-----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, JpjV4d0R/ScYf46mzxbeI05pj03FQWpv67TG7auXaiH/Y0RPv7Ag7/RyIO6awiWy GYMYsASroiT5HTobyeAGnQ== 0000950109-96-006432.txt : 19961003 0000950109-96-006432.hdr.sgml : 19961003 ACCESSION NUMBER: 0000950109-96-006432 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19961002 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ISONICS CORP CENTRAL INDEX KEY: 0001023966 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 770338561 STATE OF INCORPORATION: CA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-13289 FILM NUMBER: 96638468 BUSINESS ADDRESS: STREET 1: 4010 MOORPACK AVENUE STREET 2: SUITE 119 CITY: SAN JOSE STATE: CA ZIP: 95117 BUSINESS PHONE: 4082600155 MAIL ADDRESS: STREET 1: 4010 MOORPACK AVENUE STREET 2: SUITE 119 CITY: SAN JOSE STATE: CA ZIP: 95117 SB-2 1 FORM SB-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 2, 1996 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- ISONICS CORPORATION (Name of Small Business Issuer in Its Charter) CALIFORNIA 2819 77-0338561 (STATE OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.) --------------- 4010 MOORPARK AVENUE, SUITE 119 SAN JOSE, CALIFORNIA 95117 (408) 260-0155 (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE OF BUSINESS) --------------- JAMES E. ALEXANDER CHIEF EXECUTIVE OFFICER ISONICS CORPORATION 4010 MOORPARK AVENUE, SUITE 119 SAN JOSE, CALIFORNIA 95117 (408) 260-0155 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE) --------------- COPIES TO: C. KEVIN KELSO, ESQ. DANIEL I. DEWOLF, ESQ. BRUCE F. MACKLER, ESQ. WILLIAM N. HADDAD, ESQ. MARK PORTER, ESQ. CAMHY, KARLINSKY & STEIN FENWICK & WEST LLP 1740 BROADWAY, 16TH FLOOR TWO PALO ALTO SQUARE NEW YORK, NEW YORK 10019 PALO ALTO, CALIFORNIA (212) 977-6600 94306 (415) 494-0600 --------------- APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED TITLE OF EACH CLASS OF MAXIMUM PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE - ------------------------------------------------------------------------------------- Common Stock........... 977,500 $7.90 $7,722,250 $2,663 - ------------------------------------------------------------------------------------- Redeemable Warrants to purchase Common Stock(3)(5)........... 977,500 $0.10 $97,750 $34 - ------------------------------------------------------------------------------------- Common Stock issuable upon exercise of Redeemable Warrants... 977,500 $11.85 11,583,375 $3,995 - ------------------------------------------------------------------------------------- Representatives' Warrants.............. 85,000 $.001 $85 -- - ------------------------------------------------------------------------------------- Common Stock issuable upon exercise of Representatives' Warrants(5)........... 85,000 $9.48 $805,800 $278 - ------------------------------------------------------------------------------------- Redeemable Warrants issuable upon exercise of Representatives' Warrants.............. 85,000 $0.12 $10,200 $4 - ------------------------------------------------------------------------------------- Common Stock issuable upon exercise of Redeemable Warrants issuable upon exercise of Representatives' Warrants(5)........... 85,000 $11.85 $1,007,250 $348 - ------------------------------------------------------------------------------------- Total.................. 3,272,500 $21,226,710 $7,322
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Estimated solely for purpose of determining the registration fee pursuant to Rule 457 under the Securities Act. (2) Includes 127,500 shares of Common Stock issuable upon exercise of the Representatives' Over-Allotment Option. (3) Includes 127,500 Redeemable Warrants issuable upon exercise of the Representatives' Over-Allotment Option (4) No registration fee required pursuant to Rule 457 under the Securities Act. (5) Pursuant to rule 416 of the Securities Act, there are also being registered hereby such additional indeterminate number of Shares of Common Stock as may become issuable pursuant to the anti-dilution provisions of the Redeemable Warrants and the Representatives' Warrants. --------------- 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED OCTOBER 2, 1996 850,000 SHARES AND 850,000 WARRANTS [LOGO OF ISONICS CORPORATION] This Prospectus relates to the offering of 850,000 shares (the "Shares") of common stock, no par value (the "Common Stock"), and 850,000 warrants to purchase one share of Common Stock (the "Warrants") by Isonics Corporation, a California corporation ("Isonics" or the "Company"). The Shares and the Warrants are sometimes referred to collectively as the "Securities." All of the Securities offered hereby are being sold by the Company. Until the completion of this offering, the Shares and Warrants may only be purchased together on the basis of one Share and one Warrant (sometimes referred to as a "Unit"). Each Warrant initially entitles the holder thereof to purchase one share of Common Stock at a price of $ per share, which is 150% of the initial public offering price per Share offered hereby, subject to adjustment under certain circumstances. The Warrants are exercisable at any time, unless previously redeemed, from the date of this Prospectus through the fifth anniversary of the date of this Prospectus, subject to certain conditions. The Company may redeem the Warrants, in whole or in part, at any time upon at least 30 days prior written notice to the registered holders thereof, at a price of $0.05 per Warrant, if the closing price of the Common Stock as reported on the Nasdaq SmallCap Market equals or exceeds 200% of the initial public offering price per Share for at least 20 consecutive trading days within a period of 30 consecutive trading days ending immediately before the notice of redemption. Prior to this offering, there has been no public market for the Common Stock or Warrants, and there is no assurance that such a market will develop or be maintained following the offering. It is currently estimated that the initial public offering price will be between $5.90 and $7.90 per Share and $0.10 per Warrant. See "Underwriting" for the factors considered in determining the pubic offering price. The Company has applied for listing of the Common Stock and Warrants on the Nasdaq SmallCap Market ("Nasdaq SCM") under the symbols "ISNX" and "ISNXW," respectively. It is anticipated that the Shares and Warrants will trade separately immediately after this offering. THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK, IMMEDIATE AND SUBSTANTIAL DILUTION AND RESTRICTIONS ON SECONDARY TRADING IN SOME STATES FOR A PERIOD OF TIME AFTER THIS OFFERING. SEE "RISK FACTORS" COMMENCING ON PAGE 5 AND "DILUTION" ON PAGE 15. ---------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
UNDERWRITING DISCOUNTS PROCEEDS TO PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2) - --------------------------------------------------------------------------------------------------- Per Share................................. $ $ $ - --------------------------------------------------------------------------------------------------- Per Warrant............................... $ $ $ - --------------------------------------------------------------------------------------------------- Total (3)................................. $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Does not include additional compensation payable to the representatives (the "Representatives") of the several Underwriters (the "Underwriters"), in the form of a non-accountable expense allowance. In addition, see "Underwriting" for information relating to indemnification and contribution arrangements with the Underwriters and other compensation payable to the Representatives. (2) Before deducting estimated expenses of the offering payable by the Company of $500,000, excluding the non-accountable expense allowance payable to the Representatives. (3) The Company has granted to the Underwriters a 45-day option to purchase up to an additional 127,500 Shares and 127,500 Warrants upon the same terms and conditions as set forth above, solely to cover over-allotments. To the extent that the option is exercised, the Underwriter will offer the additional Shares and Warrants at the Price to Public shown above. If such over-allotment option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." The Securities are being offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters, and subject to approval of certain legal matters by their counsel and subject to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify this offering and to reject any order in whole or in part. It is expected that delivery of the Securities will be made at the clearing offices of Pryor, McClendon, Counts & Co., Inc., on or about , 1996. PRYOR, MCCLENDON, COUNTS & CO., INC. NATIONAL SECURITIES CORPORATION THE DATE OF THIS PROSPECTUS IS , 1996 [PICTURES] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OR WARRANTS OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. The Securities offered hereby involve a high degree of risk. See "Risk Factors." Except where otherwise indicated, all share and per share data in this Prospectus (including data with respect to options and warrants to purchase shares) have been adjusted to reflect (i) a 1-for-6.89 reverse split of the outstanding Common Stock, and (ii) the conversion into Common Stock of all outstanding shares of preferred stock of the Company, which will occur before the closing of this offering. See "Description of Capital Stock." In addition, unless otherwise indicated, all information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. THE COMPANY Isonics is an advanced materials and technology company which develops and commercializes products based on enriched stable isotopes and high purity materials. Stable isotopes can be thought of as ultra-ultra pure materials. This high degree of purification accomplished on the sub-atomic level provides enhanced performance properties compared to normal purity materials. Stable isotopes have commercial uses in several areas, including energy; medical, research, diagnostics and drug development; product tagging and stewardship; semiconductors; and optical materials. Isonics has successfully developed and commercialized two stable isotope products and intends to promote the emergence and growth of new stable isotope applications. The Company's principal product to date is isotopically depleted zinc ("DZ"). DZ, in different chemical forms, is used to prevent corrosion in nuclear power plants. Corrosion is a cause of high radiation fields in such plants which can result in radiation exposure to workers. DZ also reduces environmental cracking in certain kinds of nuclear reactors which, if not controlled, can require extremely costly repairs or can result in premature shutdown and de- commissioning of the facility. The Company believes that it provides substantially all of the DZ used in nuclear power plants worldwide. The application of DZ was developed by General Electric Company ("GE"), where the founders of the Company were previously employed. Before May 1996, all sales of DZ by the Company were made to GE, which in turn resold the product to end users. In addition to sales to GE, in May 1996 Isonics commenced direct sales to end users, and for the three months ended July 31, 1996, approximately 10% of net revenues were from sales made directly to end users. New applications for stable isotopes are continually being developed by the Company and by third parties. The Company believes that many new applications have the potential to create new markets. One opportunity is to supply stable isotope labeled compounds for the diagnostic breath test ("DBT") market. DBTs provide early diagnosis of conditions that could otherwise lead to expensive procedures such as endoscopies and biopsies. DBTs under development by third parties which utilize stable isotopes in their application include tests to diagnose peptic ulcers, fat malabsorption and liver function. A urea DBT relating to peptic ulcers has recently been approved by the U.S. Food and Drug Administration (the "FDA"), and the Company believes that other companies have applied to the FDA or comparable agencies in foreign countries for approval of these tests, which must be obtained before any products can be sold. Certain DBTs are currently marketed in certain European countries. The Company holds an option, subject to satisfaction of certain conditions, to acquire an exclusive license to two Yale University patents which cover semiconductor devices made of isotopically pure silicon, germanium, gallium arsenide and most isotopically pure compound semiconductors. The patents claim that isotopic purity provides improved device speed and improved thermal conductivity, two properties which are of great importance to the semiconductor industry. According to the Semiconductor Industry Association, sales in 1995 of silicon wafers and other semiconductor substrates were approximately $6 billion. The Company is collaborating with Yale to evaluate these isotopically engineered semiconductor applications. The Company believes that if evaluations demonstrate the commercial feasibility of one or more products, demand could emerge in certain segments of the semiconductor market. There can be no assurance, however, that these evaluations will demonstrate the commercial feasibility of any products, that the Company will be able to commercialize any such products or that a market will emerge for any such products. The Company was formed in March 1992 and incorporated in California in March 1993 under the name A&R Materials, Inc. In September 1996, the Company changed its name to Isonics Corporation. The Company's principal executive offices are located at 4010 Moorpark Avenue, Suite 119, San Jose, California, 95117. Its telephone number is (408) 260-0155. 3 RISK FACTORS The Securities offered hereby involve a high degree of risk. This Prospectus contains forward-looking statements, including those discussed under "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Use of Proceeds." These forward-looking statements involve a number of risks and uncertainties, including, but not limited to, those discussed under "Risk Factors." The Company's actual results may differ significantly from the results discussed in the forward-looking statements. See "Risk Factors." THE OFFERING Securities offered............ 850,000 shares of Common Stock and 850,000 Warrants to purchase one share of Common Stock per Warrant. The Common Stock and Warrants are being offered hereby as Units but will be separately tradeable immediately following the offering. See "Description of Capital Stock." Common Stock to be outstanding after this offering.......... 2,765,576 Shares(1) Use of proceeds............... For repayment of debt, research and development, capital expenditures and other general corporate purposes. Nasdaq SCM Symbols............ Common Stock--ISNX Warrants--ISNXW
SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS YEAR ENDED ENDED APRIL 30, JULY 31, ------------- ------------- 1995 1996 1995 1996 ----- ------ ------ ------ STATEMENT OF OPERATIONS DATA: Net revenues...................................... $ 738 $5,567 $1,190 $1,564 Operating income (loss)........................... (343) 522 138 85 Net income (loss)................................. (143) 281 83 43 Net income (loss) per share(2).................... (.06) .12 .04 .02 Shares used in computing per share information(2). 2,201 2,343 2,342 2,344
JULY 31, 1996 ---------------------- ACTUAL AS ADJUSTED(3) ------ -------------- BALANCE SHEET DATA: Cash and cash equivalents............................... $ 147 $3,563 Working capital (deficiency)............................ (134) 3,232 Total assets............................................ 2,138 5,554 Long-term debt, less current portion.................... 177 177 Total shareholders' equity.............................. 213 4,754
- ------- (1) Based on shares outstanding as of October 1, 1996. Includes 100,780 shares of Common Stock issuable upon conversion of outstanding preferred stock, which will occur upon the closing of this offering. Does not include 272,134 shares of Common Stock issuable at a weighted average exercise price of $1.56 per share upon exercise of options granted under the Company's employee benefit plan as of October 1, 1996, 275,000 additional shares of Common Stock reserved for future grants under the Company's employee benefit plans, and 390,943 shares of Common Stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $1.73 per share, and options to purchase 40,000 shares of Common Stock at an exercise price equal to 110% of the initial public offering price of the Shares. See "Capitalization--Recent Financing Transactions,""Management--Employment and Consulting Agreements," "Management--Employee Benefit Plans," "Management--Directors Compensation" and notes 8 and 11 of Notes to the Company's financial statements appearing at the end of this Prospectus (the "Financial Statements"). (2) For an explanation of the determination of the number of shares used in per share calculations, see note 1 of Notes to the Financial Statements. (3) Adjusted to reflect the repayment of the Placement Notes with the proceeds from this offering, issuance of warrants issued in the Placement to acquire 390,943 shares of Common Stock, the sale of 850,000 Shares and 850,000 Warrants by the Company hereby at an assumed initial public offering price of $6.90 per Share and $0.10 per Warrant and the issuance of Representatives' Warrants to purchase 170,000 shares of Common Stock at a weighted average exercise price of $9.38, and after deducting the estimated underwriting discounts and commissions and offering expenses and the application of the net proceeds therefrom. See "Capitalization" and "Use of Proceeds." 4 RISK FACTORS An investment in the Securities offered hereby involves a high degree of risk. In addition to the other information in this Prospectus, the following factors should be considered carefully in evaluating an investment in the Securities offered hereby. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in the Prospectus. Relationship With Certain Suppliers and Raw Materials. The Company depends upon a single processor, located in Russia, for one process involved in the manufacturing of its products, and upon a single supplier or a limited number of suppliers and processors for certain other manufacturing processes. Although the Company does have written agreements with certain of its suppliers and processors; the Company does not have any written agreements with other suppliers and processors. Although the Company seeks to reduce its dependence on its sole and limited suppliers, disruption or termination of any of the sources could occur, and such disruptions could have at least a temporary material adverse effect on the Company's business, financial condition and results of operations. Moreover, a prolonged inability to obtain alternative sources for processing could materially adversely affect the Company's relations with its customers. See "Risk Factors--Expansion of the Company's Product Offerings" and "Business--Manufacturing and Supply." Operations in Russia. The processing of the Company's products is dependent upon an isotope enrichment plant, located in Russia. The Company recently signed an agreement under which the processor has agreed to exclusively supply the Company with zinc, cadmium, silicon, and carbon isotopes over the next three years. Under the agreement, the Company negotiates with the plant annually regarding the price and certain other terms of the products to be supplied in the upcoming year, and the next such negotiation is expected to occur in November 1996. Moreover, such agreement provides that disputes arising thereunder are to be resolved by arbitration conducted in Europe under international commercial arbitration rules, and, accordingly, the enforceability of the agreement might be subject to a greater degree of uncertainty than if the agreement was with a U.S. company and disputes were resolved in the United States. Operations in Russia entail certain risks. In recent years, the former republics of the Soviet Union have experienced political, social and economic change as constituent republics sought independence from the former central government in Moscow, and certain of the republics including Russia have attempted to transition from a centrally controlled economy toward market-based economies. These changes have involved, in certain cases, armed conflict in certain republics. There can be no assurance that political or economic instability in these republics will not continue or worsen. The supply of stable isotopes could be directly affected by political, economic and military conditions in Russia. Accordingly, the operations of the Company could be materially adversely affected if hostilities in Russia should occur, if trade between Russia and the United States were interrupted or curtailed, if political conditions in Russia disrupt transportation or processing concerning the Company's goods, if laws or governmental policies concerning foreign ownership or business operations in Russia change substantially, or if tariffs are introduced or freight rates change significantly. There can also be no assurance that the Company's relationship with its processor in Russia will be successfully maintained, even apart from these political, economic or military factors. Disruption or termination of the Company's supply sources could have a material adverse effect on the Company's business, financial conditions and results of operation. The Company does not maintain political risk insurance. Additionally, Russian courts lack experience in commercial dispute resolution, and many of the procedural remedies for enforcement found in western jurisdictions are not available in Russia. Difficulties may be encountered in enforcing judgments of foreign courts or of arbitrators, in the case of the Company's agreements with suppliers or processors, or in otherwise protecting the Company's rights with its Russian suppliers and transporters. There can be no assurance that this difficulty in enforcing the rights will not have a material adverse effect on the Company. See "Business--Manufacturing and Supply." Customer Concentration. Historically, substantially all of the Company's net revenues in any particular period have been attributable to a limited number of customers. Net revenues from three customers accounted 5 for approximately 66%, 20% and 10%, respectively, of the Company's net revenues for the three months ended July 31, 1996. In fiscal 1996 two customers accounted for approximately 88% and 11%, respectively, of net revenues. In fiscal 1995 three customers accounted for approximately 59%, 26% and 11% of net revenues. The Company expects that if it continues to increase sales of depleted zinc products to end users and if it develops and sells products in the medical and research and electronic materials industries, concentration of net revenues from a limited number of customers will be reduced. None of the Company's customers have entered into long-term agreements to purchase the Company's products. If completed sales orders are not replaced on a timely basis by new orders from customers, the Company's net revenues could be materially and adversely affected. The Company's net revenues also could be adversely affected by a number of factors including the loss of a significant customer, reductions in orders from any significant customer compared to historical buying levels or otherwise, or the cancellation of a significant order from a customer. Any of these factors, many of which are outside the Company's control, could have a material adverse effect on the Company's business, financial condition and results of operations. Limited Operating History; History of Operating Losses. The Company was incorporated in March 1993 and has had only a limited operating history upon which evaluation of its prospects can be made. The Company had net losses of $171,000 and $143,000, respectively, for the years ended April 30, 1994 and 1995, and had net income of $281,000 and $43,000 for the fiscal year ended April 30, 1996 and the three months ended July 31, 1996, respectively. At July 31, 1996, the Company had negative working capital of $134,000 and retained earnings of $10,000. In addition, the Company expects that it will incur a net loss for the fiscal year ended July 31, 1997, largely as a result of expected significant increases in expenses associated with anticipated growth in research and development, marketing and sales efforts and capital expenditures. The Company's limited operating history makes the prediction of future operating results difficult. The Company does not believe that prior growth rates are necessarily indicative of future operating results. Future operating results will depend on many factors, including demand for the Company's products, the level of product and price competition, the ability of the Company to develop and market new products, the Company's ability to control costs, general economic conditions and other factors. There can be no assurance that the Company will achieve or sustain profitability. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Number of DZ Customers. Patents have been granted to GE with respect to a method for inhibiting deposition of radioactive cobalt in a water-cooled nuclear reactor through the use of DZ. The nuclear power facilities that have purchased DZ to date directly from the Company have received correspondence from GE indicating that such customers may practice the method of utilizing DZ in such facilities and may purchase DZ from entities other than GE, such as the Company. In addition, certain nuclear power facilities are located in countries where GE does not have similar patents. Similarly, certain third party entities other than nuclear power plants, such as certain entities that construct nuclear power facilities or equipment, have licenses from GE which the Company believes may allow them to purchase DZ from the Company. Other facilities or third party entities may not be granted such licenses, and the Company's ability to sell DZ to such customers may be limited by applicable patent law and/or such customers' agreements with GE. GE may in the future grant licenses to additional end users entitling them to purchase DZ from third parties such as the Company, and GE may continue to purchase DZ directly from the Company, although there can be no assurance that this will be the case. Nevertheless, it is possible that the Company's sales of DZ may be limited to only those entities described above that can purchase DZ from the Company without infringing on GE's intellectual property rights. Future Additional Capital Requirements. The Company's capital requirements will depend on numerous factors, including the level of future capital expenditures, the level of resources devoted to research and development and marketing of its products, market acceptance and demand for its products, and other factors. The Company believes the net proceeds of this offering, together with cash on hand and cash expected to be generated from operations, will provide adequate funding for the Company's anticipated operations for at least the next twelve months. Nevertheless, the Company may be required to raise additional funds through public or private debt or equity financings, collaborative relationships, bank facilities or other arrangements. There can be no assurance that the Company will not require additional funding sooner than expected or that such additional 6 funding, if needed, will be available on terms attractive to the Company, if at all. Any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. See "-- Expansion of the Company's Product Offerings," "Use of Proceeds," and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Competition. The markets for the Company's products are highly competitive, and the Company expects that competition will continue and increase as markets grow and new opportunities are realized. Some of the Company's current competitors, and many of the Company's potential competitors, have significantly greater financial, marketing, product development, testing and other resources than the Company. As a result, they may have the capacity to respond more quickly to changes in customer requirements or to devote greater resources to the development, testing, marketing and sale of their products than the Company. Some of the Company's competitors may form partnerships or alliances with larger companies, with the resulting entity possessing more market strength than the Company. New competitors will likely emerge, and some new competitors may gain significant market share. There can be no assurance that the Company will be able to compete successfully against current and future competitors, or that competitive pressures will not have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Competition." Increased competition could result in price reductions, reduced transaction size, fewer customer orders and reduced gross margins, any of which could have a material adverse effect on the Company's business, operating results and financial condition. The Company's competition varies greatly depending on which product or industry is considered. At present, the Company believes it supplies substantially all of the DZ used in nuclear power plants worldwide, but believes that other entities or persons may begin producing DZ. Several such possible producers have adequate technical and financial resources to become viable competitors of the Company in the near future. In particular, GE, which to date has been the Company's largest customer, has indicated that it may seek to sell DZ to end users independently of the Company or may seek alternative sources of DZ other than the Company. The Company has several larger and numerous smaller competitors in the area of stable isotope labeled compounds and supplying materials for diagnostic breath test products. Due to the early stage of the electronic and optical materials opportunities, the Company has not identified material competitors in these markets. However, if viable commercial markets emerge for such products, the Company anticipates that substantial competition will emerge. Expansion of the Company's Product Offerings. The Company's future success will depend in part on its ability to enhance its current product offerings on a timely basis. The expansion of the Company into new products and processes will require significant future capital commitments. Substantial development work must be undertaken before such products are ready for commercial introduction. There can be no assurance that the Company will successfully develop new products or that it will be able to improve or expand its initial products to keep pace with the demands of the marketplace. Moreover, there can be no assurance that commercial markets will emerge for the potential products that the Company is developing and considering developing. In addition, other products or technologies currently exist, and will be developed in the future, that compete directly with the Company's current products and products that the Company may develop in the future. The Company has entered into an agreement with Yale University through which the Company has the right, subject to satisfaction of certain conditions, to acquire an exclusive license for two U.S. patents entitled Isotopically Enriched Semiconductor Devices. The Company's right to exercise its option is dependent upon the attainment of certain milestones, which the Company believes it will achieve before expiration of the option term in March 1997. There can be no assurance, however, that the Company will satisfy the conditions to allow it to exercise the option or will enter into a license agreement with Yale University. If the Company did not satisfy such conditions before March 1997 and Yale did not agree to extend the option period, the Company could lose its ability to acquire rights to the technology underlying the potential isotopically pure semiconductor products described in the Prospectus. See "Business--Products--Isotopically Pure Semiconductors." Dependence on Key Personnel. The Company's future success will depend in significant part upon the continued service of its key technical, sales and senior management personnel, including James E. Alexander, 7 the Company's President and Chief Executive Officer, and Boris Rubizhevsky, the Company's Senior Vice President, Isotope Production and Supply. The Company maintains $1 million of key man life insurance on the lives of Messrs. Alexander and Rubizhevsky. The loss of the services of one or more of the Company's executive officers or other key technical personnel could have a material adverse effect on the Company's business, financial condition or results of operations. In addition, the Company's future operating results depend, in part, upon its ability to attract and retain qualified personnel for its operations. The failure to attract or retain such persons could materially adversely affect the Company's business, financial condition and results of operations. Reliance on Strategic Collaborations and Relationships. The Company's strategy for the development, processing and marketing of certain of its products includes entering into various collaborations with corporate partners, processors, suppliers and others. The Company has developed strategic relationships, including cooperative research and development projects, with certain third parties. There can be no assurance that existing collaborative arrangements will continue, or that the Company will be able to negotiate other successful collaborative arrangements in the future. The loss of any of these relationships could adversely affect the Company's business, financial condition and results of operations. If the Company is not able to maintain or establish such arrangements, it would likely face increased capital requirements to undertake such activities at its own expense, and could also encounter significant delays in development, processing, marketing or sale of products into certain markets. See "Business--Manufacturing and Supply." Third Party Reimbursement of Healthcare Costs. Some of the Company's potential products, such as DBT products, are expected to compete in the medical diagnostics and healthcare markets. Demand for such products, and the prices at which such products can be sold, may depend in large part upon the extent to which purchasers will be reimbursed by governmental agencies and insurance companies for use of such products. Future federal or state legislation could result in a substantial restructuring of the healthcare delivery system. While the Company cannot predict whether any legislative or regulatory proposals will be adopted or the effect such proposals may have on its business, uncertainty regarding such proposals, as well as the adoption of such proposals, could have a material adverse effect on the Company's ability to develop and sell products that compete in these markets. Such reforms, if adopted, and ongoing changes in the healthcare industry, could adversely affect the pricing of therapeutic or diagnostic products in the United States or the amount of reimbursement available from governmental agencies or third party insurers, and consequently could have a material adverse effect on the Company. In both domestic and foreign markets, sales of such products, if any, will depend in part on the availability of reimbursement from third party payers, such as government and private insurance plans and other organizations. Product and Other Liability; Minimal Insurance Coverage. The Company's business exposes it to potentially substantial product, environmental, occupational and other liability risks which are inherent in research and development, preclinical study, clinical trials, manufacturing, marketing, distribution and use, of the Company's current and potential products, including, but not limited to, products for pharmaceutical, medical device and nuclear energy markets. The Company currently does not have product liability insurance, but may seek such coverage as it deems prudent in light of future operations. There can be no assurance that insurance coverage will be available at an acceptable cost, if at all, or that a product liability or other claim would not materially and adversely affect the business, financial condition and results of operations of the Company even if such insurance was obtained. Management of Growth. The Company has experienced a period of rapid growth and expansion, which has placed and continues to place, a significant strain on its resources. To accommodate this growth, the Company will be required to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the improvement of its other internal management systems. There can be no assurance that such efforts can be accomplished successfully. In addition, this growth, as well as the Company's market diversification and product development activities, will necessitate an increase in the number of the Company's employees. During fiscal 1997, the Company added a General Manager of Diagnostics and a Chief Financial Officer as well as other support personnel. If the Company sustains its growth in the future, the 8 Company will need to continue to implement and improve its operational and management information systems and to hire, train, motivate and manage its employees. The Company's ability to successfully assimilate new operations and new personnel involved with any future expansion will have a material effect on the Company's future business, financial condition and results of operations. There can be no assurance that the Company will be able to manage these changes successfully or that the Company's systems, procedures and controls will be adequate to support the Company's operations. Any failure to improve the Company's operational and management systems or to hire, train, motivate or manage employees could have a material adverse effect on the Company's business, financial condition and results of operations. Factors Affecting Operating Results; Fluctuations in Quarterly Results. The Company's operating results could be materially adversely affected by a number of factors, including failure of its suppliers to process a sufficient volume of products in a timely manner; introduction of new products by competitors; adequacy of the Company's suppliers manufacturing capacity; changes in pricing policies of the Company, its customers, competitors or suppliers; economic conditions in the markets that the Company serves; the need to increase expenditures for research and development; failure to introduce new or improved products on a timely basis; and the rescheduling or cancellation of orders by its customers. The Company's quarterly operating results have varied in the past and may in the future vary significantly, depending on factors such as the size and timing of customer orders, pricing and other competitive conditions and the timing of new product announcements and releases by the Company and its competitors. The Company operates with little order backlog. Moreover, a significant portion of the Company's total revenues have been, and the Company believes will continue to be, derived from a limited number of orders in any particular quarter, and the timing of such orders and their fulfillment has caused, and is likely to continue to cause, material fluctuations in the Company's operating results, particularly on a quarterly basis. As a result, a lost or delayed sale could have a significant impact on the Company's operating results for a particular period. It is likely that in some future quarter, the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Common Stock and Warrants would likely be materially adversely affected. In addition, as a result of repayment of certain Placement Notes issued in a recent private placement transaction, the Company is likely to record an extraordinary charge to operations for the quarter in which the offering is completed, which charge is likely to have a material effect on the Company's reported earnings for that quarter. See "Capitalization--Recent Financing Transactions." No Prior Market; Stock Price Volatility. Prior to this offering, there has been no public market for the Company's securities. Consequently, the initial public offering price will be determined by negotiations among the Company and the Representatives of the Underwriters. There can be no assurance that an active public market for the Common Stock and Warrants will develop or be sustained after the offering or that the market price of the Common Stock and Warrants will not decline below the initial public offering price. The trading price of the Company's securities could be subject to wide fluctuations in response to quarter to quarter variations in operating results, announcements of technological innovations or new products by the Company or its competitors, changes in earnings estimates by analysts, or other events or factors. In addition, the stock market has experienced wide price and volume fluctuations, which have at times been unrelated to the operating performance of the companies whose securities are traded. These broad market fluctuations may adversely affect the market price of the Common Stock and Warrants. Representatives' Warrants. At the consummation of this offering, the Company will sell to the Representatives for nominal consideration the Representatives' Warrants to purchase up to 85,000 shares of Common Stock and 85,000 Warrants, representing 10% of the Shares and 10% of the Warrants, respectively, offered hereby. The Representatives' Warrants will be exercisable for a period of five years after the date of this Prospectus. Each Representatives' Warrant will entitle the holder to purchase one share of Common Stock at a price of $ per share, which is 120% of the initial public offering price of the Shares (the initial public offering price of the Shares referred to as the "IPO Price Per Share"), and, upon payment of $ , which is 120% of the initial public offering price of the Warrants, to acquire one Warrant at an exercise price equal to 150% of the IPO Price Per Share. As long as the Representatives' Warrants or other outstanding warrants remain 9 unexercised, the Company's ability to obtain additional capital might be adversely affected. Moreover, the Representatives and other holders of outstanding warrants may be expected to exercise such warrants at a time when the Company would, in all likelihood, be able to obtain needed capital by a new offering of its securities on terms more favorable than those provided by the warrants. Holders of the Representatives' Warrants and holders of other warrants have certain registration rights with respect to shares of Common Stock underlying those warrants. Protection of Intellectual Property. The Company does not currently hold any patents, and has not filed any patent applications, regarding DZ or its other actual or potential products. The Company relies primarily on a combination of trade secrets, confidentiality procedures and contractual provisions to protect its technology. Despite the Company's efforts, unauthorized parties may attempt to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's technology and products is difficult. In addition, the laws of many countries do not protect the Company's information, technology and intellectual property that it regards as proprietary to as great an extent as do the laws of the United States. There can be no assurance that the Company's protective measures will be adequate or that the Company's competitors will not independently develop similar information, technology or intellectual property. To date, the Company has not been notified of any claim that the Company's products infringe the proprietary rights of third parties, but there can be no assurance that third parties will not claim infringement by the Company with respect to current or future products. