpected results discovered in the course of the investigation. The specific objectives of this investigation are enumerated below. Modeling with the existing self-adaptive numerical technique will be used in conjunction with the measurements described below. 1. Measure the thermal conductivity (K) of thin films and bulk Si-28 by the use of the existing Transient Thermoreflectance (TTR) method. Compare the obtained data with measured K for thin films and bulk natural Si. Investigate the dependence of K on the doping level for both Si-28 and natural Si. The samples to be tested will be supplied by Isonics Corporation. pg 4 of 5 APPENDIX "A" 2. Measure K for samples made up of layered structures of Si2-8, Si02, natural Si, etc. The purpose of these measurements is to gain a perspective on the thermal response of composite materials for a new generation of electronic devices. Isonics and the SMU team will determine the range of samples to be measured, with specified materials, number of layers, and layer thicknesses. 3. Model, design and build basic FET transistors where the substrate material is either natural Si or Si-28. While activating the devices, carry out measurements of the gate temperature for each of the two cases. Determine any advantages of using Si-28 versus natural Si. The FET transistors will be manufactured by a third party on Si-28 and natural Si wafers supplied by Isonics Corp. 4. Model basic FET transistors in 3 above, where the wafer structure is a layer of Si-28 of various thicknesses on a natural silicon substrate. 5. Measure the thermal conductivity of thin films and bulk samples of natural and isotopically modified compound semiconductors such as SiC, GaAs, and GaN, as they become available. METHODOLOGY The Submicron Electro-Thermal Sciences Laboratory (SETSL) was recently established in the School of Engineering and Applied Science at SMU in recognition of industry's needs for noninvasive characterization of the thermal properties of thin-film materials. The Laboratory features a laser-based (Fig. 1 - Schematic of the TTR measurement system) pg 5 of 5 APPENDIX "A" transient thermoreflectance (TTR) measurement system, an electrical performance measurement system for microwave integrated circuits, and an adaptive computational tool for rapid thermal modeling. These capabilities are essential to the successful execution of the objectives of this investigation. The existing experimental TTR system at the SMU SESTL is depicted schematically in Fig. 1 above. The heating source is provided by an Nd:YAG pulsed laser whose wavelength is 532 nm and maximum pulse energy is 0.5 mJ. The adjustable heating spot of the YAG was characterized by CCD imaging and fast photodiode detection, and was found to have good spatial uniformity and a Gaussian temporal distribution. The probing light source is an Ar-Ion CW laser with a linearly polarized, single-mode irradiation beam at a wavelength of 488 nm. The beam is delivered to the microscope assembly via a polarization preserving, fiber optic cable with TEM00 mode. The probing beam reflects from the heated surface back along its optical path to the sensitive area of a pre-amplified silicon PIN photodiode (rise time o 1 ns) through a fiber optic cable. The photodiode signal, representing the variations in the surface reflectivity, is acquired with an 8-bit resolution by a digital oscilloscope at a rate of 2 Giga-Samples per second. The integrated CCD camera and microscope system is mounted on a precision probing station, making it possible to view the sample and to position the laser beams on its surface with a resolution of 1 o m. The microscope has a motorized, 40X continuous zoom capability. Five microscope objective lenses (5X - 100X) are available, providing a maximum magnification of 4000X. The optical system has been designed so that the heating and probing beams may be located concentrically (for through-plane property measurements) or eccentrically (for in-plane measurements). The sample under test is placed on a thermal chuck, capable of maintaining the bottom of the sample at an isothermal condition, in the range of 0 -200 (degree)C with increments of 0.1(degree)C. All components are computer interfaced for control and data acquisition. WORK SCHEDULE
Objective No. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec - ------------- --- --- --- --- --- --- --- --- --- --- --- --- 1 X X X X 2 X X X X X 3 X X X X X X 4 X X X X X X Reports X X X
EX-10.32 5 a2050556zex-10_32.txt EXHIBIT 10.32 EXHIBIT 10.32 STEVENSON-WYDLER (15 USC 3710) COOPERATIVE RESEARCH AND DEVELOPMENT AGREEMENT MASTER TERMS AND CONDITIONS (hereinafter "CRADA Terms") NO. BG9938900 BETWEEN Ernest Orlando Lawrence Berkeley National Laboratory (hereinafter "Laboratory") AND Isonics Corporation United States Industry Coalition Member Company(s) (hereinafter "Participant") both being hereinafter jointly referred to as the "Parties." The U.S. Department of Energy (DOE) is the agency responsible for the federally-owned facility known as Laboratory managed and operated under a prime contract with DOE, designated Contract No. DE-AC03-76SF00098. This instrument constitutes the Master Terms and Conditions for use in a series of Cooperative Research and Development Agreements (CRADA) initiated by individual Project Letter Agreements (PLA) under the Initiatives for Proliferation Prevention (IPP) Program of the DOE, the United States Industry Coalition, Inc. (USIC), and cooperating New Independent States (NIS) of the Former Soviet Union (FSU). When these "CRADA Terms" are combined with an approved PLA, the instrument constitutes a CRADA under the authority of the Stevenson-Wydler Technology Innovation Act of 1980, as amended (15 U.S.C. 3710 et seq). ARTICLE I. DEFINITIONS A. "Government" means the United States of America and agencies thereof. B. "DOE" means the Department of Energy, an agency of the Government. C. "Contracting Officer" means the DOE employee administering the Laboratory's DOE Contract. D. "Generated Information" means information produced in the performance of this CRADA. E. "Proprietary Information" means information which is developed at private expense outside of this CRADA, is marked as Proprietary Information, and embodies (I) trade secrets or (ii) commercial or financial information which is privileged or confidential under the Freedom of Information Act (5 USC 552 (b)(4)). F. "Protected CRADA Information" means Generated Information which is marked as being Protected CRADA Information by a Party to this CRADA and which would have been Proprietary Information had it been obtained from a non-federal entity. Page 1 of 14 G. "Subject Invention" means any invention of the Laboratory or Participant conceived or first actually reduced to practice in the performance of work under this CRADA. H. "Intellectual Property" means patents, Trademarks, copyrights, Mask Works, and other forms of comparable property rights protected by Federal law and other foreign counterparts. I. "Trademark" means a distinctive mark, symbol, or emblem used in commerce by a producer or manufacturer to identify and distinguish their goods or services