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, financial condition or results of operations. See "Business--Patents and Proprietary Rights." Risks Associated with International Sales. The Company may expand its sales and marketing activities outside of the United States, which will require management attention and financial resources. There can be no assurance that such efforts will be successful. International operations are subject to a number of risks, including longer receivable collection periods and greater difficulty in accounts receivable collections, unexpected changes in regulatory requirements, dependence on independent resellers, risks of foreign currency fluctuations relative to the U.S. dollar, import and export restrictions and tariffs, difficulties and costs of staffing and managing foreign operations, potentially adverse tax consequences, political instability, the burdens of complying with multiple, potential conflicting laws and the impact of business cycles and economic instability outside the United States. Government Regulation. The Company's operations are subject to extensive government regulations pertaining to product manufacture, marketing and distribution, and environmental, worker safety, export control and other matters. Certain of the Company's technology and products, especially those having nuclear energy or military applications, are subject to substantial controls, including requirements to obtain governmental approvals and licenses on their use, distribution, dissemination and export. Furthermore, the diagnostic and other medical products that the Company may develop in the future are subject to stringent regulation by the FDA and its foreign counterparts, and within the United States by certain state agencies. Regulations by the FDA and its counterparts impose significant restrictions on the development, testing, manufacture, marketing, distribution and export of such products, including in most cases the need for prior approval from such government agencies to manufacture, test and distribute such products. Regulatory approvals for commercial distribution of medical and diagnostic products generally require substantial preclinical and human clinical testing to demonstrate their safety and effectiveness. There can be no assurance that clinical data from such studies will demonstrate the safety or efficacy of any product that the Company may in the future develop or of products utilizing components that the Company may desire to supply, nor could there be any assurance that the FDA or its foreign counterparts will approve the commercial distribution of any such products in a timely manner, if at all. Likewise, to the extent that other foreign or domestic government approvals or permits are required for the manufacture, export, import, distribution and marketing of the Company's products and operations, there can be no assurance that the Company will be able to obtain or maintain such approvals or permits or meet applicable requirements or standards, or that such approvals or permits will not contain restrictions or limitations that materially affect the 10 sale and distribution of the Company's products. The Company's failure to obtain such approvals in a timely manner, or its failure to comply with applicable foreign or domestic laws, regulations or policies, including those applicable to its operations and products, or changes in such laws, regulations or policies, may have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Government Regulation." Control by Existing Shareholders. Upon completion of this offering, the directors, executive officers and principal shareholders of the Company and their affiliates will, in the aggregate, assuming the exercise in full of all options and warrants then outstanding, beneficially own approximately 45.5% of the Company's outstanding Common Stock (approximately 43.0% if the Underwriters' over-allotment option is exercised in full). As a result, these shareholders, acting together, will possess significant influence as shareholders of the Company, including concerning election of the Company's Board of Directors and the approval of significant corporate transactions. Such control could delay, defer or prevent a change in control of the Company, impede a merger, consolidation, takeover or other business combination involving the Company, or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company. See "Management" and "Principal Shareholders." Effect of Certain Charter Provisions. The Company's Board of Directors has the authority to issue up to 10,000,000 shares of Preferred Stock and to determine the rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the shareholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock could adversely affect the voting power of holders of Common Stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. Additionally, issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. The Company has no current plans to issue shares of Preferred Stock. Limits on Secondary Trading; Possible Illiquidity of Trading Market. The Company has applied to have the Common Stock and Warrants listed on the Nasdaq SmallCap Market, which may be a significantly less liquid market than the Nasdaq National Market. Moreover, if the Company should be unable to maintain the standards for continued quotation on the Nasdaq SmallCap Market, the Common Stock and Warrants could be subject to removal from the Nasdaq SmallCap Market. Trading, if any, in the Common Stock and Warrants would therefore be conducted in the over-the-counter market on an electronic bulletin board established for securities that do not meet the Nasdaq SmallCap Market listing requirements, commonly referred to as the "pink sheets." As a result, an investor would find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the Common Stock or Warrants. In addition, depending on several factors including the future market price of the Common Stock and Warrants, the Common Stock and Warrants could become subject to the so-called "penny stock" rules that impose additional sales practices and market making requirements on broker-dealers who sell and/or make a market in such securities, which could affect the ability or willingness of broker-dealers to sell or make a market in the Common Stock and Warrants and the ability of purchasers of the Common Stock and Warrants to sell their securities in the secondary market. Underwriting History. Pryor, McClendon, Counts & Co., Inc., one of the Representatives, has not previously acted as a managing underwriter of a public offering of equity securities, although it has participated as an underwriter in several public offerings of equity securities and has substantial experience as an underwriter in public offerings of debt securities, including municipal bonds. Prospective purchasers of the Securities offered hereby should consider such Representative's limited experience in offerings such as this in evaluating an investment in the Securities. See "Underwriting." Shares Eligible for Future Sale. Sales of a substantial number of shares of Common Stock in the public market following this offering could adversely affect the market price for the Company's Common Stock or Warrants. However, the number of shares of Common Stock that can be traded in the public market is limited by restrictions under the Securities Act of 1933, as amended (the "Securities Act"). In addition, holders of substantially all of the outstanding shares of Common Stock and options and warrants to acquire Common Stock have entered into lock-up agreements pursuant to which they have agreed not to sell or otherwise dispose of any 11 of their shares for a period of 12 months after the initial closing date of this offering. As a result of these restrictions, based on shares outstanding as of October 1, 1996, on the date of this Prospectus, no shares other than the 850,000 Shares and 850,000 Warrants offered hereby will be eligible for public sale, and approximately 1,915,576 currently outstanding shares will be eligible for public sale 12 months after the initial closing date of this offering. Additional shares of Common Stock issuable upon the exercise of certain outstanding options and warrants will become eligible for public sale as a result of registration rights agreements with the Company. See "Description of Capital Stock--Registration Rights." In addition, the Company intends to register on a registration statement on Form S-8, shortly after the effective date of this offering, a total of approximately 547,134 shares of Common Stock reserved for issuance under certain outstanding options and future options to be granted under the Company's employee benefit plans. See "Shares Eligible for Future Sale." Immediate and Substantial Dilution. Investors participating in this offering will incur immediate, substantial dilution of $5.35 per share. To the extent options or warrants to purchase Common Stock are exercised, there may be further dilution. See "Dilution." USE OF PROCEEDS The net proceeds to the Company from the sale of the 850,000 shares of Common Stock and Warrants offered hereby are estimated to be approximately $4,677,000 ($5,367,000 if the Underwriters' over-allotment option is exercised in full), after deducting estimated underwriting discounts and commissions and offering expenses. The Company expects to use the net proceeds of this offering as follows:
APPROXIMATE APPLICATION OF NET APPROXIMATE PERCENTAGE OF NET PROCEEDS DOLLAR AMOUNT PROCEEDS ------------------ ------------- ----------------- Repayment of outstanding debt(1)................. $1,261,000 27% Facilities and Capital Expenditures(2)......... $ 930,000 20% Research and development............. $1,000,000 21% Working capital and general corporate purposes................ $1,486,000 32%
- -------- (1) The Company intends to apply these proceeds to repay approximately $1,261,000 payable under the notes issued in the Placement. See "Capitalization--Recent Financing Transactions" and "Certain Transactions." (2) The Company intends to conduct a feasibility study concerning construction of an isotope manufacturing facility and to purchase equipment and upgrade management information systems. See "Business--Manufacturing and Supply." The foregoing represent estimates only, and the actual amounts expended by the Company for these purposes and the timing of such expenditures will depend on numerous factors. The Company may use a portion of the net proceeds to acquire businesses or products complementary to the Company's business, although the Company currently has no specific plans or commitments in this regard. Pending use of the net proceeds for the above purposes, the Company intends to invest such funds in short-term, interest-bearing, investment-grade obligations and federally insured certificates of deposit. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its capital stock. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, operations, capital requirements, the general financial condition of the Company, general business conditions and contractual restrictions on payment of dividends, if any. The Company currently anticipates that it will retain all future earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. 12 CAPITALIZATION The following table sets forth, as of July 31, 1996, (1) the actual capitalization of the Company, (2) the pro forma capitalization of the Company giving effect to the closing of a private placement transaction (the "Placement") in August and September 1996 and the issuance of warrants in the Placement and (3) the capitalization of the Company as adjusted to give effect to the sale of 850,000 Shares and 850,000 Warrants offered hereby at an assumed initial public offering price of $6.90 per Share (the price per share at which the Shares are sold hereby referred to as the "IPO Price Per Share") and $0.10 per Warrant, the issuance of Representatives' Warrants to purchase 170,000 shares of Common Stock, 85,000 of which are exercisable at an assumed price of $8.40 per share and 85,000 of which are exercisable at an assumed price of $10.35 per share, the exercise of options, after July 31, 1996, to purchase 315,376 shares of Common Stock at a weighted average exercise price of $1.69 per share and the issuance of 100,780 shares of Common Stock upon the conversion of existing preferred shares, after deducting underwriting discounts and commissions and other estimated expenses of the offering.
JULY 31, 1996 ------------------------------- ACTUAL PRO FORMA(1) AS ADJUSTED ------ ------------ ----------- (IN THOUSANDS) Notes payable.............................. $177 $1,065 $ 177 ==== ====== ======= Shareholders' equity: Preferred stock, no par value, 100,000 shares authorized actual, 10,000,000 shares authorized pro forma and as adjusted; 6,250 issued and outstanding, no shares issued or outstanding pro forma and as adjusted .................. 125 125 -- Common stock, $1.00 par value actual and no par value pro forma and as adjusted 14,513,788 shares authorized actual, 20,000,000 shares authorized pro forma and as adjusted: 1,499,419 shares issued and outstanding actual, 2,765,576 as adjusted................................ 78 78 5,412 Warrants................................. -- 373 373 Common stock subscriptions receivable.... -- -- (330) Retained earnings (accumulated deficit).... 10 10 (499) ---- ------ ------- Total stockholders' equity............... 213 586 4,956 ---- ------ ------- Total capitalization................... $390 $1,651 $ 5,133 ==== ====== =======
- -------- (1) The Placement is reflected in the Pro Forma amounts as a borrowing and a sale of securities. See "--Recent Financing Transactions." The $1,261,000 gross proceeds of the Placement has been allocated between the Placement Notes and Placement Warrants based on their estimated relative fair values at the date of issuance. The fair value of the warrants issued in connection with the Placement as estimated by the Company approximates $373,000. Expenses and discounts related to the issuance of the Placement Notes were $136,000. The Placement Notes are due upon closing of this offering. The "As Adjusted" amount includes a charge to retained earnings and the statement of operations of $509,000, representing the value of the Warrants and the aggregate discounts relating to the Placement. The foregoing table excludes (i) 272,134 shares of Common Stock issuable upon exercise of outstanding options at a weighted average exercise price of $1.56 per share, (ii) 275,000 shares reserved for future grants under the Company's employee benefit plans, (iii) 390,943 shares of Common Stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $1.73 per share, (iv) 170,000 warrants to purchase shares of Common Stock issuable to the Representatives at a weighted average exercise price of $9.38 per share, (v) 850,000 shares of Common Stock issuable upon exercise of the Warrants offered hereby and (vi) options to purchase 40,000 shares of Common Stock at an exercise price equal to 110% of the IPO Price Per Share. 13 RECENT FINANCING TRANSACTIONS In an August and September 1996 private placement (the "Placement"), the Company issued approximately $1,261,000 principal amount of 12% nonconvertible promissory notes (the "Placement Notes") and warrants (the "Placement Warrants") to acquire 263,222 shares (the "Placement Shares") of Common Stock to a small number of sophisticated investors (the "Placement Investors"). Net proceeds were approximately $1,125,000. The Placement Notes bear interest at 12% per annum and are due and payable in full at the earlier of five business days after the Company receives funds from this offering or May 1, 1998. Unless the Placement Notes are earlier paid in full (i) accrued but unpaid interest at 15% per annum is due and payable monthly from September 1996 through May 1997 and (ii) principal and accrued but unpaid interest is due and payable in equal installments monthly from June 1997 through May 1998. The Company may prepay any or all of the amounts due under the Placement Notes at any time without penalty. To secure repayment of the Placement Notes, the Company entered into a security agreement, granting a security interest to the Placement Investors in substantially all of the assets of the Company. The security agreement and certain provisions of California law govern the rights of the Placement Investors in the collateral, the events of default which authorize their resort to the collateral, and the procedures governing the treatment and disposition of the collateral if the Placement Investors elect to resort to the collateral in the event of such default. Upon repayment of the Placement Notes, the collateral will be released in full. Placement Warrants to purchase 131,611 Placement Shares are exercisable in whole at any time or in part at $.4217 per share, and Placement Warrants to purchase 131,611 Placement Shares are exercisable in whole at any time or in part at $3.3727 per share, in each case for a period of five years. If the Company defaults in its payment obligations under the Placement Notes, then the Placement Investors may, in addition to exercising their rights in the collateral, exercise additional Placement Warrants to purchase a total of approximately 325,500 additional Placement Shares (such warrants referred to as "Default Warrants") at $.0689 per share, and can require the holders of approximately 1,387,810 shares of Common Stock to vote their shares to elect as a majority of the Company's Board of Directors the designees of the Placement Investors. In conjunction with the financing, the Company issued warrants to purchase 127,721 shares of Common Stock exercisable for a period of five years at $1.378 per share to an advisor. The Company intends to repay the Placement Notes out of a portion of the net proceeds of this offering. See "Use of Proceeds." As a result, after the closing of this offering no Placement Notes will remain outstanding, and no Default Warrants will be issued. The Company has agreed to file at its expense a registration statement under the Securities Act no later than nine months after the effectiveness of this offering registering the resale of the Placement Shares, and the Placement Investors have certain additional piggyback registration rights. See "Description of Capital Stock--Registration Rights." The estimated fair value of the warrants issued in connection with the Placement was approximately $373,000. This amount represents a discount from the principal amount of the Placement Notes. In addition, certain of the Placement Notes, in an aggregate principal amount of approximately $300,000, were issued to Lindsay Gardner, a director of the Company, one employee of the Company and two affiliates of directors or officers of the Company at a discount totalling approximately $30,000, and other discounts total approximately $106,000. The aggregate discount of $509,000 will be amortized to interest expense over the contractual life of the Placement Notes. Accordingly, in the quarter in which this offering is completed, the amount of the discounts which have not already been amortized will, be recorded as a charge to operations for debt restructuring (and if material, will be shown as an extraordinary item) and will be reflected in the Company's statement of operations for that period. The charge is likely to have a material effect on the Company's reported earnings for that quarter. 14 DILUTION The net tangible book value of the Company as of July 31, 1996 was $(119,000) or $(.06) per share of Common Stock. The July 31, 1996 book value was adjusted for the following items: (i) the assumed conversion of the preferred shares, (ii) the exercise of options by two of the Company's executive officers in September 1996 to purchase an aggregate of 217,706 shares of Common Stock at an exercise price of $1.52 per share and (iii) the exercise of options by one employee of the Company in September 1996 to purchase 97,671 shares of Common Stock at an average exercise price of $2.06 per share. The Company loaned the two executive officers $165,000 each representing the purchase price for the options, and the officers executed promissory notes reflecting these loans. Under Generally Accepted Accounting Principles ("GAAP"), such promissory notes are shown as a reduction of shareholders equity. Therefore, the promissory notes have not been reflected as tangible assets for purposes of the dilution table. Net tangible book value per share is determined by dividing the amount of total tangible assets of the Company less total liabilities by the number of shares of Common Stock outstanding at that date. After giving effect to the sale of the 850,000 shares of Common Stock and 850,000 Warrants offered by the Company hereby at an assumed initial public offering price of $7.00 per Share and ascribing no value to the Warrants for this purpose, and after deducting the estimated underwriting discounts and commissions and offering expenses, the pro forma net tangible book value of the Company as of July 31, 1996, as adjusted, would have been $4,558,000 or $1.65 per share. This represents an immediate increase in net tangible book value of $1.71 per share to existing shareholders and an immediate dilution of $5.35 per share to new investors purchasing Common Stock and Warrants at the initial public offering price. The following table illustrates the per share dilution. Assumed initial public offering price per share................ $7.00 Net tangible book value per share at July 31, 1996........... $(.06) Increase in net tangible book value per share attributable to new investors............................................... $1.71 Pro forma net tangible book value per share after the offering. 1.65 ----- Net tangible book value dilution per share to new investors.... $5.35 =====
The following table summarizes, on a pro forma basis as of July 31, 1996, giving effect to the transactions described above, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by the existing shareholders and by the new investors purchasing shares of Common Stock and Warrants in this offering, an assumed initial public offering price of $7.00 per share and ascribing no value to the Warrants for this purpose, and before deduction of estimated underwriting discounts and commissions and offering expenses:
TOTAL SHARES PURCHASED CONSIDERATION ----------------- ------------------ AVERAGE NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE --------- ------- ---------- ------- --------------- Existing shareholders.. 1,915,576 69.0% $ 735,000 11.0% $0.38 New investors.......... 850,000 31.0% $5,930,000 89.0% $7.00 --------- ----- ---------- ----- Totals............. 2,765,576 100.0% $6,685,000 100.0% ========= ===== ========== =====
The foregoing table assumes no exercise of the Underwriters' over-allotment option and no other exercise of options and warrants. Giving effect to the Placement and this offering, as of July 31, 1996, there were (i) 272,134 shares of Common Stock issuable at a weighted average exercise price of $1.56 per share upon exercise of options granted under the Company's employee benefit plan, (ii) Placement Warrants and warrants issued in conjunction with the Placement to acquire 390,943 shares of Common Stock issuable at a weighted average exercise price of $1.73 per share, (iii) additional warrants to purchase 850,000 shares of Common Stock at an exercise price of 150% of the initial public offering price of the Shares offered hereby and (iv) 170,000 shares of Common Stock issuable upon exercise of the Representatives' Warrants, 85,000 of which have an exercise price of 120% of the IPO Price Per Share and 85,000 of which have an exercise price of 150% of the IPO Price Per Share. To the extent that any of these options or warrants are exercised, there may be further dilution to new investors. See "Capitalization," "Management--Employee Benefit Plans" and "Description of Capital Stock." 15 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and Notes thereto included elsewhere in this Prospectus. The selected financial data, insofar as it relates to each of the years ended April 30, 1995 and 1996, have been derived from audited financial statements, including the balance sheets at April 30, 1995 and 1996 and the related statements of operations for each of the two years ended April 30, 1996 and notes thereto appearing elsewhere herein. The selected financial data as of July 31, 1996 and for the three months ended July 31, 1995 and 1996 are derived from unaudited financial statements of the Company and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for the period. Operating results for the three months ended July 31, 1996 are not necessarily indicative of the results that may be expected for the entire year.
THREE MONTHS YEAR ENDED ENDED JULY APRIL 30, 31, ------------- -------------- 1995 1996 1995 1996 ----- ------ ------ ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net revenues................................. $ 738 $5,567 $1,190 $1,564 Cost of revenues........................... 626 3,835 807 1,123 ----- ------ ------ ------ Gross margin............................... 112 1,732 383 441 Operating expenses: Selling, general and administrative........ 293 902 186 266 Research and development................... 162 308 59 90 ----- ------ ------ ------ 455 1,210 245 356 ----- ------ ------ ------ Operating income (loss)...................... (343) 522 138 85 Other expenses, net.......................... (15) (66) (3) (12) ----- ------ ------ ------ Income (loss) before income taxes............ (358) 456 135 73 Income tax expense (benefit)................. (215) 175 52 30 ----- ------ ------ ------ Net income (loss)............................ $(143) $ 281 $ 83 $ 43 ===== ====== ====== ====== Net income (loss) per share ............... $(.06) $ .12 $ .04 $ .02 ===== ====== ====== ====== Shares used in computing per share information............................... 2,201 2,343 2,342 2,344 ===== ====== ====== ======
APRIL 30, JULY 31, ------------ -------- 1995 1996 1996 ----- ----- -------- (IN THOUSANDS) Cash and cash equivalents............................. $ 38 $ 116 $ 147 Working capital (deficiency).......................... (248) (61) (134) Total assets.......................................... 1,057 1,788 2,138 Long-term debt........................................ 352 276 177 Retained earnings (accumulated deficit)............... (314) (33) 10 Total shareholder's equity (deficit).................. (111) 170 213
16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS OVERVIEW The business of the Company was founded in March 1992 and was initially conducted as a partnership. In March 1993, the Company was incorporated and the business was transferred to the Company. The Company was initially engaged in the business of marketing non-radioactive stable isotopes for the energy industry. During fiscal 1996, the Company expanded its business operations to include developing specialty chemicals and materials, and conducting research and development concerning potential products, for the medical research, diagnostic, pharmaceutical and semiconductor industries. The Company believes that a substantial portion of its revenues in the future will depend on its success in developing and selling products in these markets. The Company's quarterly operating results have varied in the past and may in the future vary significantly, depending on factors such as the size and timing of customer orders, price and other competitive conditions and the timing of new product announcements and releases by the Company and its competitors. The Company operates with little order backlog. Moreover, a significant portion of the Company's total revenues have been, and the Company believes will continue to be, derived from a limited number of orders in any particular quarter, and the timing of such orders and their fulfillment has caused, and is likely to continue to cause, material fluctuations in the Company's operating results, particularly on a quarterly basis. As a result, a lost or delayed sale could have a significant impact on the Company's operating results for a particular period. It is likely that in some future quarter, the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Common Stock would likely be materially adversely affected. The Company has experienced, and expects to continue to experience, significant fluctuations in its results of operations. See "Risk Factors." Some of the factors that affect the Company's results of operations include the volume and timing of orders received, changes in the mix of products sold, market acceptance of the Company's and its customers' products, competitive pricing pressures, the Company's ability to develop and introduce new products, and the timing and extent of research and development expenses. As a result of the foregoing or other factors, there can be no assurance that the Company will not experience material fluctuations in future operating results on a quarterly or annual basis, and such fluctuations could materially and adversely affect the Company's business, financial condition and results of operations. Historically, substantially all of the Company's net revenues in any particular period have been attributable to a limited number of customers. Net revenues from three customers accounted for approximately 66%, 20% and 10%, respectively, of the Company's net revenues for the three months ended July 31, 1996. In fiscal 1996 two customers accounted for approximately 88% and 11%, respectively, of net revenues. In fiscal 1995 three customers accounted for approximately 59%, 26% and 11% of net revenues. The Company expects that if it continues to increase sales of depleted zinc products to end users and develop and sell products in the medical and research and electronic materials industries, concentration of net revenues from a limited number of customers will be reduced. None of the Company's customers have entered into long-term agreements to purchase the Company's products. If completed sales orders are not replaced on a timely basis by new orders from customers, the Company's net revenues could be materially and adversely affected. The Company's net revenues also could be adversely affected by a number of factors including the loss of a significant customer, reductions in orders from any significant customer compared to historical buying levels or otherwise or the cancellation of a significant order from a customer. Any of these factors, many of which are outside the Company's control, could have a material adverse effect on the Company's business, financial condition and results of operations. In March 1995, the Company acquired certain assets and assumed certain liabilities of Isoserve, Inc. ("Isoserve"), a stable isotope supplier. The acquisition was accounted for as a purchase. The Financial Statements for the fiscal year ended April 30, 1995 include the operations related to Isoserve from March 28, 1995. See note 10 to the Financial Statements. 17 RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of total net revenues for the periods indicated.
THREE MONTHS YEAR ENDED ENDED APRIL 30, JULY 31, ------------- ------------- 1995 1996 1995 1996 ----- ----- ----- ----- Net revenues................................ 100.0% 100.0% 100.0% 100.0% Cost of revenues............................ 84.8 68.9 67.8 71.8 ----- ----- ----- ----- Gross margin.............................. 15.2 31.1 32.2 28.2 Operating expenses: Selling, general and administrative....... 39.7 16.2 15.6 17.0 Research and development.................. 22.0 5.5 5.0 5.8 ----- ----- ----- ----- Total operating expenses.................... 61.7 21.7 20.6 22.8 ----- ----- ----- ----- Operating income (loss)..................... (46.5) 9.4 11.6 5.4 Other expense, net.......................... (2.0) (1.2) (0.3) (0.7) ----- ----- ----- ----- Income (loss) before income taxes........... (48.5) 8.2 11.3 4.7 ----- ----- ----- ----- Income tax expense (benefit)................ (29.1) 3.1 4.4 1.9 ----- ----- ----- ----- Net income (loss)........................... (19.4)% 5.0 % 7.0 % 2.7 % ===== ===== ===== =====
Net Revenues. Net revenues increased from $738,000 in 1995 to $5.6 million in 1996. The increase was due to stronger demand for the Company's energy products, increased unit prices of products following the acquisition of Isoserve in March 1995 and sales of a new product, cadmium, which is used for laser holography applications. Net revenues for the three months ended July 31, 1996 were $1.6 million compared to $1.2 million for the three months ended July 31, 1995, an increase of approximately $400,000 or 33%. The increase was due to stronger demand for the Company's energy products and cadmium, and to a lesser extent sales of stable isotope labeled compounds. The Company believes that its revenue growth in the first three months of fiscal 1997 compared to the comparable period of fiscal 1996 is not necessarily indicative of the results to be expected in the future. International sales represented 14%, 13%, 18% and 20% of net revenues for fiscal 1995, 1996 and the three months ended July 31, 1995 and 1996, respectively. International sales were principally to Asia and are denominated in U.S. dollars. Gross Margin. Gross margin is affected by the volume of product sales, product mix and average selling price. The Company's gross margin increased from 15.2% of net revenues in fiscal 1995 to 31.1% in fiscal 1996. The gross margin in fiscal 1995 was negatively impacted by competitive pricing pressures. Gross margin in fiscal 1996 increased in part from the acquisition of Isoserve, a supplier of depleted zinc oxide, which contributed to increased per unit selling price and relatively stable production costs. Gross margin for fiscal 1996 also improved from sales of cadmium. The Company's gross margin percentage decreased to 28.2% in the three month period ended July 31, 1996 from 32.2% in the comparable period of the prior year, due to increased raw material costs associated with the production of energy related products which was offset in part by increased sales prices. Gross margin percentage was also negatively affected by discounts given to customers for prompt payment. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased from $293,000 in fiscal 1995 to $902,000 in fiscal 1996; however, as a percentage of net revenues such expenses decreased from 39.7% to 16.2% of net revenues, respectively. The increase on a dollar basis was primarily due to expanded marketing, business development and administrative activities, while the decrease as a percentage of net revenues was due to significant revenue growth. 18 Selling general and administrative expenses increased from $186,000, or 15.6% of net revenues, to $266,000, or 17.0% of net revenues, for the three months ended July 31, 1995 and 1996, respectively. The increase was due to additional staffing for medical, research and diagnostics products and for finance and administration. The Company anticipates selling, general and administrative expenses will generally continue to increase in absolute dollars, but may vary as a percentage of net revenues. Research and Development Expenses. Research and development expenses include costs associated with new product development. Research and development expenses increased from $162,000 in fiscal 1995 to $308,000 in fiscal 1996; however, as a percentage of net revenues such expenses decreased from 22.0% to 5.5% of net revenues, respectively. The increase in fiscal 1996 on a dollar basis from the prior year reflected the Company's continued efforts to remain competitive through investments in product development by increased staffing, while the decrease as a percentage of revenues was due to significant revenue growth and management's decision to balance research and development expenditures and financial results. Research and development expenses increased from $59,000, or 5.0% of revenues, to $90,000, or 5.8% of revenues, for the three months ended July 31, 1995 and 1996, respectively. The increase was due to increased staffing for product development. The Company believes that the development and introduction of new product applications is critical to its future success and expects that research and development expenses will increase on a dollar basis and as a percentage of revenues in the future. Other Expense, Net. Other expense reflects interest incurred by the Company on its long and short-term borrowings. Other expense, net, increased from $15,000 in fiscal 1995 to $66,000 for fiscal 1996, and from $3,000 to $12,000 for the three months ended July 31, 1995 and 1996, respectively, but remained consistent as a percentage of net revenues. Income Taxes. For fiscal 1995 and 1996, the income tax expense (benefit) was $(215,000), or (29.1)% of net revenues, and $175,000, or 3.1% of net revenues, respectively. The effective tax benefit rate of 60% in fiscal 1995 differed from the federal statutory rate due principally to the realization of temporary differences and loss carryforwards and the determination that such differences were realizable. The Company's effective tax rate of 39% in fiscal 1996 differs from the statutory rate due to state income taxes, net of the federal benefit. The provision for income taxes was $52,000 and $30,000 for the three months ended July 31, 1995 and 1996, respectively. The Company's effective tax rate of 38% and 41% differs from the statutory rate due to state income taxes, net of the federal benefit. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has primarily financed its operations through a combination of cash flow from operations, borrowed funds, lease financing and private sales of equity securities. The Company generated cash flow from operating activities of $180,000 in fiscal 1996, principally as a result of net income, adjusted for non-cash items, increases in accounts payable and income taxes payable offset by increased inventory. Cash used by operations of $96,000 in fiscal 1995 was principally a result of the net loss during the period and adjustments for non-cash items, offset by increases in accounts payable and accrued liabilities. The Company generated cash flow from operating activities of $78,000 for the three months ended July 31, 1996, principally as a result of net income, adjusted for non-cash items, and increases in accounts payable offset by increased inventory and decreases in accrued liabilities. The Company's investing activities used cash of $57,000, $7,000, $2,000 and $4,000 in 1995 and 1996 and the three months ended July 31, 1995 and 1996, respectively. Such investing activities were principally for purchases of property and equipment and the cash paid for the acquisition of Isoserve in fiscal 1995. Financing activities used cash of $95,000, $49,000 and $43,000 in fiscal 1996 and the three months ended July 31, 1995 and 1996, respectively, and provided cash of $187,000 in fiscal 1995. Financing activities in fiscal 19 1996 consisted of the issuance of notes which were more than offset by payments of principal, while financing activities for the three months ended July 31, 1996 consisted of debt repayments. Financing activities in fiscal 1995 consisted of the issuance of notes and preferred stock which were offset in part by payments of principal. As of April 30, 1995 and 1996, and July 31, 1996 the Company had negative working capital of $248,000, $61,000, and $134,000, respectively. At present, the Company has no credit facility with a bank or other financial institution and no in-place source of capital, other than the approximately $1,125,000 net proceeds of the Placement, see "Capitalization--Recent Financing Transactions." The Company intends to use a portion of the net proceeds of this offering to repay the Placement Notes. The Company is also considering building an isotope manufacturing facility. The Company intends to use a portion of the net proceeds of this offering to conduct a feasibility study concerning such a facility. If the Company decides to proceed with construction of such a facility, additional financing would be required. The Company currently has no arrangements for loans or other financing relating to any such construction. The unavailability of such financing could adversely affect its ability to increase sales of new products. The additional funding, if needed, may not be available on terms attractive to the Company, if at all. While the timing and amount of capital requirements cannot be predicted with certainty, the Company believes that cash on hand at July 31, 1996, together with the proceeds from the Placement and the net proceeds from this offering will be sufficient to allow the Company to continue its expected level of operations for at least 12 months from the date of this Prospectus. Any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. See "Use of Proceeds" and "Risk Factors--Future Additional Capital Requirements." 20 BUSINESS Isonics is an advanced materials and technology company which develops and commercializes products based on enriched stable isotopes and high purity materials. Stable isotopes can be thought of as ultra-ultra pure materials. This high degree of purification accomplished on the sub-atomic level provides enhanced performance properties compared to normal purity materials. Stable isotopes have commercial uses in several areas, including energy; medical, research, diagnostics and drug development; product tagging and stewardship; semiconductors; and optical materials. Isonics has successfully developed and commercialized two stable isotope products and intends to promote the emergence and growth of new stable isotope applications. The Company's principal product to date is isotopically depleted zinc ("DZ"). DZ, in different chemical forms, is used to prevent corrosion in nuclear power plants. Corrosion is a cause of high radiation fields in such plants and can result in radiation exposure to workers. DZ also reduces environmental cracking in certain kinds of nuclear reactors which, if not controlled, can require extremely costly repairs or can result in premature shutdown and de-commissioning of the facility. The Company believes that it provides substantially all of the DZ used in nuclear power plants worldwide. The application of DZ was developed by General Electric Company ("GE"), where the founders of the Company were previously employed. Before May 1996, all sales of DZ by the Company were made to GE, which in turn resold the product to end users. In addition to sales to GE, in May 1996 Isonics commenced direct sales to end users, and for the three months ended July 31, 1996, approximately 10% of net revenues were from sales made directly to end users. New applications for stable isotopes are continually being developed by the Company and by third parties. The Company believes that many new applications have the potential to create new markets. One opportunity is to supply stable isotope labeled compounds for the diagnostic breath test ("DBT") market. DBTs provide early diagnosis of conditions that could otherwise lead to expensive procedures such as endoscopies and biopsies. DBTs under development by third parties which utilize stable isotopes in their application include tests to diagnose peptic ulcers, fat malabsorption and liver function. A urea DBT relating to peptic ulcers has recently been approved by the U.S. Food and Drug Administration (the "FDA"), and the Company believes that other companies have applied to the FDA or comparable agencies in foreign countries for approval of these tests, which must be obtained before any products can be sold. Certain DBTs are currently marketed in certain European countries. The Company holds an option, subject to satisfaction of certain conditions, to acquire an exclusive license to two Yale University patents which cover semiconductor devices made of isotopically pure silicon, germanium, gallium arsenide and most isotopically pure compound semiconductors. The patents claim that isotopic purity provides improved device speed and improved thermal conductivity, two properties which are of great importance to the semiconductor industry. According to the Semiconductor Industry Association, sales in 1995 of silicon wafers and other semiconductor substrates were approximately $6 billion. The Company is collaborating with Yale to evaluate these isotopically engineered semiconductor applications. The Company believes that if evaluations demonstrate the commercial feasibility of one or more products, demand could emerge in certain segments of the semiconductor market. There can be no assurance, however, that these evaluations will demonstrate the commercial feasibility of any products, that the Company will be able to commercialize any such products or that a market will emerge for any such products. The Company was formed in March 1992 and incorporated in California in March 1993 under the name A&R Materials, Inc. In September 1996, the Company changed its name to Isonics Corporation. The Company's principal executive offices are located at 4010 Moorpark Avenue, Suite 119, San Jose, California, 95117. Its telephone number is (408) 260-0155. 21 BACKGROUND The following discussion utilizes several technical terms which are explained in greater detail in the Glossary preceding the financial statements at the end of this Prospectus. An isotope is one of two or more species of the same chemical element which differ from one another only in the number of neutrons in the nucleus of the atom. The different number of neutrons can create significantly different nuclear physics characteristics. To take advantage of some of these different characteristics, it is usually necessary to increase ("enrich") or decrease ("deplete") the concentration of a particular isotope. There are over 280 naturally occurring stable isotopes of 83 elements. Some elements have only one naturally occurring stable isotope, while others have many. Stable isotopes are not radioactive. Stable isotopes of an element differ in mass and diameter as well as several nuclear properties, such as cross-section, spin and magnetic moment. Differences in these properties can result in substantially different effects, and some of these differences have the potential for commercial application. For example, in ultra chemically pure crystals grown for electronics or optical applications, isotopic impurities are the greatest contributor to crystal disorder due to mass and diameter variations. Eliminating this disorder by using a single enriched isotope results in increased thermal conductivity and optical transparency, and thus in improved product performance. Similarly, enriching or depleting isotopes based upon their cross-sections allows materials to be engineered for applications in the nuclear power industry, for controlled doping of some semiconductors and for use as targets to produce radioisotopes for medicine and industry. Stable isotopes of an element do not differ significantly in their chemical behavior. Tagging of materials can be performed by varying the natural abundance of isotopes to give a compound its own mass or nuclear magnetic signature without changing its chemical properties. Though chemically equivalent, the "tagged" or labeled compound is discernible from its unlabeled twin through the use of several types of instruments called spectrometers. COMPANY STRATEGY The Company believes that its strength is the ability to bring the necessary elements together to identify, evaluate, develop, engineer and successfully commercialize applications for stable isotopes and value-added products manufactured from stable isotopes. This is evidenced by management's experience (at the Company and in prior employment) in developing DZ from a cost prohibitive concept to a commercial product. DZ is now one of the largest worldwide commercial applications of a stable isotope product. The Company believes it has created a product development model that can serve as a basis for current and future expansion efforts of the Company. Isonics believes that coordination with the ultimate user to establish a product specification and, with the Company's Russian partners, to establish a cost effective product manufacturing process to meet that specification, has the potential to make the Company a viable competitor. This coordination process also includes initiating and managing development projects necessary to adapt existing manufacturing methods to new missions, assembling and coordinating necessary project-specific product and service suppliers, obtaining appropriate regulatory approvals, and verifying product conformance to stringent customer requirements. To capitalize on the commercial opportunities that have been identified for stable isotopes, the Company has adopted a business strategy designed to maximize the value of its technologies, business development and management resources, while