from those of others. J. "Mask Work" means a series of related images, however fixed or encoded, having or representing the predetermined, three-dimensional pattern of metallic, insulating, or semiconductor material present or removed from the layers of a semiconductor chip product; and in which series the relation of the images to one another is that each image has the pattern of the surface of one form of the semiconductor chip product. (17 USC 901(a)(2)) K. "Participating NIS Institute" means the scientific institute of the New Independent State of the Former Soviet Union that is performing work in support of this CRADA under subcontract with the Laboratory. L. "Participating NIS Institute Invention" means any invention of the Participating NIS Institute conceived or first actually reduced to practice in the performance of work under its subcontract with the Laboratory in support of this CRADA. ARTICLE II. STATEMENT OF WORK Appendix A, Statement of Work, is hereby incorporated into this CRADA by reference. ARTICLE III. TERM, FUNDING AND COSTS A. The effective date of this CRADA shall be the latter date of (1) the date on which the Project Letter Agreement (PLA) incorporating the Terms and Conditions of this instrument is signed by the last of the Parties hereto or (2) the date on which it is approved by DOE. The work to be performed under this CRADA shall be completed within the time specified in the PLA Statement of Work (SOW). B. The cost contribution of the Participant unless otherwise approved by the DOE will be at least fifty percent (50%) of the total cost of the project. The estimated contribution by the Participant and the Government for each cooperative research project shall be as set forth in the specific PLA entered into under this CRADA, subject to available funding. Page 2 of 14 C. Neither Party shall have an obligation to continue or complete performance of its work at a cost in excess of its estimated cost as contained in paragraph B of this Article, including any subsequent amendment. D. Each Party agrees to provide at least thirty (30) days notice to the other Party if the actual cost to complete performance will exceed the estimated cost. ARTICLE III.1 SPECIAL PAYMENT TERMS AND CONDITIONS An advance payment is required on the funds-in contribution made by the Participant under any PLA entered into hereunder. The terms and conditions of the advance payment will be set forth in the PLA. ARTICLE IV. PERSONAL PROPERTY All tangible personal property produced or acquired under this CRADA shall become the property of the Participant or the Government depending upon whose funds were used to obtain it. Such property will be identified in the Statement of Work, attached to the individual PLA. Personal property shall be disposed of as directed by the owner at the owner's expense. All jointly funded property shall be owned by the Government. ARTICLE V. DISCLAIMER THE GOVERNMENT, THE PARTICIPANT, THE PARTICIPATING NIS INSTITUTE, AND THE LABORATORY MAKE NO EXPRESS OR IMPLIED WARRANTY AS TO THE CONDITIONS OF THE RESEARCH OR ANY INTELLECTUAL PROPERTY, GENERATED INFORMATION, OR PRODUCT MADE OR DEVELOPED UNDER THIS CRADA, OR THE OWNERSHIP, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE RESEARCH OR RESULTING PRODUCT. NEITHER THE GOVERNMENT, THE PARTICIPANT, THE PARTICIPATING NIS INSTITUTE, NOR THE LABORATORY SHALL BE LIABLE FOR SPECIAL, CONSEQUENTIAL, OR INCIDENTAL DAMAGES ATTRIBUTED TO SUCH RESEARCH OR RESULTING PRODUCT, INTELLECTUAL PROPERTY, GENERATED INFORMATION, OR PRODUCT MADE OR DEVELOPED UNDER THIS CRADA. ARTICLE VI. PRODUCT LIABILITY Except for any liability resulting from any negligent acts or omissions of the Participating NIS Institute, Participant agrees to indemnify the Government, The Regents, and the Participating NIS Institute for all damages, cost and expenses, including attorney's fees, arising from the commercialization and utilization of technologies, including, but not limited to, the making, using, selling or exporting of a product, process or service by or on behalf of the Participant, its Page 3 of 14 assignees or licensees, which were derived from the work performed under this CRADA. In respect to this Article, neither the Government nor The Regents shall be considered assignees or licensees of the Participant as a result of reserved Regents and/or Government rights. The indemnity set forth in this paragraph shall apply only if the Participant shall have been informed as soon and as completely as practical by The Regents and/or the Government of the action alleging such claim and shall have been given an opportunity, to the maximum extent afforded by applicable laws, rules, or regulations, to participate in and control its defense, and The Regents and/or Government shall have provided all reasonably available information and reasonable assistance requested by the Participant. No settlement of an action against The Regents and/or the Government for which the Participant would be responsible hereunder shall be made without the Participant's consent unless required by final decree of a court of competent jurisdiction. ARTICLE VII. OBLIGATIONS AS TO PROPRIETARY INFORMATION A. If Proprietary Information is orally disclosed to a Party, it shall be identified as such, orally, at the time of disclosure and confirmed in a written summary thereof, appropriately marked by the disclosing party, within ten (10) days as being Proprietary Information. B. Each Party agrees to not disclose Proprietary Information provided by a Participating NIS Institute or another Party to anyone other than the CRADA Participant, the Participating NIS Institute, and the Laboratory without written approval of the providing Party, except to Government employees who are subject to the statutory provisions against disclosure of confidential information set forth in the Trade Secrets Act (18 USC 1905). C. All Proprietary Information shall be returned to the provider thereof at the conclusion of this CRADA at the provider's expense. D. All Proprietary Information shall be protected, unless and until such Proprietary Information shall become publicly known without the fault of the recipient, shall come into recipient's possession without breach of any of the obligations set forth herein by the recipient, or shall be independently developed by recipient's employees who did not have access to such Proprietary Information. ARTICLE VIII. OBLIGATIONS AS TO PROTECTED CRADA INFORMATION A. Each Party may designate as Protected CRADA Information, as defined in Article I, any Generated Information produced by its employees, and with the agreement of the other Party, designate any Generated Information produced by the other Party's employees. All such designated Protected CRADA Information shall be appropriately marked. B. For a period of five (5) years from the date Protected CRADA Information is produced, the Parties agree not to further disclose such information except: (1) as necessary to perform this CRADA, including disclosure to the Participating NIS Institute; Page 4 of 14 (2) as provided in Article XI; (3) as requested by the DOE Contracting Officer to be provided to other DOE facilities for use only at those DOE facilities with the same protection in place; (4) as requested by Participant for disclosure to other USIC members with the same protection in place; (5) to existing or potential licensees, affiliates, customers or suppliers of the Parties in support of commercialization of the technology with the same protection in place. Disclosure of Participant's Protected CRADA Information under this subparagraph shall only be done with Participant's consent; or (6) as mutually agreed by the Parties in advance. C. The obligations of paragraph B of this Article shall end sooner for any Protected CRADA Information which shall become publicly known without fault of either Party, shall come into a Party's possession without breach by that Party of the obligations of paragraph B of this Article, or shall be independently developed by a Party's employees who did not have access to the Protected CRADA Information. ARTICLE IX. RIGHTS IN GENERATED INFORMATION The Government shall have unlimited rights in all Generated Information produced or provided by the Parties under this CRADA, except for information which is disclosed in a Subject Invention disclosure being considered for patent protection, protected as a Mask Work right, or marked as being copyrighted, Protected CRADA Information, or Proprietary Information. ARTICLE X. EXPORT CONTROL THE PARTIES UNDERSTAND THAT MATERIALS AND INFORMATION RESULTING FROM THE PERFORMANCE OF THIS CRADA MAY BE SUBJECT TO EXPORT CONTROL LAWS AND THAT EACH PARTY IS RESPONSIBLE FOR ITS OWN COMPLIANCE WITH SUCH LAWS. ARTICLE XI. REPORTS AND ABSTRACTS A. The Parties agree to produce the following deliverables: (1) an initial abstract suitable for public release at the time the CRADA is approved by DOE; Page 5 of 14 (2) other abstracts (final when work is complete, and others as substantial changes in scope and funding occur); (3) a final report, upon completion or termination of this CRADA, to include a list of Subject Inventions; (4) a semi-annual, signed financial report of the Participant's in-kind contributions to the project; (5) other topical/periodic reports where the nature of research and magnitude of funding justify; and (6) computer software in source and executable object code format as defined within the Statement of Work or elsewhere within the CRADA documentation. B. It is understood that the Laboratory has the responsibility to provide the above information at the time of its completion to the DOE Office of Scientific and Technical Information. C. Participant agrees to provide the above information to the Laboratory to enable full compliance with paragraph B of this Article. D. It is understood that the Laboratory and DOE have a need to document the long-term economic benefit of the cooperative research being done under this CRADA. Therefore, the Participant acknowledges a responsibility to respond to reasonable requests, during the term of this CRADA and for two years thereafter, from the Laboratory for pertinent information. ARTICLE XII. PRE-PUBLICATION REVIEW A. The Parties agree to secure pre-publication approval from each other which shall not be unreasonably withheld or denied beyond thirty (30) days. B. The Parties agree that neither will use the name of the other Party or its employees in any promotional activity, such as advertisements, with reference to any product or service resulting from this CRADA, without prior written approval of the other Party. ARTICLE XIII. COPYRIGHTS A. The Parties may assert copyright in any of their Generated Information. Assertion of copyright generally means to enforce the copyright or give any indication of an intent or right to enforce, such as by marking or securing Federal registration. B. Each Party may retain ownership of copyrights in works created by its employees or contractors. Copyrights in jointly developed works shall be jointly owned. Page 6 of 14 C. For Generated Information, the Parties acknowledge that the Government has for itself and others acting on its behalf, a royalty-free, non-transferable, nonexclusive, irrevocable worldwide copyright license to reproduce, prepare derivative works, distribute copies to the public, and perform publicly and display publicly, by or on behalf of the Government, all copyrightable works produced in the performance of this CRADA, subject to the restrictions this CRADA places on publication of Proprietary Information and Protected CRADA Information. D. For all copyrighted computer software produced in the performance of this CRADA, the Party owning the copyright will provide the source code, an expanded abstract as described in Appendix B (Abstract Format Description), the executable object code and the minimum support documentation needed by a competent user to understand and use the software to DOE's Energy Science and Technology Software Center, P.O. Box 1020, Oak Ridge, TN 37831. The expanded abstract will be treated in the same manner as Generated Information in paragraph C of this Article. E. The Laboratory and the Participant agree that, with respect to any copyrighted computer software produced in the performance of this CRADA, DOE has the right, at the end of the period set forth in paragraph B of Article VIII hereof and at the end of each two-year interval thereafter, to request the Laboratory and the Participant and any assignee or exclusive licensee of the copyrighted software to grant a nonexclusive, partially exclusive, or exclusive license to a responsible applicant upon terms that are reasonable under the circumstances, provided such grant does not cause a termination of any licensee's right to use the copyrighted computer software. If the Laboratory or the Participant or any assignee or exclusive licensee refuses such request, the Laboratory and the Participant agree that DOE has the right to grant the license if DOE determines that the Laboratory, the Participant, assignee, or licensee has not made a satisfactory demonstration that it is actively pursuing commercialization of the copyrighted computer software. Before requiring licensing under this paragraph E, DOE shall furnish the Laboratory/Participant written notice of its intentions to require the Laboratory/Participant to grant the stated license, and the Laboratory/Participant shall be allowed thirty (30) days (or such longer period as may be authorized by the cognizant DOE Contracting Officer for good cause shown in writing by the Laboratory/Participant) after such notice to show cause why the license should not be required to be granted. The Laboratory/Participant shall have the right to appeal the decision by DOE to the grant of the stated license to the Invention Licensing Appeal Board as set forth in paragraphs (b)-(g) of 10 CFR 781.65, "Appeals." F. The Parties agree to place copyright and other notices, as appropriate for the protection of copyright, in human readable form onto all physical media, and in digitally encoded form in the header of machine readable information recorded on such media such that the notice will appear in human readable form when the digital data are off-loaded or the data are accessed