attempting to minimize capital costs arising from addressing multiple markets. This strategy involves: . focusing on development of high value-added products which have a perceived competitive advantage in large or growing markets; . leveraging research and development expenditures through collaborations, government programs and corporate partnerships, including performing substantial work in Russia, where the Company believes an attractive value per dollar of cost can be obtained; 22 . minimizing early capital needs by obtaining stable isotopes through alliances and supply agreements with Russian stable isotope sources, followed by investment in Company owned isotope production facilities when markets are more established and the optimum production technology has been determined; . obtaining value-added processing technology through sub-contract manufacturing agreements, joint ventures and acquisitions of strategically important technologies and companies; and . developing a time-balanced product pipeline to provide a continual supply of new business opportunities. PRODUCTS The Company's product pipeline includes products with current revenues (consisting of DZ, cadmium, medical imaging target materials and stable isotope labeled compounds), and other potential products that may, but will not necessarily, generate revenues beginning in future years (such as manufactured labeled compounds, electronic materials and diagnostic breath test substrates, isotopically pure semiconductor fabrication materials and diagnostic breath test kits). Isotopically Depleted Zinc Maintaining radiation exposure of nuclear power plant workers to levels as low as reasonably achievable is mandated in the U.S. by the Nuclear Regulatory Commission. Also of significant concern is cracking of nuclear power plant structural materials due to the corrosive nature of the water used to cool the nuclear reactor core. Nuclear power plants are designed with substantial safety margins against such cracking, and frequent surveillance is performed to assure that this safety margin is not compromised. If not controlled, cracking can require extremely costly repairs or, if not reparable, can result in premature shutdown and de-commissioning of a facility which may have cost hundreds of millions of dollars or more to construct. Zinc provides the important benefits outlined above, but one isotope of natural zinc becomes radioactive in the nuclear reactor, thus offsetting a substantial portion of the desired benefits. By depleting this zinc isotope, the desired benefits are still obtained while the detrimental side effect is essentially eliminated. This product is known as isotopically depleted zinc ("DZ"). Testing sponsored by the Electric Power Research Institute has shown that the addition of a soluble form of zinc to the nuclear reactor coolant reduces plant radiation fields, and in some cases, substantially mitigates environmentally induced cracking. Zinc acts as a corrosion inhibitor for the stainless steel and other metal components of the nuclear reactor systems. In boiling water reactors ("BWRs"), zinc prevents the development and concentration of corrosion products, the cause of high radiation fields which can result in radiation exposure to plant workers. In pressurized water reactors ("PWRs"), zinc not only prevents radiation field build-up, but has been shown in a PWR test to substantially reduce environmental cracking. DZ is currently sold to 19 of the approximately 95 BWRs in the world including 16 of the 37 U.S. BWRs. Typical current annual DZ requirements for a BWR utilizing DZ are approximately $250,000 to $350,000, based on current prices. No PWRs are currently adding either natural zinc or DZ on a routine basis; however, the Company believes that one or more PWRs may in the near future begin doing so. Programs to evaluate the effectiveness of utilizing DZ at PWRs are planned or underway in the United States and certain foreign countries. If these programs demonstrate the commercial effectiveness of DZ for PWRs, the Company believes that a market may develop for DZ use in PWRs, due in part to the importance of environmental cracking mitigation. Initial test results suggest that PWRs will probably use a smaller amount of DZ per plant as compared to BWRs, but there are approximately 200 PWRs in the world. At present prices, the Company estimates the potential market for sales to nuclear power plants to be between approximately $50-$70 million. There can be no assurance that a market will develop for DZ sales to PWRs, that the Company will be able to sell DZ to all such potential customers, or that selling prices of DZ will not decrease. 23 Sales of DZ are presently the Company's largest source of revenues, representing approximately 59%, 88% and 76% of net revenues in fiscal 1995 and 1996 and the three months ended July 31, 1996, respectively. In March 1995, Isonics acquired the stable isotope business of Isoserve. The Company and Isoserve have supplied substantially all of the DZ used in nuclear power plants in the world to date. Until May 1996, DZ was sold only to GE, which in turn resold it to the end-user nuclear power utilities. In addition to sales to GE, the Company currently is marketing DZ directly to U.S. and foreign utilities and concluded its first direct end-user sale in May 1996. The Company believes that direct sales to end users may increase in the future, while sales to GE may remain level or decrease. There can be no assurance as to the size of orders, if any, from direct end users in the future or as to the number of customers that can purchase DZ from the Company. See "Risk Factors--Number of DZ Customers." The Company believes that the decision to purchase DZ is price sensitive. The Company is actively working to further reduce costs by utilizing in-house production of raw materials, developing and implementing low-cost zinc oxide processing technologies, and providing DZ in innovative forms which lowers the utilities' overall cost. Cadmium Sales of cadmium isotopes are presently the Company's second largest source of revenues, representing approximately 11%, 11% and 20% of net revenues in fiscal 1995 and 1996 and the three months ended July 31, 1996, respectively. The Company sells enriched cadmium for use in helium cadmium lasers. Cadmium isotopes may also be used for the manufacture of radioisotopes and might be used in semiconductors and cadmium vapor lighting products. In a helium cadmium laser, cadmium is vaporized and behaves like a gas along with helium. Enriched cadmium is routinely used in these lasers to achieve optimum performance. Tests by laser manufacturers have shown that by using only a single, even isotope of cadmium, such as cadmium-114, the power output of a laser can be increased by at least 50% and the laser light coherence can be improved significantly. Stable Isotope Labeled Compounds Stable isotope labeled compounds ("SILCs") are created by incorporating carbon, nitrogen, hydrogen and oxygen isotopes into several thousand relevant chemical compounds. SILCs allow researchers to probe the metabolism of living systems, determine the structures of important biological compounds, design new drugs and measure extremely low levels of environmental toxins. The Company believes that greater availability of stable isotopes and advances in instrumentation (improvements in sensitivity and reduced cost) will promote increased demand for SILCs. Examples of existing and emerging applications include: . Metabolic studies. Increasingly, drug studies are performed with labeled drugs to facilitate research on metabolism, distribution, mode of action and elimination. The FDA may eventually mandate the labeling of all new drugs for investigational use during some or all phases of pre-clinical and clinical evaluations of these drugs, but there can be no assurance that the FDA will make this mandate in the near future, if at all. . Rational drug design. Nuclear magnetic resonance ("NMR") spectroscopy is being developed as a tool to determine the structure of larger and larger molecules in solution, many of which cannot be analyzed by the more traditional x-ray crystallography techniques. The Company believes that this new NMR sensitivity combined with the sophisticated isotopically labeled cell growth media needed to produce the labeled human proteins will require an increasing supply of the stable isotopes of carbon, nitrogen and deuterium. . Product tagging and stewardship applications. The source of materials and explosives may be identified, without changing their chemistry, by tagging with the stable isotopes of carbon, nitrogen, oxygen and hydrogen. Several other approaches are currently being implemented, and other technologies have also been proposed. These other approaches involve the addition of extraneous materials such as dyes, exotic 24 chemical compounds or radioactive compounds. The Company believes that adding such extraneous materials can sometimes detract from the performance of the product. Tagging with small amounts of isotopically engineered versions of the material itself results in a unique identifier which behaves chemically in exactly the same way as the host material. The Company's efforts to date in the production and sales of SILCs have focused on structurally simple "building block" compounds which are used to synthesize more complex and higher value SILCs. The Company presently markets carbon-13 and nitrogen-15 building block SILCs which it obtains through its supply alliance and network of stable isotope producers. See "--Manufacturing and Supply." The Company intends to expand into the synthesis of more complex SILCs. In addition to providing additional revenue potential and possibly higher margins, the Company believes that developing complex SILC synthesis capability is synergistic with the Company's breath test diagnostics development efforts and will aid the Company in early identification of future stable isotope business opportunities. To effectively implement this product expansion strategy, the Company believes that it is necessary to establish its own isotope enrichment capability and to obtain cost-competitive SILC synthesis technology. See "--Manufacturing and Supply." The Company is recruiting personnel with the requisite chemical synthesis skills and labeled compound market knowledge to establish a production laboratory. See "-- Facilities." Diagnostic Breath Tests Healthcare consumes a large amount of resources in the U.S. and worldwide. The Company believes that substantial changes are taking place to control or reduce the high costs of health maintenance. A significant trend is a general shift from therapy to cost-effective prevention. Early diagnosis of conditions which otherwise could require expensive therapies, such as surgical and invasive diagnostic gastrointestinal procedures, could help diminish the risks and expense of such subsequent procedures. The Company has elected to pursue what it believes is a promising segment of this market: Diagnostic Breath Tests ("DBTs"). Breath tests are all based on the same principle and use a common instrument to measure the result: . a small amount of a carbon-13 SILC (referred to as a substrate) is swallowed by the patient; . breath samples are collected at regular intervals; and . breath samples are analyzed for their carbon-13 content. Most DBTs are intended to replace unpleasant, costly and sometimes risky procedures such as endoscopies and biopsies of the digestive system. The Company believes that DBTs may become a widely used and accepted diagnostic tool. Certain DBTs are currently being sold in certain European countries. Their ease of administration may allow medical internists and general practitioners to use them, potentially resulting in lower cost, earlier diagnosis and broader application. The market for DBTs is defined by the incidence of diseases addressed and existing alternative diagnostic procedures. The urea breath test is the most established DBT. If they become commercially available, carbon-13 urea breath tests ("UBTs") may address a potential population of approximately 8 million peptic ulcer patients in the U.S., who presently utilize drugs and procedures with an estimated cost of at least $2 billion each year. The Company believes that the UBT, coupled with antibiotic treatment, can reduce the cost of peptic ulcer management. The Company believes that one company in the U.S. has recently received FDA approval for a carbon-13 UBT, that another company has applied for FDA approval for a carbon-13 UBT, and that several companies in Europe, including Sanofi and Inbiomed in France, are also pursuing regulatory approval. The Company intends first to enter this market as a carbon-13 and a pharmaceutical-grade substrate supplier. The initial step in pursuing this objective was the addition of Dr. Jacques Delente, an experienced researcher and developer of breath test diagnostics, to the Company's management team. 25 The following table provides breath tests which are at various stages of clinical research and pre-clinical and clinical trials by various third parties.
BREATH TEST CONDITION DIAGNOSED ----------- ------------------- /1//3/ C-Urea Helicobacter pylori /1//3/ C-Triolein Fat malabsorption /1//3/ C-Galactose Liver function /1//3/ C-Xylose Small Bowel Bacterial Overgrowth (the major cause of chronic diarrhea) /1//3/ C-Aminopyrine Liver function /1//3/ C-Caffeine Liver function Cyclosporin dosage following /1//3/ C-Erythromycin transplantation Genotype of MSUD (Maple Syrup Urine /1//3/ C-Valine Disease) /1//3/ C-Phenylalanine Genotype of PKU (Phenylketonuria) /1//3/ C-Sucrose Sucrose malabsorption (sucrase-isomaltase complex deficiency) /1//3/ C-Starch Pancreas amylase function /1//3/ C-Cholesteryl Octanoate Pancreas esterase function
The DBT business is subject to extensive government regulation. The products and instruments used, which may be regulated as drugs and devices, are subject to the scrutiny of FDA review and approval as well as ongoing FDA inspection of most aspects of the production, marketing, distribution and use of these tests. The Company believes that the production and marketing of DBTs is also subject to similar regulatory controls in the foreign countries where the Company would likely seek to market products. Consequently, such products cannot be commercially introduced for several years, and there can be no assurance that the products would ever be approved for use. The DBT business is complex. The Company intends to enter the market initially as a carbon-13 supplier or as a bulk supplier of carbon-13 SILCs (substrates). The Company may also seek to develop a DBT measurement device under the jurisdiction of the FDA. At some future date, the Company may seek to become a more fully integrated supplier of DBT kits and measurement instrumentation, although there can be no assurance that the Company will pursue this strategy. In a parallel effort, the Company is currently exploring several options for commercializing a UBT and other DBTs in Russia. Recent agreements between the United States and Russia in the area of drug and device regulation allow for more cooperation in the review and approval of new applications, such as DBTs. Russian authorities already have in place or are working on similar agreements with other countries. The Company believes that these agreements will simplify and shorten the Russian process of approving health care products already approved in countries with which they have agreements, although there can be no assurance that this will be the case. The Company plans to capitalize on its strengths in supplying carbon-13, labeled substrates, clinical knowledge and data and regulatory support while looking for one or more local partners with strengths in the Russian regulatory system, measurement hardware and facilities, and marketing and sales capabilities. The Company also believes this approach has the potential to improve its entry into the European market, because of proximity, existing relationships and cost advantages. Medical Imaging and Therapy Materials Stable isotopes of thallium, zinc, cadmium, xenon, oxygen, strontium and many others are routinely used in a variety of medical imaging and therapy applications. In their enriched form or converted to a specific radioactive isotope in a cyclotron or nuclear reactor, these materials are incorporated in chemical compounds which concentrate in specific parts of the human body upon injection, inhalation or ingestion. Measuring the distribution of the materials in the patient can assist physicians in diagnosing disease states and developing appropriate treatment therapies, some of which incorporate radioactive materials produced from stable isotopes. 26 Most phases of the development and ongoing production of these materials are controlled by the FDA and similar foreign regulatory agencies. This fact, combined with the complexities of production and distribution, has resulted in a market with only a few manufacturers. Tight quality control requirements and the importance to the health care industry of a ready supply of these drugs leads these manufacturers to pay close attention to their stable isotope suppliers. Quality, supply reliability, ultimate source, breadth of offerings, price and track record are principal factors that a manufacturer considers in evaluating a potential stable isotope supplier. Much of the material used to manufacture such products originates in countries of the former Soviet Union. While the U.S. Department of Energy ("DOE") has significant capabilities in this area, its costs are usually substantially higher because of the full cost recovery mandated by legislation governing the DOE's operations. The Company is capable of supplying many of the stable isotopes currently sold in this market. The Company also has established relationships in Russia, an important consideration for those drug manufacturers that have less established relationships with Russian suppliers. Finally, the original impetus for new applications of stable isotopes in health care frequently comes from the drug manufacturers. For these reasons, the Company has recently begun marketing its products, services and capabilities to the existing and emerging manufacturers. Isotopically Pure Semiconductors Isotopic purification of carbon used to manufacture synthetic diamonds has resulted in substantially improved physical properties. Published tests conducted by GE and others have shown that the removal of a small amount of carbon-13 to produce isotopically pure carbon-12 synthetic diamonds can result in a 50% improvement in room temperature thermal conductivity of the diamond. At cryogenic (i.e., extremely cold) temperatures, the heat conductivity is so great that it cannot be measured using conventional techniques. Additionally the new diamond was found to be highly transparent, and the transmission of certain frequencies of light was increased by approximately 10 times without the diamond sustaining damage. GE has stated that isotopically pure carbon-12 diamonds may enable faster, more reliable computers due to their superior heat removal capability and may result in more efficient laser cutting tools and more accurate laser measurement devices, and that the new diamonds may enable designers to use lasers in semiconductor fabrication techniques. Synthetic diamonds made from isotopically pure carbon-13 have been found by Ford Motor Company scientists to have more atoms per cubic centimeter than any other solid known to exist on earth. These isotopically pure carbon-13 diamonds are harder than any other presently-known material. Studies conducted at Lawrence Berkeley Laboratory and the Max Planck Institute on isotopically pure germanium have shown thermal conductivity improvements similar to those found in isotopically pure carbon-12 diamonds. The Company believes that these and other improved properties might be found in other isotopically pure materials and may result in commercial opportunities, particularly in the area of semiconductors. According to the Semiconductor Industry Association, the 1995 market for silicon wafers and other semiconductor substrates was approximately $6 billion. This market is projected to grow 50% by the year 1999 to over $9 billion. Improvement in the thermal conductivity of these materials is important since as the feature size continuously decreases, the power density increases. As power density increases, more heat is generated per unit volume, causing device operating temperature to rise. The semiconductor industry is moving toward lower operating voltages and is using mechanical means to remove bulk heat, but the Company believes that greater heat dissipation on the micro scale will become even more important to the industry in the future. Better thermal conductivity directly affects heat removal capability and indirectly improves device speed. As the industry moves toward multi-layer devices and true 3-D chips, the ability to remove heat will be a material consideration for the semiconductor industry. Natural silicon contains three isotopes, silicon-28 (92%), silicon-29 (5%) and silicon-30 (3%). An otherwise perfect crystal of silicon will contain imperfections in the form of isotopes of different mass, with the density of these imperfections amounting to nearly 8%. This far exceeds the doping levels and density of imperfections ordinarily found in device-quality crystals. The Company believes that removal of the minor isotopes should result in substantially improved thermal conductivity. 27 The Company believes that if commercial opportunities emerge, isotopically pure silicon-28 (99.5%) deployed as wafers or substrates and as silane for building epitaxial layers should find a niche in the manufacture of high performance silicon semiconductors. Even at the premium price required for isotopically pure silicon, the Company believes that it can compete in high performance, less cost driven market segments. Isonics has obtained an option entitling it, upon the satisfaction of certain conditions, to acquire an exclusive license regarding two U.S. patents concerning isotopically pure semiconductor devices, which are owned by Yale University. Yale's prior efforts to license its technology to semiconductor manufacturers was hindered by Yale's inability to obtain the necessary isotopically pure and chemically pure materials to evaluate its use. Since the Company's stable isotopes could enable the development and commercialization of the Yale technology, Yale chose to collaborate with the Company in evaluating isotopically pure semiconductors. These patents cover silicon, germanium, gallium arsenide and most isotopically pure compound semiconductors. The Company is collaborating with Yale to evaluate possible isotopically engineered semiconductor applications and their commercial feasibility, including cost. The Company believes that if evaluations demonstrate the commercial feasibility of one or more products, demand could emerge in certain segments of the semiconductor market. There can be no assurance, however, that these evaluations will demonstrate the commercial feasibility of any products, that the Company will be able to commercialize any such products or that a market will emerge for any such products. To exercise the option, the Company must deliver to Yale before March 1997 specimens of isotopically pure silicon-28 meeting certain specifications. The Company believes it will be able to satisfy this requirement, but there can be no assurance that this will be the case. The option specifies that the terms of the license shall be reasonable, but the terms may be no less favorable to the Company than those specified in the option. The license, if obtained, will require payment by the Company of an annual royalty based on a percentage of the Company's or its sublicensees' net sales of products derived from technology covered by the Yale patents. In addition, the license will permit deduction of one-half of the Company's reasonable cost of securing the silicon-28 from its future royalty payments to Yale University. Upon notice by the Company of its exercise of the option, the Company and Yale are required to negotiate in good faith to arrive at a license agreement within 90 days. In addition to silicon, the Company plans to evaluate a number of compound semiconductors, such as gallium arsenide, which may particularly benefit from enhanced heat dissipation capability. RESEARCH AND DEVELOPMENT Consistent with the Company's product development strategy, a variety of new stable isotope products and potential markets are continually being identified and evaluated for economic and technical feasibility, and the Company intends to devote a portion of the net proceeds of this offering for research and development. See "Use of Proceeds." The Company intends to spend substantial resources on improved technologies for isotope separation and materials processing technologies. Much of the expenditures to date have been in Russia to capitalize on the high quality of technology and economical labor rates. The Company's activities in Russia could, however, be directly affected by political, economic and military conditions in Russia. See "Risk Factors-- Operations in Russia." PATENTS AND PROPRIETARY RIGHTS The Company relies primarily on a combination of trade secrets, confidentiality procedures and contractual provisions to protect its technology. Despite the Company's efforts to protect its rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's technology and products is difficult. In addition, the laws of many countries do not protect the Company's rights in information, materials and intellectual property that it regards as proprietary to which it regards as great an extent as do the laws of the United States. There can be no assurance that the Company's means of protecting its rights in proprietary information, materials and technology will be adequate or that the Company's competitors will not independently develop similar information, technology or intellectual property. 