for display or printout. Page 7 of 14 ARTICLE XIV. REPORTING SUBJECT INVENTIONS A. The Parties agree to promptly disclose to each other every Subject Invention which may be patentable or otherwise protectable under the Patent Act. The Laboratory agrees to promptly disclose to Participant every Participating NIS Institute Invention which is reported to the Laboratory. The Parties acknowledge that the Laboratory and Participant will disclose their respective Subject Inventions to DOE within two (2) months after the inventor first discloses the Subject Invention in writing to the person(s) responsible for patent matters of the disclosing Party. B. These disclosures should be in sufficiently complete technical detail to convey a clear understanding, to the extent known at the time of the disclosure, of the nature, purpose and operation of the Subject Invention. The disclosure shall also identify any known actual or potential statutory bars, i.e., printed publications describing the Subject Invention or the public use or on sale of the Subject Invention in this country. The Parties further agree to disclose to each other any subsequent statutory bar that occurs for a Subject Invention disclosed but for which a patent application has not been filed. All Subject Invention disclosures shall be marked as confidential under 35 USC 205. ARTICLE XV. TITLE TO INVENTIONS Whereas the Participant and Laboratory have been granted the right to elect to retain title to Subject Inventions, A. Each Party shall have the first option to elect to retain title to any Subject Invention made by its employees, and such election shall be made: (1) for the Participant within 12 months of disclosure of the Subject Invention to DOE or (2) for the Contractor within the time period specified in its prime contract for electing to retain title to Subject Inventions. If a Party elects not to retain title to any Subject Invention of its employees, then the other Party shall have the second option to elect to retain title to the Subject Invention. B. For Subject Inventions made by the Laboratory and Participating NIS Institute Inventions, the Laboratory will provide Participant with a non-exclusive, non-transferable, royalty-free, field of use license required by the Participant for its own use. Participant has a first option to negotiate for greater rights, such as exclusive, transferable, domestic and foreign rights. If Participant obtains the right to sublicense, the sublicenses must be royalty-bearing, and the Participant will pay a reasonable royalty to the Laboratory. The Laboratory will share equitably all net royalties received for Subject Inventions and Participating NIS Institute Inventions with the Participating NIS Institute. C. The Participant acknowledges that The Regents has offered to the Participant the option to an exclusive license, for reasonable compensation and subject to reasonable terms, in a pre- Page 8 of 14 negotiated field of use related to this CRADA for any Subject Invention made in whole or in part by The Regents' employee. D. The Parties acknowledge that DOE may obtain title to each Subject Invention reported under Article XIV for which a patent application or applications are not filed pursuant to Article XVI and for which any issued patents are not maintained by any Party to this CRADA. E. The Parties acknowledge that the Government retains a nonexclusive, nontransferable, irrevocable, paid-up license to practice or to have practiced for or on behalf of the United States every Subject Invention under this CRADA throughout the world. ARTICLE XVI. FILING PATENT APPLICATIONS A. The Parties agree that the Party initially indicated as having an ownership interest in any Subject Inventions shall have the first opportunity to file U.S. and foreign patent applications; but if such Party does not file such applications within one year after election, then the other Party to this CRADA may file patent applications on such inventions and the Party initially having ownership shall fully cooperate in this effort. The Parties will agree as to who will file patent applications on any joint Subject Inventions. B. The Parties agree that DOE has the right to file patent applications in any country in which neither Party desires to file a patent application for any Subject Invention. Notification of such negative intent shall be made in writing to the DOE Contracting Officer within three (3) months of the decision of the non-inventing Party not to file a patent application for the Subject Invention pursuant to Article XV, or not later than sixty (60) days prior to the time when any statutory bar might foreclose filing of a U.S. patent application. ARTICLE XVII. TRADEMARKS The Parties may seek to obtain Trademark/Service Mark protection on products or services generated under this agreement or any resulting PLA, in the United States or foreign countries. The ownership and other rights relating to this Trademark shall be as mutually agreed to in writing by the Parties. The Parties hereby acknowledge that the Government shall have the right to indicate on any similar goods or services it produces, that such goods or services were derived from and are a DOE version of the goods or services protected by such Trademark/Service Mark with the Trademark of the owner thereof being specifically identified. In addition, the Government shall have the right to use such Trademark/Service Mark in print or communication media. ARTICLE XVIII. MASK WORKS The Parties may seek to obtain legal protection for Mask Works fixed in semiconductor products generated under this agreement as provided by Chapter 9 of Title 17 of the United States Code. Page 9 of 14 The rights to any Mask Work covered by this provision shall be as mutually agreed to in writing by the Parties. The Parties acknowledge that the Government or others acting on its behalf shall retain a nonexclusive, paid-up, worldwide, irrevocable, nontransferable license to reproduce, import, or distribute the covered semiconductor product by or on behalf of the Government, and to reproduce and use the Mask Work by or on behalf of the Government. ARTICLE XIX. COST OF INTELLECTUAL PROPERTY PROTECTION Each Party shall be responsible for payment of all costs relating to copyright, Trademark, and Mask Work filing, U.S. and foreign patent application filing and prosecution, and all costs relating to maintenance fees for U.S. and foreign patents hereunder which are owned by the Party. ARTICLE XX. REPORTS OF INTELLECTUAL PROPERTY USE The Parties agree to submit, upon request of DOE, a non-proprietary report no more frequently than annually on efforts to utilize any Intellectual Property arising under this CRADA. ARTICLE XXI. DOE MARCH-IN RIGHTS For Subject Inventions made solely by the Participant and for assignments and exclusive licenses by the Laboratory to the Participant in Subject Inventions made in whole or in part by the Laboratory, DOE has march-in rights in accordance with 15 USC 3710a(b)(1)(B) and (C). For all other rights retained or transferred by the Laboratory in Subject Inventions of the Laboratory, DOE has march-in rights in accordance with 48 CFR 27.304-1(g). ARTICLE XXII. U.S. COMPETITIVENESS The Parties agree that a purpose of this program is to provide substantial benefit to the United States economy and the economy of the participating NIS. A. In exchange for the benefits received under this CRADA, the Participant therefore agrees to the following: Products, processes, services, and improvements which are covered by Intellectual Property developed under this CRADA shall be incorporated into the Participant's manufacturing facilities in the United States either prior to or simultaneously with implementation outside the United States. In any case, such implementation outside the United States shall not result in reduction of manufacture or use of the same products, processes, services, or improvements in the United States. Page 10 of 14 B. The Laboratory agrees to a U.S. Industrial Competitiveness clause in accordance with its prime contract with respect to any licensing and assignments of its Intellectual Property arising from this CRADA, except that any licensing or assignment of its Intellectual Property rights to the Participant shall be in accordance with Paragraph A of this Article. In the event it is not feasible to meet the requirements of this Article, a plan for providing net benefit to the United States economy is attached hereto as an integral part of the PLA. ARTICLE XXIII. ASSIGNMENT OF PERSONNEL A. It is contemplated that each Party may assign personnel to the other Party's facility as part of this CRADA. Such personnel assigned by the assigning Party to participate in or observe the research to be performed under this CRADA shall not, during the period of such assignments, be considered employees of the receiving Party for any purposes. B. The receiving Party shall have the right to exercise routine administrative and technical supervisory control of the occupational activities of such personnel during the assignment period and shall have the right to approve the assignment of such personnel and/or to later request their removal by the assigning Party. C. The assigning Party shall bear any and all costs and expenses with regard to its personnel assigned to the receiving Party's facilities under this CRADA. The receiving Party shall bear facility costs of such assignments. ARTICLE XXIV. FORCE MAJEURE No failure or omission by the Laboratory or Participant in the performance of any obligation under this CRADA shall be deemed a breach of this CRADA or create any liability if the same shall arise from any cause or causes beyond the control of the Laboratory or Participant, including but not limited to the following, which, for the purpose of the CRADA, shall be regarded as beyond the control of the Party in question: acts of God, acts or omissions of any government or agency thereof, compliance with requirements, rules, regulations, or orders of any governmental authority or any office, department, agency, or instrumentality thereof, fire, storm, flood, earthquake, accident, acts of the public enemy, war, rebellion, insurrection, riot, sabotage, invasion, quarantine, restriction, transportation embargoes, or failures or delays in transportation. ARTICLE XXV. ADMINISTRATION OF THE CRADA It is understood and agreed that this CRADA is entered into by the Laboratory under the authority of its prime contract with DOE. The Laboratory is authorized to and will administer this CRADA in all respects unless otherwise specifically provided for herein. Administration of Page 11 of 14 this CRADA may be transferred from the Laboratory to DOE or its designee with notice of such transfer to the Participant, and the Laboratory shall have no further responsibilities except for the confidentiality, use, and/or nondisclosure obligations of this CRADA. ARTICLE XXVI. RECORDS AND ACCOUNTING SYSTEM The Participant shall maintain records of receipts, expenditures, and the disposition of all Government property in its custody related to the CRADA. ARTICLE XXVII. NOTICES A. Any communications required by this CRADA, if given by postage prepaid first class U.S. Mail addressed to the Party to receive the communication, shall be deemed made as of the day of receipt of such communication by the addressee, or on the date given if by verified facsimile. Address changes shall be given in accordance with this Article and shall be effective thereafter. All such communications, to be considered effective, shall include the number of this CRADA. B. The address, telephone numbers, and facsimile numbers for the Parties are as follows: (1) For the Laboratory: U.S. Mail Only: Fed. Ex., UPS, Freight: The Regents of the University of California Ernest Orlando Lawrence Berkeley National Laboratory 1 Cyclotron Road, Mail Stop 937-400 Berkeley, CA 94720 Sponsored Projects Office Contact: Sueann Dang E-mail: SLDang@lbl.gov Phone: (510) 486-6273 Fax: (510) 486-4386 (a) FORMAL NOTICES AND COMMUNICATIONS, COPIES OF REPORTS Attn: Ms. Sueann Dang Tel: 510-486-6273 Facsimile: 510-486-4386 (b) TECHNICAL CONTACT, REPORTS, COPIES OF FORMAL NOTICES AND COMMUNICATIONS Technical Contacts: Page 12 of 14 Eugene Haller, Mailstop 2-200 Joel Ager, Mailstop 62-203 Email: EEHaller@lbl.eov Email: JWAger@lbl.gov Phone: (510) 486 5294 Phone: (510) 486 6715 FAX: (510) 486 5530 FAX: (510) 486 4114 (2) For Participant: U.S. Mail Only: Fed. Ex., UPS, Freight: Isonics Corporation 5906 McIntyre Street Golden, CO 80403 (a) FORMAL NOTICES AND COMMUNICATIONS, COPIES OF REPORTS Attn: Dr. Stephen Burden, Vice President, Electronic Materials Tel: 303-279-7900 Facsimile: 303-279-7300 (b) TECHNICAL CONTACT, REPORTS, COPIES OF FORMAL NOTICES AND COMMUNICATIONS Attn: Dr. Stephen Burden, Vice President, Electronic Materials Tel: 303-279-7900 Facsimile: 303-279-7300 ARTICLE XXVIII. DISPUTES The parties shall attempt to jointly resolve all disputes arising from this CRADA. If the Parties are unable to jointly resolve a dispute within a reasonable period of time after submission of the dispute for resolution, said dispute shall be adjudicated in a court of competent jurisdiction in the State of CALIFORNIA. To the extent that there is no applicable U.S. Federal law, this CRADA and performance thereunder shall be governed by the law of the State of California. ARTICLE XXIX. ENTIRE CRADA AND MODIFICATIONS A. It is expressly understood and agreed that this CRADA with its Appendices, Statement of Work, and related Project Letter Agreements contains the entire agreement between the Parties with respect to the subject matter hereof and that all prior representations or agreements relating hereto have been merged into this document and are thus superseded in totality by this CRADA. This CRADA shall not be effective until approved by DOE. Page 13 of 14 B. Any agreement to change any terms or conditions of this CRADA or the Appendices shall be valid only if the change is made in writing, executed by the Parties hereto, and approved by DOE. C. The Participant certifies that it has not and will not enter into an agreement with the Participating NIS Institute that conflicts with the terms of this CRADA. To the extent that any subsequent agreement between the Participant