28 The Company currently has no patents and has not filed any patent applications. The Company has rights to several isotopically engineered innovations regarding electronic and optical materials which it believes may be patentable. Ongoing work in the area of isotope separation by biochemical means may also lead to patentable inventions. To date, the Company has not been notified of any claim that the Company's products infringe the proprietary rights of third parties, but there can be no assurance that third parties will not claim infringement by the Company with respect to current or future products. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, financial condition or results of operations. See "Risk Factors--Protection of Intellectual Property." COMPETITION The markets for the Company's products and proposed products are highly competitive, and the Company expects that competition will continue and increase as markets grow and new opportunities are realized. Some of the Company's current competitors, and many of the Company's potential competitors, are larger and have significantly greater financial, technical, marketing and other resources. Some of the Company's competitors may form partnerships or alliances with large pharmaceutical or electronics companies, with the resulting entity possessing more market strength than the Company. The Company's competition varies greatly depending on which product or industry is considered. DZ. At present, the Company is the only producer of DZ, but believes that other entities or persons may begin producing DZ. Several such possible producers have adequate technical and financial resources to become viable competitors of the Company in the near future. In particular, Siemens has indicated that it has a relationship with Ultracentrifuge Netherlands ("UCN") and GE has indicated that it intends to establish a second Russian source to compete with the Company for GE purchases. UCN also competes with the Company in the markets for cadmium and in medical target isotopes. SILCs. The Company has several larger and numerous smaller competitors in the markets for the SILC products that the Company currently supplies, and will have additional competitors if it offers breath test diagnostic products and additional SILCs in the future. Two of these companies, Cambridge Isotope Laboratories Inc., and Isotec, Inc., have their own isotope separation capability, while all of the competitors produce some combination of SILCs and DBT substrates. The Company believes that one company in the U.S. has recently received FDA approval for a carbon-13 UBT, that another company has applied for FDA approval for a carbon-13 UBT, and that several companies in Europe are also pursuing regulatory approval. The Company's principal current competitors and potential competitors include Tracer Technologies, Aldrich Chemicals, Icon Services, MicroForest, Omicron, C/D/N Isotopes and Martek Biosciences. The Company has in the past, and may in the future, sell products to or purchase products from these companies. Electronics and Optical Materials. Due to the early stage of the electronic and optical materials opportunities, the Company has not identified material competitors in these markets. However, given the potential size and importance of these new potential markets, the Company anticipates that substantial competition will emerge if these markets develop. Many of the areas in which the Company is or intends to compete are rapidly evolving. There can be no assurance that an existing or potential competitor has already developed, or may develop, a patentable product or process which will substantially prevent the Company from competing in its intended markets. The Company competes primarily on the basis of product performance, proprietary position and price. Some of the Company's products may also compete based on product efficacy, safety, patient convenience and reliability. In many cases the first company to introduce a product to the market will obtain at least a temporary competitive advantage over subsequent market entrants. 29 MANUFACTURING AND SUPPLY Consistent with the Company's strategy to minimize capital expenditures, the Company obtains stable isotopes through alliances and multi-year supply agreements with Russian stable isotope sources and may invest in Company-owned isotope production facilities in the future upon determining the optimum production technology. Currently, the Company obtains substantially all its isotopes from a supply alliance in the former Soviet Union. The production of DZ is an international activity involving several distinct steps which require up to nine months for the complete production cycle. First the feed material, high purity diethylzinc, is procured from a chemical plant in the United States and shipped by freighter to St. Petersburg, Russia. There it is transported by truck or train to the gas centrifuge plant where it is depleted of the zinc-64 isotope and converted to depleted zinc oxide. The oxide form of DZ, which is acceptable for air freight, is then shipped to a processing facility in the United States where additional chemical and mechanical operations are performed to prepare the powder for use in nuclear plants either as pellets or as a very fine grained powder. If the final product form is pellets, further processing is performed in Ireland, but the Company is pursuing development of the technology to perform this manufacturing step in-house in the future. The Company has entered into an agreement with an isotope enrichment plant located in Russia. The term of the agreement is through 1999. Under the agreement, the plant will produce DZ and other stable isotopes for the Company will allocate its entire stable isotope production capacity to the Company and will produce other isotopes to respond to marketplace demand on the Company for other stable isotopes. Under the agreement, the specific terms for each year's production, including pricing terms, are negotiated between the parties by November 1 of the preceding year, and the next such negotiation is expected to occur in November 1996. The agreement provides that disputes arising thereunder are to be resolved by arbitration conducted in Europe under international commercial arbitration rules, and accordingly the enforceability of the agreement might be subject to the greater degree of uncertainty than if the agreement was with a U.S. company and disputes were resolved in the U.S. The supply of stable isotopes could be directly affected by political, economic and military conditions in Russia. Accordingly, the operations of the Company could be materially adversely affected if hostilities involving Russia should occur, if trade between Russia and the United States were interrupted or curtailed, or if the Company should fail to obtain and maintain all necessary governmental approvals. Operations in Russia entail certain other risks, including, among others, supply disruptions as well as introduction of tariffs and fluctuations in freight rates. See "Risk Factors--Operations in Russia." There can be no assurance that the Company's relationship with its processor in Russia will be successfully maintained. Disruption or termination of the Company's supply sources could delay shipments by the Company and could have a material adverse effect on the Company's business, financial condition and results of operations. The Company does not presently maintain political risk insurance but will evaluate the desirability and availability of such insurance in the future. To increase capacity and to geographically diversify the Company's production of certain isotopes, the Company is considering constructing a facility outside of Russia. The Company believes that owning this facility may improve its profitability and will improve the security of its supply. The Company intends to conduct a feasibility study to evaluate the nature and timing of such a facility, and a portion of the net proceeds of this offering will be used to fund that study. See "Use of Proceeds." The nature and timing of any such construction will depend on several factors, including the results of the study. If such a facility is constructed, it is likely that the facility would be located in North America. The Company depends upon a single processor, located in Russia, for one process involved in the manufacturing of its products, and upon a single supplier or a limited number of suppliers and processors for certain other manufacturing processes. Although the Company does have written agreements with certain of its suppliers and processors, the Company does not have any written agreements with other suppliers and processors. The Company seeks to reduce its dependence on its sole and limited suppliers, but disruption or termination of any of the sources could occur, and such disruptions could have at least a temporary material adverse affect on the Company's business, financial condition and results of operations. Moreover, a prolonged inability to obtain alternative sources for processing could materially adversely affect the Company's relations with its customers. 30 GOVERNMENT REGULATION Regulation by government authorities in the United States and other countries is a significant consideration in the development, production, distribution and marketing of the Company's products and in its continuing research, development, and other activities. In order to clinically test, manufacture, distribute, market and sell products, especially those intended for therapeutic or diagnostic use, mandatory procedures and safety and other standards established by applicable regulatory authorities must be followed. In many cases, specific approval to clinically test and commercially distribute such products must be obtained from numerous governmental authorities. Furthermore, the Company is subject to various laws, regulations and requirements relating to such matters as the import and export of its products, ensuring safe working conditions, laboratory and manufacturing practices, the use and disposal of hazardous or potentially hazardous substances used in connection with the Company's research, development and manufacturing activities. Some of the regulations are summarized below. See "Risk Factors--Government Regulation." FDA Regulation The Company's testing, manufacture, marketing, distribution, export and sale of diagnostic products, such as any DBT it might in the future develop and seek to sell, are subject to extensive and rigorous regulation by United States and other countries in which the Company may choose to test, manufacture or market its proposed diagnostic products. As of the date of this Prospectus, the Company has not determined those countries, other than the United States, where it might seek regulatory approvals to market any such products it may develop. The products the Company intends to develop are subject to rigorous preclinical and clinical testing and other FDA approval requirements, and similar requirements in most other countries. The process for obtaining the required regulatory approvals from the FDA and other regulatory authorities takes many years and can be expensive. The Company has limited experience in conducting and managing the preclinical and clinical testing necessary to obtain regulatory approvals and expects to rely on experienced outside experts to assist as well as develop its own resources. The various diagnostic products of which the Company is contemplating development are subject to different regulations and other requirements. Various components of the DBT and other products proposed for development are regulated as drugs or medical devices under the Federal Food, Drug, and Cosmetic Act ("FDCA"). The applicable FDA requirements for approval may be different for different types or components of products. There can be no assurance that any product developed by the Company, or other entities to which the Company may sell bulk or other materials, will prove to meet all of the applicable standards to receive marketing approval, or that any such approvals will be granted on a timely basis, if at all, or that such products if approved will be commercially successful. Delays and costs in obtaining these regulatory approvals could adversely affect the Company's ability to commercialize its products and its ability to receive market revenues. Even if regulatory approvals for a product are obtained, such approvals may involve restrictions and limitations on the labeling and clinical use of the product. Following market approval, the product will continue to be subject to compliance with applicable federal and state laws and regulations. The Company or the FDA may suspend clinical trials or commercial distribution at any time if either determines that the subjects or patients are being exposed to an unacceptable health risk related to the manufacturing, testing and use of the Company's investigational or approved products, or if the FDA determines that the Company has violated applicable laws or regulations. If clinical studies are suspended, the Company may be unable to continue development of the investigational products affected. Violation of applicable laws and regulations, particularly those dealing with medical products, can result in the imposition of substantial penalties against the Company and its employees and officers, such as product seizures, recalls, fines, injunctions and withdrawal or suspensions of approvals to test, manufacture, export or market products. Delays and costs in obtaining or reinstating these approvals and the subsequent compliance with applicable federal and state statutes and regulations, and any penalties imposed for their violation, could adversely affect the Company's ability to commercialize products. 31 Diagnostic Medical Device Products Certain diagnostic products that the Company may pursue, such as the DBT products, are regulated as medical devices. Diagnostic products may be subject to one of two marketing approval procedures. One procedure, known as a "510(k) review," is available when the manufacturer can demonstrate that the proposed product is "substantially equivalent" to another product that either was in commercial distribution in the United States before May 28, 1976, or that has been subsequently classified as a Class I or Class II medical device. When a 510(k) review is used, a sponsor is required to submit a Pre-Market Notification to the FDA, at least 90 days before it plans to initiate commercial distribution of the product. The Company cannot proceed with sales of such products for human clinical use until it receives notification from the FDA that FDA agrees with the Company's assertion of substantial equivalence, a process that can take six to eighteen months, or longer. In the event that the FDA requests additional information for the Pre-Market Notification, there could be multiple cycles of submissions, each involving an additional waiting period, until clearance is obtained. The FDA also has statutory authority to require clinical or other study data to support a Pre-Market Notification 510(k). Where there is no existing legally marketed product "substantially equivalent" to the Company's product, the Company will be required to seek marketing approval of its product by the second procedure. This second procedure, a Pre-Market Approval ("PMA") application, involves a lengthier and more burdensome procedure, which would likely require clinical studies. Together with the FDA review of the PMA, this application process may take 3-5 years before commercial marketing can occur, if the PMA is approved. There can be no assurance that any future product the Company develops which is the subject to FDA review will be found to have an intended use and characteristics that would qualify the new test for commercial distribution for clinical use under 510(k) Pre-Market Notification. Thus, PMAs may be required for some or all of the Company's future proposed products. The FDA invariably requires clinical data before approving either a PMA or a 510(k). The FDA is empowered to grant a 510(k) clearance without supporting clinical data. If clinical studies are necessary for either a PMA approval or 510(k) clearance, the FDA may require the Company to obtain an investigational device exemption ("IDE"). An IDE normally restricts the transfer of an investigational device to a limited number of institutions, and use to a limited number of investigators. Before the approval and/or clearance is issued, such institution or investigators may receive the Company's investigational devices only for the purpose of performing the clinical studies that are to be submitted to the FDA in support of a 510(k) or a PMA application. The Company believes that DBT instruments, if any, that it may develop in the future will be eligible for marketing under a 510(k) Premarket Notification, if cleared by FDA, but that the substrate would require approval of a New Drug Application as described in the following section. The Company believes that clinical studies would be required to obtain FDA approval of the 510(k)/NDA the DBT instrument/substrate, and would be conducted under IDE approved by FDA. There can be no assurances that FDA will allow the Company to conduct such clinical studies or that such studies will provide the data necessary to obtain the approval of the 510(k)/NDA for any DBT or other product that the Company may develop, or that FDA will in fact provide the necessary approval of the 510(k)/NDA in a timely manner, if at all. In addition, use of the DBT and other diagnostic products developed by the Company may be subject to regulation under the Comprehensive Laboratory Improvement Act of 1986 ("CLIA"). Under CLIA, clinical laboratories must be certified to perform diagnostic tests. Such certification specifies the highest "complexity level" of tests that the laboratory can perform. The specific complexity level of a given diagnostic product is determined by governmental agencies, currently the U.S. Centers for Disease Control. The Company's ability to successfully market diagnostic products within the U.S. may depend on its obtaining a complexity level determination that allows the broadest use. There can be no assurance that such complexity level determination can be obtained in a timely manner, if at all, and that such failure will not have a material adverse effect on the Company and its operations. 32 Drug Products Certain products that may be developed by the Company may be classified, depending on their characteristics, as drugs regulated under the FDCA. Development of a drug product for use in humans is a multistep process. First, laboratory and animal testing establishes reasonable safety of the experimental product for testing in humans and suggests potential efficacy with respect to a given disease. Once the general investigative plan and protocols for specific human studies are developed, an investigational new drug application ("IND") is submitted to the FDA. Under FDA regulations, the Agency does not approve an IND. Rather, assuming compliance with applicable requirements, the IND becomes effective, thus allowing a clinical investigation to commence unless FDA notifies the sponsor to the contrary within 30 days of receipt of the IND. That approval may come within 30 days of IND submission but may involve substantial delays if the FDA requests additional information before approving any clinical testing. The initial phase of clinical testing (Phase 1) is conducted on a relatively small number of subjects (e.g., 20-50) to evaluate the pharmacological actions and side effects of the experimental product in humans and, if possible, to gain early evidence of effectiveness. Phase 1 studies evaluate various routes, dosages and schedules of product administration. The demonstration of diagnostic performance is not required in order to complete such studies successfully. If acceptable product safety is demonstrated, then Phase 2 studies may be initiated. The Phase 2 studies are designed to evaluate the effectiveness of the product in the diagnosis of a given disease and, typically, are well-controlled, closely monitored studies on a relatively moderate number of patients (e.g., 50-200). The optimal routes, dosages and schedules of administration, and other matters, are determined in these studies. If Phase 2 trials are successfully completed, Phase 3 trials will be commenced. Phase 3 trials are the larger controlled trials and uncontrolled studies, often involving hundreds of patients (400-500 or more) that are intended to gather additional information about safety and effectiveness in order to demonstrate the overall risk/benefit relationship of the experimental product and to provide an adequate basis for labeling and marketing approval. It is not possible to estimate the time in which Phase 1, 2 and 3 studies will be completed with respect to a given product, although the time period required is often four to ten years in duration, depending on the clinical protocol design, endpoints and FDA requirements. Following the successful completion of these clinical trials, the clinical evidence that has been accumulated is submitted to the FDA as part of a new drug application ("NDA"). Approval of the NDA is necessary before a company may market the product. The approval process can be very lengthy, frequently taking one to two years, or more, after submission and depends in part upon the speed of FDA's review of the application and the time required for the company to provide satisfactory answers or additional clinical or other data when requested. With any given product, there is no assurance that an NDA will ever be approved in a timely manner or at all. Failure to obtain such approvals would prevent the Company from commercializing its products and would have a material adverse effect on the Company's business. Furthermore, the process of seeking and obtaining FDA approval for a new product generally requires substantial funding, and there can be no assurance such funding will be available. cGMPs and Other Controls The FDA also has extensive regulations concerning manufacturing of regulated products in accordance with current good manufacturing practices ("cGMPs"). The Company's compliance with cGMPs, including compliance of its third-party manufacturers, and its ability to ensure the potency, purity and quality of the drugs and medical devices manufactured, must be documented in the NDAs, 510(k)s and PMAs submitted for the products. Continued compliance with cGMPs is required to continue to market both drugs and medial devices once they are approved. Failure to comply with the cGMP regulations or other applicable legal requirements can lead to federal seizure of violating products, injunctive relief actions brought by the federal government and potential criminal investigation and prosecution of the Company and its officers and employees who are responsible for the activities that lead to the violations. 