and the Participating NIS Institute conflicts with the allocation of rights in Participating NIS Institute Inventions under this CRADA, the Participant agrees that the terms of this CRADA will supersede the terms of such agreement. ARTICLE XXX. TERMINATION This CRADA may be terminated by either Party upon thirty (30) days written notice to the other Party. This CRADA may also be terminated by the Laboratory in the event of failure by the Participant to provide the necessary advance funding, as agreed in Article III.1. In the event of termination by either Party, each Party shall be responsible for its share of the costs incurred through the effective date of termination, as well as its share of the costs incurred after the effective date of termination and which are related to the termination. The confidentiality, use, and/or nondisclosure obligations of this CRADA shall survive any termination of this CRADA. For the Laboratory For Participant BY /s/ Charles V. Shank BY /s/ S. J. Burden TITLE: Charles V. Shank, Director TITLE: VP Semiconductor Materials DATE: November 9, 1999 DATE: October 26, 1999 Page 14 of 14 PROJECT LETTER AGREEMENT TO MASTER CRADA BG99-389(00) WITH ISONICS CORPORATION FOR ISOTOPICALLY PURE SILICON FOR IMPROVED MICROELECTRONICS A. SCOPE OF WORK: ELECTRONICS MATERIALS PROGRAM, LBNL This program (Eugene Haller, program head) has been a research leader in exploiting scientifically and technically the properties of isotopically pure Group IV and III-V semiconductors. The program has studied phonon properties, solid state diffusion, local vibrational mode spectroscopy, and metal-insulator transitions in isotopically controlled materials and structures in collaboration with many research groups worldwide. ISONICS CORPORATION Isonics is an advanced materials and technology company founded in 1992 which develops and commercializes products based on enriched stable isotopes and high purity materials. Isonics is a publicly held company with annual sales of $6.78 million for the fiscal year ended April 30, 1998 (49% increase from previous fiscal year). Recent acquisitions have expanded the scope of the company's products and based on historical performance, FY 1999 sales of $16 million are expected. Isonics is the major supplier of Depleted Zinc (DZ), used in different forms to mitigate corrosion and cracking in nuclear power plants. Isonics is the third largest supplier of carbon-13 for medical applications and is further developing its supply position. The company also offers metal isotopes used in nuclear medicine for therapy and imaging. Isonics has begun a major R&D effect to develop isotopically enriched Si for semiconductor applications; this CRADA is part of that effort. KRASNOYARSK-45 The NIS institute in this project is Krasnoyarsk-45, a former Closed Nuclear City of the USSR which was involved in nuclear weapons design, assembly, and plutonium storage. The isotope manufacturing technology (centrifuge) that will be utilized in this project to make isotopically pure Si was originally developed to make isotopically enriched materials for use in nuclear weapons. Krasnoyarsk-45 is interested in finding non-military used for its isotope separation technology and has already shipped sample volumes of isotopically enriched Si to Isonics for test purposes. B. REASONS FOR COOPERATION The project involves Isonics, which is a leading supplier of isotopes to technological markets, Berkeley Lab's Electronic Materials Program, which has been a research leader in exploiting scientifically and technically the properties of isotopically pure Group IV and III-V semiconductors, and Krasnoyarsk-45, which has a unique high-volume manufacturing capacity for silicon isotopes. These parties have a mutual interest in the project as detailed below. NONPROLIFERATION IMPACT AND BENEFIT TO NIS The NIS institute in this project is Krasnoyarsk-45, a former Closed Nuclear City of the USSR which was involved in nuclear weapons design, assembly, and plutonium storage. The isotope manufacturing technology that will be utilized in this project to make isotopically pure Si was used, and could still be used, to make isotopes used in nuclear weapons. By adapting the centrifuge facilities at Krasnoyarsk-45 for the production of silicon isotopes, this project will develop a market for its unique isotope manufacturing technologies that does not involve weapons of mass destruction. The potential market for products based on isotopically pure Si is large, and Krasnoyarsk-45 has some unique manufacturing capabilities to provide large quantities of raw materials for this market. The highly skilled scientists and engineers would be employed in developing a product, which, if successful, would allow them to be a producer of silicon isotopes for the electronics industry. If cost-effective production methods are achieved, it is possible that the NIS could establish itself as the leading supplier of isotopically pure silicon for semiconductor applications. This would give the NIS a role in the lucrative $6 billion international silicon manufacturing industry that it has not had to date. BENEFITS TO LBNL AND DOE This project gives the LBNL scientists access to large quantities of highly enriched Si isotopes, which still are prohibitively expensive to buy from non-NIS vendors. There are a number of unique and fundamental scientific experiments that can be performed with this material, as described below. There are direct benefits to DOE from this project related to the missions of both the Basic Energy Sciences Office and the DOE Technology Offices. Silicon is the major semiconductor material and devices of this material are becoming increasingly important in the generation, distribution, and consumption of electrical energy. The US electric power grid can be used today to a much higher capacity than a few years ago because loop currents and subharmonic oscillations on the power grid can now be suppressed with active silicon controlled capacitor charge storage and phase shifters. Isotopically controlled silicon has great promise in allowing such silicon devices to handle larger power loads. Furthermore, the Department of Energy and other Government Departments, would have access to isotopically purified silicon which would benefit a wide range of fundamental and applied electronic materials and device studies. BENEFITS TO INDUSTRIAL PARTNER (ISONICS CORP.) A goal of this project is the establishment of a manufacturing capability for isotopically pure silicon. The application of isotopically pure silicon would impact the entire semiconductor industry and allow Moore's Law to remain valid for years to come. The potential benefits of isotopically pure silicon will be of interest to electronic device manufacturers for the following reasons. o Improved device performance and higher speed switching due to lower temperatures at active junctions o Higher reliability devices due to fewer hot spots and a lower overall operating temperatures o Lower costs due to lowered cooling requirements, allowing the use of smaller, less expensive packaging o Improved yields due to increased number of prime chips o The possibility of being able skip/delay next generation of manufacturing technology due to the performance improvements, which would vastly decrease capital expenditures These advantages are available without any changes in current equipment or process technology. Even further improvements can be realized by optimizing devices to take advantage of the higher thermal conductivity of isotopically enriched - 28Si. It is expected that improvements would occur in both high- density integrated circuits (e.g. microprocessors) and in high power devices (e.g. power transistors). A market analysis done by Isonics shows that if a commercial source of isotopically pure Si were available, it would be of international interest to IC manufacturers who use $6 billion worth of silicon per year. At present, early test wafers of 28Si are being evaluated at leading research organizations including Stanford University, Yale University, UC Berkeley, MIT, and Lucent Technologies (Bell Laboratories). A limited number of epitaxial wafers made to custom specifications are currently available to integrated circuit manufacturers. Isonics has received inquires concerning isotopically pure, high thermal conductivity Si wafers from a number of microprocessor manufacturers including AMD, IBM, Intel, Motorola, Digital Equipment (Compaq), Sun Microsystems, and Silicon Graphics. C. EXPECTED ACCOMPLISHMENTS AND GOALS The project will use 25 kg of 99.9% enriched 28Si, 500 g of 90% enriched 29Si, and 500 g of 90% enriched 30Si to be provided by Krasnoyarsk-45 as their commitment. (All weights refer to the amount of Si regardless of the chemical form, i.e., silane, trichlorosilane, etc.) The project goals are the following: o Manufacture 28Si epitaxial layers on natural Si wafer up to 8" (200 mm) in size for fabrication of IC test circuits and for thermal conductivity testing with the goal of establishing isotopically enriched Si as a viable component of the semiconductor manufacturing process. o Produce 0.25-1.0" diameter 28Si boules using poly-28Si as a starting material. o Generate high-quality P-doped (n-type) Si material via neutron transmutation doping (NTD) of highly 30Si -enriched material. o Perform fundamental scientific measurements on isotope enriched Si including thermal conductivity measurements in 28Si bulk samples, self- and dopant diffusion and electronic transport studies in isotope superlattice structures, and magnetic resonance studies in 29Si -enriched material. D. TECHNICAL OBJECTIVES KRASNOYARSK-45 Krasnoyarsk-45 is expected to use its existing isotope separation technology (centrifuge) to achieve pilot-plant-scale production of silicon tetrafluoride (SiF4) with semiconductor grade chemical purity isotopically enriched to greater than 99.9% 28Si and to a lesser percentage (90%) for 29Si and 30Si. These materials would be suitable for the manufacturing of high quality, isotopically pure single crystal boules and wafers for use in IC manufacturing and scientific studies. The contract with Krasnoyarsk-45 will be negotiated separately through the Civilian Development and Research Foundation (CDRF). ISONICS CORPORATION Isonics Corporation is responsible for the commercial purification of the silicon tetrafluoride to semiconductor industry standards and production of purified silane and other silicon compounds required by this project. Isonics has previously used Krasnoyarsk material to manufacture IC-grade 28Si epitaxial layers on natural Si wafer substrates. One of Isonics' objectives is to establish this technology as a solution to the heat management problem that will occur in the next generation of microprocessor designs. LAWRENCE BERKELEY NATIONAL LABORATORY Lawrence Berkeley National Laboratory will assist in the chemical analysis of the raw materials, produce small diameter single crystals of isotopically pure silicon, and measure the electronic and physical properties of the isotopically enriched bulk and thin film silicon, such as lattice parameter, thermal conductivity, optical transmittance, carrier mobilities and lifetimes, and perform basic materials studies. Most of these will use already existing capabilities available to the Electronic Materials Program. With technical assistance from Isonics, LBNL will construct and operate a reactor for the deposition of the poly-Si precursor required to make single crystals. E. TASKS, RESPONSIBILITIES, AND SCHEDULE
ACTIVITIES AND DELIVERABLES RESPONSIBLE 1 2 3 4 5 6 7 8 PARTY - ----------------------------------- ----------- ----- ----- ----- ----- ----- ----- ----- ----- PRODUCTION SCHEDULE FOR ENRICHED SI Units are quantities after project start Operation of centrifuge for the KRAS-45 production of enriched Si isotopes Delivery #1: 7kg 28Si, 100g 29Si, KRAS-45 100g 30Si (required to be 99.9% SiF4). All deliveries made to Isonics Delivery #2: 8kg 28Si, 200g 29Si, KRAS-45 200g 30Si Delivery #3: 10kg 28Si, 200g KRAS-45 29Si, 200g 30Si CONVERSION OF SIF4 TO CVD PRECURSORS Conversion of SiF4 to trichlorosilane Isonics for production of isotopic epilayers and isotope superlattices Conversion of SiF4 to silane for Isonics production of poly-Si and single crystals MATERIALS PRODUCTION SCHEDULE: ISONICS Produce 28Si epilayers on natural Si wafers Production milestones (10, 25, Isonics 100, 150 coated, IC-ready wafers, respectively) MATERIALS PRODUCTION SCHEDULE: LBNL Precursor delivery #1: 1kg 28Si, Isonics 100g 29Si, 100g 30Si in form of silane (these deliveries are made to LBNL) Precursor delivery #2: 1kg 28Si, 200g 29Si, 100g 30Si in form of silane Precursor delivery #3: 1kg 28Si, Isonics 200g 29Si, 100g 30Si in form of silane Construction of poly-Si reactor LBNL and tests with natural Si Production of poly-28Si LBNL Single crystal growth LBNL Production of first 28Si bulk LBNL sample Production of superlattice and LBNL epilayer samples for fundamental studies FUNDAMENTAL STUDIES NTO studies using 30Si LBNL Magnetic resonance studies using LBNL 29Si Transport and diffusion studies LBNL using isotope superlattices Thermal conductivity measurements LBNL on bulk 28-Si REPORTS AND MEETING Quarterly technical meeting LBNL Isonics Quarterly progress reports LBNL End of DOE Fiscal Year technical LBNL report 1 2 3 4 5 6 7 8
F. DELIVERABLES Project deliverables and milestones are indicted by solid diamonds in the project plan in section B.4. Additional notes are as follows. o Over the course of the project 25 kg equivalent of 28Si produced by Krasnoyarsk-45 will be delivered in the form of SiF4 to Isonics. Isonics is responsible for the costs of converting this to silane (SiH4). 3 kg. equivalent of this silane wilt be delivered to LBNL per the schedule in Section E. The balance of the silane will belong to Isonics. o The costs of converting the 500 g equivalents of 50% enriched 28Si and 30Si into silane or other suitable growth precursors will be borne by LBNL. o The wafers coated with thick epilayers of 28Si in the size range up to 200 mm that are manufactured by Isonics using the 28SiH4 in this project will belong to Isonics and may be marketed and sold by them. The 28Si poly-Si, 28Si single crystals, and the epilayer structures made with all three Si isotopes by LBNL in this project will belong to LBNL. G. PERIOD OF PERFORMANCE The project is expected to run two years from the date of the signing of the CRADA and the subcontract agreement with Krasnoyarsk-45. H. AUTHORIZED TRAVEL Travel by LBNL personnel to be supported by the DOE funds in this project is authorized as detailed below. Travel to Scientific Conference Up to 1 trip/year Travel to Technical Meetings associated with the Project Up to 3 trips/year Travel to vendors, suppliers, and Process Providers associated with the operation of the project Up to 3 trips/year Travel to Krasnoyarsk-45 Up to 1 trip/year 1. TOTAL COST, INCLUDING LBNL, NIS SUBCONTRACT, AND PARTICIPANT IN-KIND: 1. LBNL Total Costs (Including NIS Subcontract) $1,009,487.00 NIS Subcontract Amount $607,800.00 2. Participant In-Kind Contribution $1,144,475.00 3. Total Costs $2,153,962.00