33 The Company and the facilities used by it also are required to comply with environmental and other regulations concerning the operations of and the materials used by the Company, as well as handling and distribution of products and waste materials. Failure to ensure compliance with such federal, state or local laws and regulations could have a material adverse effect on the Company. In addition, the manufacture, distribution and export of some of the Company's current or potential products and technology may be subject to governmental controls pertaining to materials and technology that might have been used for military, nuclear power, or nuclear weapons purposes. These controls include, in certain cases, export license requirements or other restrictions. There can be no assurances that the Company will be able to obtain or maintain such licenses, or that the failure to obtain or maintain such licenses, or comply with other restrictions that might be placed on such manufacturing and exports, will not have a material adverse effect on the Company and its operations. Export and Environmental Controls Certain of the Company's products and technology, particularly those having potential nuclear energy or military applications, such as DZ and related technology, are subject to stringent controls over their manufacture, use, distribution, dissemination and export. In many cases, such activities may require approvals or licenses from various U.S. and foreign governmental agencies, and compliance with substantial regulatory controls. Such approvals can be difficult to obtain and maintain and may not be obtainable from certain countries. Furthermore, such approvals or licenses may be restricted or terminated because of changes in laws, regulations, policies governing those approvals and licenses, or changes in the political or other matters in the countries granting such approvals or licenses to which the Company's products and technology would be exported. Likewise, certain current and potential operations of the Company may necessitate submitting registrations or notifications to federal and state regulatory authorities responsible for environmental and related matters, including the U.S. Environmental Protection Agency ("EPA") and complying with stringent controls pertaining to the handling and distribution of the Company's products and operations, including under certain conditions obtaining governmental approvals and licenses, either of which may be subject to significant restrictions. Violation of any of these regulatory controls may subject the Company to significant administrative civil and criminal penalties, including loss of its approvals and licenses, or the imposition of additional restrictions on the Company's operations. There can be no assurances that the Company will be able to obtain and maintain the approvals or licenses necessary to successfully market its products and technology, or that it will be able to comply with applicable laws and regulations. Any such failure to obtain such licenses or approvals, where required, and comply with such laws and regulations may materially and adversely affect the business, financial condition and results of operations of the Company. Regulation of Non-Medical Chemical Products The import, export, handling, transportation, sale, storage and other activities undertaken in connection with the Company's non-medical products are subject, or potentially subject, to substantial federal, state, local and foreign government controls pertaining to hazardous chemical and chemical wastes, import export controls and other matters. These regulations are complex, pervasive and evolving. The Company's ability to effect and maintain compliance with these controls is important to its commercial success. With respect to transportation of its products, the Company relies on Russian and U.S. freight carriers to handle and deliver all its shipments, and utilizes domestic overnight courier services for shipments to its customers. These carriers must comply with Department of Transportation ("DOT") regulations in the shipping and packaging of the stable isotope chemicals. The Company must also comply with DOT regulations when packaging material kept in inventory for domestic shipment. As required under federal and state law, the Company has prepared Material Safety Data Sheets ("MSDS"), which are enclosed with each product shipment. The Company must periodically update its MSDS sheets based on new literature reports. The Company cannot assure that its MSDS sheets will continue to be in compliance with applicable requirements. 34 The shipments received at the Company's Columbia, Maryland facility are subject to federal and Maryland regulations pertaining hazardous chemicals and hazardous waste disposal. These shipments are stored in an area of the facility designated for such materials. Currently, the Company is considered a small quantity generator of hazardous waste and will rely on certified haulers to dispose of its minimal amounts of hazardous waste. Should the levels of hazardous waste increase as its inventory and handling operations increase in volume, then it would have to comply with Environmental Protection Agency ("EPA") requirements and obtain an EPA ID number, which are costly and require an increased investment of personnel and money. The Company has no experience in this area of compliance and would have to rely on outside consultants or hire additional employees with pertinent experience and training. Potentially, if substantially larger inventories of hazardous chemicals must be maintained at the Maryland facility, the Company might have to move to new facilities in order to meet EPA requirements for the storage of hazardous chemicals. The shipments from Russian manufacturing sources now enter the U.S. duty (without tariff) free; however, there can be no assurance that such duty-free importation will continue. If the shipments are subject to tariff, the Company cannot assure that it will be able to sell the imported products will be commercially viable because of these increased tariff costs. The Nuclear Regulatory Commission ("NRC") has authority to regulate importation and exports of deuterium containing chemicals whose ratio of deuterium atoms to hydrogen atoms exceed 1:5000. At present, the deuterium containing compounds which the Company imports do not require any special licenses or importation authorization. There can be no assurances that the NRC will continue these policies. The NRC regulates exports of deuterium containing chemicals under general license. The Company will not be able to ship these chemicals to certain countries which require a special license for such shipments; none of these countries represent significant current or expected future markets for the Company. In addition, certain technology or products that the Company is or may in the future develop, may be subject to other government controls pertaining to armaments, including the need to obtain special licenses for exports. The imposition of such controls may impair the ability to broadly market such products. PRODUCT LIABILITY AND INSURANCE The Company's business exposes it to potentially substantial product, environmental, occupational and other liability risks which are inherent in product research and development, manufacturing, marketing distribution and use of its products and operations, including, but not limited to, products used in nuclear power plants and medical device products. The Company currently does not have product liability insurance, but may seek such insurance before it begins commercial distribution of medical or other products that it may develop. There can be no assurance that adequate or necessary insurance coverage will be available at an acceptable cost, if at all, or that even if such insurance were obtained, a product liability or other claim would not materially and adversely affect the business or financial condition of the Company. See "Risk Factors--Product Liability; Minimal Insurance Coverage." The terms of the Company's agreements with its customers provide that liability to nuclear power plant utilities is limited to the Company's standard warranty to replace non-conforming product, and liability for consequential damages caused by the improper use of the Company's products is limited by contractual terms. Nevertheless, one or more third parties could bring an action against the Company based on product liability, breach of warranty or other claims, and, there can be no assurance that the foregoing contract clauses would effectively limit the Company's liability in any such actions. EMPLOYEES As of August 15, 1996, the Company had 10 full-time employees, of whom 2 have Ph.D.'s and 4 have advanced degrees in chemistry, engineering, and related fields. Approximately 3 employees are involved in research and product development, 2 in manufacturing and sourcing, and 5 in business development and administration, but such employees' responsibilities may also encompass areas other than their primary area of responsibility. 35 The Company plans to recruit a Vice President to manage and lead its development of the planned electronic and optical materials business and a General Manager plus additional personnel as may be required to staff its intended SILC laboratory and business expansion. The Company considers its relations with its employees to be good. None of the Company's employees are covered by a collective bargaining agreement. LEGAL PROCEEDINGS The Company is not a party to any legal proceedings. FACILITIES The Company leases 2,500 square feet of administrative and technical space in San Jose, California. The lease expires January 1999. The Company leases 641 square feet for an administrative office in Columbia, Maryland. This lease expires in December 1997. The Company intends to lease or acquire a facility in the Columbia, Maryland, area in which to relocate its administrative offices in Maryland. The Company leases office and laboratory space on a month-to-month basis at Moscow State University where it performs its contract research on isotope separation. 36 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The members of the Board of Directors ("Board") and the executive officers of the Company are as follows:
NAME AGE POSITION ---- --- -------- James E. Alexander 47 President, Chief Executive Officer and Chairman of the Board Boris Rubizhevsky 45 Senior Vice President, Isotope Production and Supply and Director Joe Friscia 64 Vice President, Energy and Environmental Products and Secretary Daniel J. Grady 42 Vice President, Medical, Research & Diagnostics Paul J. Catuna 32 Chief Financial Officer and Director of Administration Lindsay A. Gardner 45 Director Larry J. Wells 52 Director
Each director holds office until the next annual meeting of shareholders and until his or her successor is elected and qualified or until his or her earlier death, resignation or removal. Each officer serves at the discretion of the Board. Mr. Alexander is a founder of the Company and has served as its President, Chief Executive Officer and a director since its inception. He has worked full-time for the Company since January 1994. From June 1972 to December 1993, he worked in a variety of technology positions at GE in the aircraft engine and nuclear power businesses, where his last position was Manager of Technology Programs. Mr. Alexander received his bachelors degree in Metallurgical Engineering from the University of Cincinnati and performed graduate work in materials science there. He earned a masters degree in Business Administration from Santa Clara University. Mr. Rubizhevsky is a founder of the Company and has been a Senior Vice President and a director of the Company since inception. From November 1986 through December 1994, he owned and operated SAR Marketing, a consulting firm providing business advice and services to large multinational corporations. From June 1977 to May 1986, Mr. Rubizhevsky worked at GE as Business Development Manager in various international locations. He received his bachelors degree in Engineering from the Stevens Institute of Technology. Mr. Friscia joined the Company in April 1995 as Vice President Energy and Environmental Products. From October 1994 through the Company's acquisition of Isoserve in April 1995, he served as President of Isoserve. From January 1990 through October 1994, he served as a Vice President of Concord Trading Company. Mr. Friscia was employed by GE from August 1954 until September 1987, and held a number of sales and marketing positions in the power systems business including Manager of Marketing, Europe for Nuclear Power Plants. He received his bachelors degree in Electrical Engineering and a masters degree in Nuclear Engineering from Georgia Institute of Technology. Dr. Grady joined the Company as Vice President, Medical, Research & Diagnostics in October 1995. From March 1994 through September 1995, Dr. Grady was Vice President of Research and Development at Sopha Medical Systems. From April 1991 until March 1994, he served as Marketing Manager, Nuclear Energy for GE. From May 1998 through March 1991, Dr. Grady served as Software Engineering Manager, Nuclear Medicine for GE in England. From October 1984 through May 1988, he served as Clinical Applications Manager for GE Nuclear Medicine. Between June 1981 and October 1984, he served as the Engineering Analysis Section Head for TRW. Dr. Grady received his bachelors and masters degree, and Ph.D. in Nuclear Engineering from the University of Michigan. Mr. Catuna joined the Company in July 1996 as Chief Financial Officer and Director of Administration. From January 1994 to July 1996, Mr. Catuna was employed at Deloitte & Touche LLP, an international accounting and consulting firm, where he most recently served as an audit senior manager. From January 1988 to January 1994, Mr. Catuna worked for Grant Thornton LLP, an international accounting and consulting firm, where he most recently served as an audit manager. Mr. Catuna received his bachelors degree in Business Administration-Accounting from California State University Fresno, and is a certified public accountant. 37 Ms. Gardner has served from 1991 through the present as President of LG Associates, a US-based management consulting firm providing materials management expertise to foreign company affiliates of US companies in developing countries. She began performing consulting services for Isonics in September 1992 and was elected a director in September 1993. During her tenure at LG Associates, she resided in Moscow, Russia from September 1991 to January 1994 when she moved to Beijing, China, where she currently resides. From 1977 to 1991, Ms. Gardner worked for GE in a variety of management and functional positions including international marketing, quality assurance and materials. Ms. Gardner received her bachelors degree in International Economics from The George Washington University Elliott School of International Affairs, and earned a masters in Business Administration from the University of Louisville. Mr. Wells was elected a director of the Company in September 1996. He is the founder of Sundance Venture Partners, L.P. ("Sundance"), a venture capital fund, and is the chairman of the entity that acts as the manager of Sundance. From 1983 to 1987, Mr. Wells served as Vice President of Citicorp Venture Capital and then became Senior Vice President of Inco Venture Capital. From May 1969 to June 1983, Mr. Wells was the founder and President of Creative Strategies International, a market research consulting firm specializing in emerging markets. Mr. Wells is a director of Identix, Inc., Atlanta Technology Group, Cellegy Pharmaceuticals, Gateway Data Sciences and Telegen Corporation as well as several privately held companies. Mr. Wells holds a BA degree in Economics and an MBA degree from Stanford University. SCIENTIFIC ADVISORY PANEL The Company has established relationships with a group of scientific advisors with expertise in physics, material science, isotope separation, nuclear medicine and chemical synthesis. The Company's advisors consult with management and key scientific employees of the Company to assist the Company in identifying stable isotope and other product development opportunities, to help structure and review the progress of the Company's development projects and to aid in the recruitment and evaluation of the Company's scientific staff. The nature, scope and frequency of consultations between the Company and each scientific advisor varies depending upon the Company's current activities, the need for specific assistance and the individual scientific advisor. Although the Company expects to receive guidance from its scientific advisors, all of the advisors have substantial commitments to third parties and are able to devote only a small portion of their time to the business of the Company. To date the scientific advisory panel has not been compensated for its services. Michael Alferieff, Ph.D. Dr. Alferieff currently serves as an independent consultant. He holds a bachelors degree in Mathematics and Physics from the Massachusetts Institute of Technology and received his masters degree in Theoretical Physics from Columbia University and a Ph.D. in Theoretical Physics from the University of California. He has worked at the GE R&D Center in Santa Barbara and at IBM's Thomas J. Watson Research Center, among other assignments. More recently, Dr. Alferieff has focused on translation of Russian technical articles for a number of international journals, universities, and private companies. Vladimir Yu. Baranov, Ph.D. Dr. Baranov is currently a director of the Institute of Molecular Physics at the I.V. Kurchatov Institute in Moscow, an institution specializing in theoretical physics, fusion energy research and isotope separation technology development. He received a doctor of science degree in Physics from the I.V. Kurchatov Institute and a Ph.D., from the Moscow Institute of Electrical Engineering. In 1991, he was appointed a member of the Academy of Sciences of the Russian Federation. Dr. Baranov has special expertise in separation of stable isotopes utilizing high power lasers. John Engdahl, Ph.D. Dr. Engdahl serves as President of Applied Nuclear Imaging, Inc., a consulting company, which he founded in 1996. Since 1982, Dr. Engdahl has worked in nuclear medicine in design of equipment and image processing applications. Dr. Engdahl was Vice President of Clinical Science at Sopha Medical Systems from 1990 to 1996. Dr. Engdahl was employed as radiologic physicist in nuclear medicine at Henry Ford Hospital from 1987 to 1990, and from 1982 to 1987 he was employed at GE Medical Systems as manager of product development for GE's nuclear imaging business. Dr. Engdahl chaired the National Electrical 38 Manufacturers Association, Nuclear Diagnostic Imaging Section from 1992 to 1995, is a member of the IEEE and Society of Nuclear Medicine. Dr. Engdahl received his bachelors and masters degree, and Ph.D. from the University of Michigan. Eugene E. Haller, Ph.D. Dr. Haller is currently a Professor of Material Science at the University of California at Berkeley and program leader of the Advanced Electronic Materials Program at the Lawrence Berkeley Laboratory. Dr. Haller received his doctorate degree in Solid State and Applied Physics from the University of Basel, Switzerland. Dr. Haller has published many works on, among other subjects, isotopically engineered semiconductors. Ward Rigot. Mr. Rigot is a research associate at the Dow Chemical Company. He holds a bachelors degree in Chemistry from Eastern Michigan University and received a masters degree in Nuclear Engineering from the University of Michigan. He has also served as an adjunct professor at Saginaw Valley State University. Mr. Rigot is experienced in radiation detection and measurement, analytical chemistry, and synthesis of organic and inorganic compounds. Mammem Thomas. Mr. Thomas currently serves as Chief Executive Officer of Technology Management Consultants, Inc., a consulting company, and Vice President of Technology at Elan Microsystems, Inc., a semiconductor company. Mr. Thomas holds a bachelors degree in Engineering from the University of Kerala, India, and received a masters of Business Administration from the Indian Institute of Management in Calcutta, and a masters in Electrical Engineering from the University of Michigan. Mr. Thomas is experienced in the manufacture of semiconductor devices and in the transfer of semiconductor manufacturing technology. EXECUTIVE COMPENSATION The following table sets forth all compensation awarded to, earned by, or paid for services rendered to the Company in all capacities during the year ended April 30, 1996 ("fiscal 1996") by (i) the Company's chief executive officer and (ii) the Company's other executive officers whose salary and bonus (including consulting fees) exceeded $100,000 during fiscal 1996 (each a "Named Person"). SUMMARY COMPENSATION TABLE
ANNUAL LONG-TERM COMPENSATION COMPENSATION AWARDS ---------------- ------------------- SECURITIES NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS(#) - ------------------ ---- -------- ------- --------------- ------------------- James E. Alexander ..... 1996 $135,000 $52,380 $ -- 108,853 President and Chief Executive Officer Boris Rubizhevsky....... 1996 $ 90,000 $36,666 $ -- 108,853 Senior Vice President
- -------- (1) Excludes other compensation, the aggregate amount of which does not exceed the lesser of $50,000 or 10% of such Named Person's annual compensation. 39 The following table sets forth information with respect to the options granted to each Named Person during fiscal 1996. OPTION/SAR GRANTS IN LAST FISCAL YEAR
NUMBER OF % OF TOTAL SECURITIES OPTIONS/SARS UNDERLYING GRANTED TO EXERCISE OPTION/SARS EMPLOYEES IN PRICE PER EXPIRATION NAME GRANTED(#)(1) FISCAL YEAR SHARE($)(2) DATE - ---- ------------- ------------ ----------- ---------- James E. Alexander............ 108,853 26.1% $1.52 Jan. 2001 Boris Rubizhevsky............. 108,853 26.1% $1.52 Jan. 2001