There are no funds-in contribution by Isonics. Inc. and no advance payments are due. J. BACKGROUND INTELLECTUAL PROPERTY "Background Intellectual Property" means the Intellectual Property Rights in the items identified by the Parties below, which were in existence prior to or are first produced outside of this CRADA, and for such items, the inventions must have been conceived outside of this CRADA and not first actually reduced to practice under this CRADA to qualify as Background Intellectual Property. Licensing of Background Intellectual Property, if agreed to by the Parties, shall be the subject of separate licensing agreements between tire Parties. Background Inventions are not subject inventions. F. DELIVERABLES Project deliverables and milestones are indicted by solid diamonds in the project plan in section B.4. Additional notes are as follows. o Over the course of the project 25 kg. equivalent of 28Si produced by Krasnoyarsk-45 will be delivered in the form of SiF4 to Isonics. Isonics is responsible for the costs of converting this to silane (SiH4). 3 kg equivalent of this silane will be delivered to LBNL per the schedule in Section E. The balance of the silane will belong to Isonics. o The costs of converting the 500 g equivalents of 50% enriched 28Si and 30Si into silane or other suitable growth precursors will be borne by LBNL. o The wafers coated with thick epilayers of 28Si in the size range up to 200 mm that are manufactured by Isonics using the 28SiH4 in this project will belong to Isonics and may be marketed and sold by them. The 28Si poly-Si, 28Si single crystals, and the epilayer structures made with all three Si isotopes by LBNL in this project will belong to LBNL. G. PERIOD OF PERFORMANCE The project is expected to run two years from the date of the signing of the CRADA and the subcontract agreement with Krasnoyarsk-45. H. AUTHORIZED TRAVEL Travel by LBNL personnel to be supported by the DOE funds in this project is authorized as detailed below. Travel to Scientific Conference Up to 1 trip/year Travel to Technical Meetings associated with the Project Up to 3 trips/year Travel to vendors, suppliers, and process providers associated with the operation of the project Up to 3 trips/year Travel to Krasnoyarsk-45 Up to 1 trip/year I. TOTAL COST, INCLUDING LBNL, NIS SUBCONTRACT, AND PARTICIPANT IN-KIND: 1. LBNL Total Costs (Including NIS Subcontract) $1,009,487.00 NIS Subcontract Amount $607,800.00 2. Participant In-Kind Contribution $1,144,475.00 ------------- 3. TOTAL COSTS $2,153,962.00
There are no funds-in contribution by Isonics, Inc. and no advance payments are due. J. BACKGROUND INTELLECTUAL PROPERTY "Background Intellectual Property" means the Intellectual Property Rights in the items identified by the Parties below, which were in existence prior to or are first produced outside of this CRADA, and for such items, the inventions must have been conceived outside of this CRADA and not first actually reduced to practice under this CRADA to qualify as Background Intellectual Property. Licensing of Background Intellectual Property, if agreed to by the Parties, shall be the subject of separate licensing agreements between the Parties. Background Inventions are not subject inventions. The Parties have identified the following items as Background Intellectual Property: PARTICIPANT IDENTIFIED ITEMS: Isonics will be using the isotopically enriched semiconductor devices to study the isotopically pure silicon for improved microelectronics. In addition to process know-how, the intellectual property consists of U.S. Patent 5,144,409 assigned to Yale University, for which Isonics has the exclusive license. THE REGENTS IDENTIFIED ITEMS: None THE REGENTS OF THE FOR PARTICIPANT UNIVERSITY OF CALIFORNIA, LAWRENCE BERKELEY LABORATORY BY /s/ Charles V. Shank BY /s/ Stephen J. Burden TITLE: Laboratory Director TITLE VP Semiconductor Materials DATE November 9, 1999 DATE October 26, 1999 EX-10.33 6 a2050556zex-10_33.txt EXHIBIT 10.33 EXHIBIT 10.33 MEMORANDUM OF AGREEMENT JULY 1996 This MOA is a record of agreement reached by the following parties after several meetings in Russia and the USA: Electrochemical Plant Zelenogorsk, Russia AO Techsnabexport Co., Ltd. Moscow, Russia A & R Materials, Inc. San Jose, California The Parties seeing the benefits of the ongoing business relationship that combines their individual strengths in the manufacturing and marketing of enriched stable isotopes have agreed to the following: 1. The Parties will extend current, 1996 delivery contracts for additional 3 years, through 1997, 1998 and 1999. Specific contract details such as quantities, price and delivery schedule for each contract year will be agreed to by November 1 st of the previous year. 2. Following stable isotope products will be covered by these contracts: Depleted Zinc (DZO) Carbon Cadmium Silicon 3. The Parties agree that Electrochemical Plant will allocate its stable isotope production capacity for the A & R identified markets and customers and will expand the isotope products list as dictated by the marketplace. 4. The Parties agree that a natural continuation to these contracts would be formation of a joint venture (JV). The Parties further agree that such JV could become effective at any time and would replace the then existing contracts between the Parties. The Parties wishing to be bound to the aforesaid, affix the signatures of their authorized representatives below: Electrochemical Plant AO Techsnabexport Co. Ltd. A&R Materials, Inc. /s/ A. Shubin A. Shubin /s/ A. Shishkin A. Shishkin /s/ B. Rubizhevsky J. Alexander - ------------------------ ----------------------------- -------------------------------- General Director General Director for President 19 07 96 Date 25 07 96 Date 7/26/96 Date
EX-23.10 7 a2050556zex-23_10.txt EXHIBIT 23.10 CONSENT OF INDEPENDENT AUDITORS We have issued our report dated June 26, 2000, accompanying the consolidated financial statements of Isonics Corporation and Subsidiaries appearing in the Registration Statement and Prospectus. We consent to the use of the aforementioned report in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption "Experts." /s/ GRANT THORNTON LLP San Jose, California May 29, 2001 -----END PRIVACY-ENHANCED MESSAGE-----