- -------- (1) Mr. Alexander's and Mr. Rubizhevsky's options are exercisable in full at the date of grant, but are subject to a right of repurchase in favor of the Company upon the employment termination of the optionee, which right lapses over a three-year period with respect to 20% of the shares subject to the option after one year from the grant date, an additional 8.33% of the shares subject to the option each three month period from January 1997 through January 1998, and an additional 11.66% of the shares subject to the option for each three month period from February 1998 through January 1999. (2) The exercise price for these options represents 110% of the estimated fair market value of the underlying Common Stock, as determined by the Board as of the date of grant. DIRECTOR COMPENSATION Directors of the Company do not receive cash compensation for their services as directors but are reimbursed for their reasonable expenses in attending meetings of the Board. Directors are eligible to participate in the Executives Plan and Incentive Plan. See "--Employee Benefit Plans." EMPLOYMENT AND CONSULTING AGREEMENTS The Company has employment agreements dated January 1, 1996 with James E. Alexander and Boris Rubizhevsky. Effective upon the closing of this offering, those agreements will be amended by new employment agreements. The new agreements become effective upon the closing of this offering. The agreements have a term of four years and provide for annual salaries of $200,000 and $180,000, respectively. Either the Company or the officer may terminate the agreement at any time upon notice to the other party. The agreements provide that upon a termination of employment other than for cause (as defined in the agreements), the officer is entitled to severance compensation of 18 months of his salary, paid at the same time as salary payments, and in addition all outstanding stock options held by the officer will be accelerated and will become exercisable in full and the Company's right of repurchase will terminate with respect to such shares. The agreements provide for similar accelerated vesting of outstanding stock options, upon a change in control of the Company. The Company has also entered into an agreement with Paul Catuna, the Company's Chief Financial Officer, providing for the grant of a stock option to acquire 40,000 shares of Common Stock at an exercise price equal to 110% of the IPO Price Per Share. The shares subject to the option are subject to a right of repurchase that lapses based upon the achievement of certain financial requirements. The Company has also entered into a number of employment agreements with certain of its officers, including Daniel J. Grady, Martin Laurent, Joe Friscia, Paul J. Catuna and Jacques Delente. The terms of these agreements are similar in material respects except for the compensation payable to such officers. The agreements have an indefinite term and provide for at-will employment, terminable at any time by either party. The agreements provide for a rate of annual compensation, which the Company will review annually. Under the agreements, the employees are entitled to participate in the Company's standard plans and policies. The agreements also include customary confidentiality and invention assignment provisions. 40 The Company has a consulting agreement with Donald P. Hateley pursuant to which Mr. Hateley will provide financial, public relations and investor relations services for a period of six months after the date of this offering. The agreement provides for payments to Mr. Hateley totalling $180,000, of which approximately $120,000 is expected to be paid and $90,000 is expected to be expensed in the fiscal quarter during which the offering becomes effective. Mr. Hateley is entitled to receive additional compensation if the Warrants are exercised. A law firm, of which Mr. Hateley is of counsel holds warrants to purchase 127,721 shares of Common Stock, exercisable at any time until September 2000 at an exercise price of $1.38 per share, received approximately $54,000 for legal services during fiscal 1996 and the first three months of fiscal 1997. The Company has agreed to file a registration statement after the effectiveness of this offering covering the resale of the shares issuable upon exercise of the warrants. EMPLOYEE BENEFIT PLANS The Company currently has a 1996 Stock Option Plan (the "Existing Plan"). After the closing of this offering, no further options will be granted under the Existing Plan, and future awards will be granted pursuant to the Company's 1996 Executives Equity Incentive Plan (the "Executives Plan") and the 1996 Equity Incentive Plan (the "Incentive Plan"). The terms of the Existing Plan are, in material respects, similar to the terms of the Executives Plan and the Incentive Plan. The Executives Plan and Incentive Plan are sometimes referred to collectively as the "Plans." The Company's shareholders approved these Plans in October 1996, and the Plans will become effective upon the effective date of this offering. 1996 Executives Plan and Incentive Plan. In September 1996, the Board adopted the Executives Plan and Incentive Plan. A total of 225,000 shares of Common Stock and 50,000 shares of Common Stock are reserved for issuance under the Executives Plan and the Incentive Plan, respectively. Except for the number of shares reserved under each Plan, the terms of vesting of options or other awards upon a Change of Control (as defined below) and as otherwise set forth below, the Executives Plan and the Incentive Plan are similar in material respects. Under each of the Executives Plan and the Incentive Plan, shares that (i) are subject to an option under that Plan but cease to be subject to such option for any reason other than exercise of such option, (ii) are awarded under that Plan but are forfeited or are repurchased by the Company at the original issue price or (iii) are subject to an award that otherwise terminates without shares being issued will, in each case, be redesignated as available for grant or issuance under that Plan. Both Plans will terminate in September 2006, unless terminated earlier in accordance with their provisions. The Executives Plan and Incentive Plan provide for grants of stock options, stock bonuses and awards of restricted stock by the Company to its officers, directors who are employees of the Company, other employees, consultants, independent contractors and advisors. No person will be eligible to receive awards covering more than 200,000 shares in any calendar year under the Executives Plan, and no person will be eligible to receive more than 30,000 shares in any calendar year pursuant to grants under the Incentive Plan. The Plans will be administered by the Compensation Committee of the Board (the administrator referred to as the "Committee"). The Plans permit the Committee to grant options that are either incentive stock options, as defined in Section 422 of the Code or nonqualified stock options, on terms (including the exercise price, which may not be less than 85% of the fair market value of the Common Stock, and the vesting schedule) determined by the Committee, subject to certain statutory and other limitations in the Plans and certain limitations imposed by state blue sky authorities. In addition to, or in tandem with, awards of stock options, the Committee may grant participants restricted stock awards to purchase Common Stock for not less than 85% of its fair market value at the time of grant. The other terms of such restricted stock awards may be determined by the Committee. The Committee may also grant stock bonus awards of Common Stock either in addition to, or in tandem with, other awards under the Plans, under such terms, conditions and restrictions as the Committee may determine. Under the Plans, stock bonuses may be awarded for the satisfaction of performance goals established in advance. In the event of a dissolution, merger, consolidation or similar corporate transaction (each such transaction a "Change of Control") (other than a merger into a parent, wholly owned subsidiary or a reincorporation, in each event without substantial change of equity interest), all outstanding awards under the Executives Plan will become exercisable 41 in full immediately before the consummation of such transaction and, if not then exercised, will expire. In the event of a Change of Control under the Incentive Plan, outstanding awards may be assumed, converted, replaced or substituted by the successor corporation, which assumption, conversion, replacement or substitution will be binding on all participants in the Plan. If such successor corporation does not assume or substitute awards under the Incentive Plan, such awards will expire on the consummation of such Change in Control, on such terms and conditions as the Board determines. 401(k) Plan. The Board has adopted the Isonics Corporation 401(k) Plan (the "401(k) Plan"), a defined contribution profit-sharing plan intended to qualify under Section 401 of the Code. The shareholders of the Company approved the 401(k) Plan in October 1996. Under the 401(k) Plan, a participating employee can make pre-tax contributions, subject to limitations under the Code, of a percentage (not to exceed 15%) of his or her total compensation. Employee contributions and the investment earnings thereon are fully vested at all times. The Company may make contributions for the benefit of eligible participating employees. INDEMNIFICATION OF DIRECTORS AND OFFICERS AND LIMITATION OF LIABILITY The Company's Restated Articles of Incorporation (the "Restated Articles") include a provision that eliminates to the fullest extent permitted by law the personal liability of its directors to the Company and its shareholders for monetary damages for breach of the directors fiduciary duties. This limitation has no effect on a director's liability (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that a director believes to be contrary to the best interests of the Company or its shareholders or that involved the absence of good faith on the part of the director, (iii) for any transaction from which the director derived an improper personal benefit, (iv) for acts or omissions that show a reckless disregard for the director's duty to the Company or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the Company or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Company or its shareholders, (vi) under Section 310 of the California Corporations Code (the "California Code") concerning contracts or transactions between the Company and a director or (vii) under Section 316 of the California Code concerning directors' liability for improper dividends, loans and guarantees. The provision does not extend to acts or omissions of a director in his or her capacity as an officer. Further, the provision will not affect the availability of injunctions and other equitable remedies available to the Company's shareholders for any violation of a director's fiduciary duty to the Company or its shareholders. The Restated Articles further authorize the Company to indemnify its agents (as defined in Section 317(a) of the Code, which includes directors and officers) through Bylaw provisions, agreements with agents, votes of shareholders or disinterested directors or otherwise, to the fullest extent permissible under California law. Pursuant to this provision, the Company's Bylaws provide for indemnification of directors and officers. The Bylaws also permit the Company to enter into indemnity agreements with individual directors, officers, employees and other agents. The Company has entered into such agreements with its directors and executive officers effective upon the closing of this offering. These agreements, together with the Company's Bylaws and Restated Articles, may require the Company, among other things, to indemnify directors or officers against certain liabilities that may arise by reason of their status or service as directors (other than liabilities resulting from willful misconduct of a culpable nature), to advance expenses to them as they are incurred (provided that they undertake to repay the amount advanced if it is ultimately determined by a court that they are not entitled to indemnification), and to obtain and maintain directors and officers insurance if available on reasonable terms. Section 317 of the California Code, the Company's Bylaws and the indemnity agreements provide for the indemnification of officers, directors and other corporate agents in terms sufficiently broad to indemnify such persons, under certain circumstances, for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. At present, there is no pending litigation or proceeding involving a director, officer or employee of the Company regarding which indemnification is sought, nor is the Company aware of any threatened litigation that may result in claims for indemnification. 42 Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. 43 CERTAIN TRANSACTIONS Since May 1, 1994, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which the Company was or is to be a party in which the amount involved exceeds $60,000 and in which any director, executive officer, holder of more than 5% of the Common Stock, or any member of the immediate family of any such person had or will have a direct or indirect material interest other than compensation arrangements, see "Management," and as described below. In connection with the August and September 1996 Placement, Placement Notes in an aggregate principal amount of $300,000 were issued to Lindsay Gardner, a director of the Company, one employee of the Company and two affiliates of directors or officers of the Company at a discount totalling approximately $30,000 and otherwise on the same terms as the other Private Investors. In addition, an entity of which Larry J. Wells, a director of the Company, is an affiliate, acquired $200,000 principal amount of Placement Notes and Placement Warrants to acquire approximately 41,746 shares of Common Stock on the same terms as other Private Investors, and the Company entered into a consulting agreement with that entity, pursuant to which the Company paid the entity $85,000. See "Capitalization--Recent Financing Transactions." In September 1996, in part in order to allow the Company to establish a pool of shares available for future awards pursuant to the Plans in amounts that comply with the guidelines established by certain state blue sky authorities, Mr. Alexander and Mr. Rubizhevsky exercised stock options to acquire 108,853 and 108,853 shares, respectively, of Common Stock at an exercise price of $1.52 per share. The exercise price for the shares was paid by means of a loan from the Company in the principal amount of the exercise price. The purchased shares are pledged as collateral for the loans pursuant to a pledge agreement. The loans bear interest at an annual rate equal to the minimum applicable federal rate, and interest is payable annually. Principal and accrued but unpaid interest is due five years from the date of the note. For each optionee, until the note has been paid in full, upon any sale of such option shares by the optionee a portion of the sales proceeds will be used to pay amounts owed under the note. In addition, the Company has agreed to loan to such officers, pursuant to a five-year note with interest at the minimum applicable federal rate, an amount equal to the federal and state tax liability incurred by them as a result of exercising such options, and to pay compensation to such officers equal to the amount of interest payable under the loans. The predecessor entity to the Company was a general partnership. At the time of incorporation in 1993, Mr. Alexander and Mr. Rubizhevsky exchanged their partnership interests for 758,345 and 620,465 shares of Common Stock, respectively. The Company is also a party to several employment and consulting agreements. See "Management--Employment and Consulting Agreements." 44 PRINCIPAL SHAREHOLDERS The following table sets forth certain information known to the Company regarding beneficial ownership of the Common Stock as of October 1, 1996, and as adjusted to reflect the sale of the Securities offered hereby, by (i) each person known by the Company to be the beneficial owner of more than 5% of the Common Stock, (ii) each of the Company's directors, (iii) each Named Person and (iv) all executive officers and directors as a group. The address of each person is in care of the Company, 4010 Moorpark Avenue Suite 119, San Jose, CA 95117.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO OWNED AFTER OFFERING(1) OFFERING(1)(2) ---------------------------------------------- DIRECTORS, NAMED PERSONS, AND 5% SHAREHOLDERS NUMBER PERCENT NUMBER PERCENT -------------------------------- ------------ ---------------------- ---------- James E. Alexander(3).............. 867,198 33.6 867,198 19.3 Boris Rubizhevsky(3)(7)(8)......... 792,821 30.7 792,821 17.7 Lindsay Gardner(4)................. 95,760 3.7 95,760 2.1 Larry Wells(6)..................... 41,746 1.6 41,746 0.9 All executive officers and directors as a group (7 persons)(5)........................ 2,040,718 77.9 2,040,718 45.5
- -------- (1) The persons named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. (2) Assumes that the Underwriters' over-allotment option to purchase up to 127,500 Shares and 127,500 Warrants from the Company is not exercised. See "Underwriting." (3) Includes 108,853 shares of Common Stock subject to a repurchase right in favor of the Company. (4) Includes warrants to purchase 23,191 shares of Common Stock issued in connection with the Placement. (5) Includes options to purchase 203,193 shares of Common Stock and 217,726 shares of Common Stock subject to repurchase rights in favor of the Company, warrants to purchase 88,128 shares of Common Stock issued in connection with the Placement, 40,312 shares of Common Stock issuable upon conversion of Preferred Stock held by an affiliate of Mr. Rubizhevsky and options to purchase 40,000 shares of Common Stock issuable at the closing of this offering. (6) Includes 41,746 shares issuable upon the exercise of Placement Warrants held by an entity with which Mr. Wells is affiliated. (7) Includes 40,312 shares of Common Stock issuable upon conversion of Preferred Stock held by an affiliate of Mr. Rubizhevsky. (8) Includes 23,192 shares issuable upon the exercise of Placement Warrants held by an affiliate of Mr. Rubizhevsky. 45 DESCRIPTION OF CAPITAL STOCK Upon the closing of this offering, the authorized capital stock of the Company will consist of 20,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock. As of October 1, 1996, there were outstanding 1,915,576 shares of Common Stock held of record by five shareholders, 6,250 shares of Class A Non-Voting Preferred Stock which will convert into 100,780 shares of Common Stock upon the closing of this offering, options and warrants to purchase 663,077 shares of Common Stock, which included options to purchase 272,134 shares of Common Stock issued under the Company's employee benefit plan and warrants to purchase 390,943 shares of Common Stock associated with the Placement. COMMON STOCK Subject to preferences that may be applicable to any Preferred Stock outstanding at the time, the holders of outstanding shares of Common Stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as the Board of Directors may from time to time determine. Each shareholder is entitled to one vote for each share of Common Stock held on all matters submitted to a vote of shareholders. Cumulative voting for the election of directors is specifically authorized by the Bylaws. Moreover, until the Company becomes a "Listed Company" as defined by applicable California law, the Company may not amend its charter documents to prohibit the exercise of cumulative voting rights. Upon the closing of this offering, the Company will not be a "Listed Company" as so defined, and therefore cumulative voting will continue to be available in connection with the election of directors. The Common Stock is not entitled to preemptive rights and is not subject to conversion or redemption. Upon liquidation, dissolution or winding up of the Company, the remaining assets legally available for distribution to shareholders, after payment of claims or creditors and payment of any liquidation preferences, if any, on outstanding Preferred Stock, are distributable ratably among the holders of the Common Stock and any participating Preferred Stock outstanding at that time. Each outstanding share of Common Stock is, and all shares of Common Stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK The Board of Directors is authorized, subject to any limitations prescribed by California law, to provide for the issuance of shares of Preferred Stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the rights, preferences and privileges of the shares of each unissued series and any qualifications, limitations or restrictions thereon, and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding), without any further vote or action by the shareholders. The Board of Directors may authorize the issuance of Preferred Stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of Common Stock. Thus, the issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no current plans to issue any shares of Preferred Stock. OTHER SECURITIES Representatives' Warrants In connection with this offering, the Company has authorized the issuance to the Representatives of 85,000 Representatives' Warrants and has reserved 170,000 shares of Common Stock for issuance upon exercise of the Representatives' Warrants and the warrants issuable upon exercise of the Representatives' Warrants. Each Representatives' Warrant will entitle the holder to purchase one share of Common Stock at a price of $ per share, which is 120% of the IPO Price Per Share, and, upon payment of $ , which is 120% of the initial public offering price of the Warrants, to acquire one Warrant. Each such Warrant will entitle the holder to purchase one share of Common Stock at a price of $ per share, which is 150% of the IPO Price Per Share. 46 The Representatives' Warrants will, subject to certain conditions, be exercisable any time until the fifth anniversary of the date of this Prospectus. See "Underwriting." The Representatives' Warrants also contain provisions to protect the holder against dilution by adjustment of the exercise price in certain events, such as stock dividends and distributions, stock splits and recapitalizations. The Company is not required to issue fractional shares upon the exercise of a Representatives' Warrant, and the holder thereof will not possess any rights as a shareholder of the Company until such holder exercises the Representatives' Warrants. The other terms of the Representatives' Warrants are similar in material respects to the Warrants, except that the Representatives' Warrants (and the warrants included therein) will not be publicly tradeable and will not be redeemable by the Company. The foregoing discussion of certain terms and provisions of the Representatives' Warrants is qualified in its entirety by reference to the detailed provisions of the Representatives' Warrant Agreement, the form of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The Warrants The following is a brief summary of certain provisions of the Warrants. Reference is made to the actual text of the Warrant Agreement between the Company and Continental Stock Transfer & Trust Company (the "Warrant Agent"), a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part, for a more complete description of the Warrants. Exercise Price and Terms. Each Warrant entitles the registered holder thereof to purchase, at any time during the five year period commencing on the date of this Prospectus, one share of Common Stock at a price of $ per share (150% of the IPO Price Per Share), subject to adjustment in accordance with the anti-dilution and other provisions referred to below. The holder of any Warrant may exercise such Warrant by surrendering the certificate representing the Warrant to the Warrant Agent, with the subscription form thereon properly completed and executed, together with payment of the exercise price. No fractional shares will be issued upon the exercise of the Warrants. Adjustments. The exercise price and the number of shares of Common Stock purchasable upon the exercise of the Warrants are subject to adjustment upon the occurrence of certain events, including stock dividends, stock splits, combinations or reclassifications of the Common Stock. Additionally, an adjustment would be made in the case of an exchange of Common Stock, consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving corporation) or sale of all or substantially all of the assets of the Company, in order to enable holders to acquire the kind and number of shares of stock or other securities or property receivable in such event by a holder of the number of shares of Common Stock that might have been purchased upon the exercise of the Warrant. Redemption Provisions. The Company may redeem the Warrants in whole or in part, at any time upon at least 30 days prior written notice to the registered holders thereof, at a price of $0.05 per Warrant, if the closing price of the Common Stock as reported on the Nasdaq SmallCap Market equals or exceeds 200% of the IPO Price Per Share (subject to adjustment for stock dividends, stock splits, combinations or reclassifications of the Common Stock), for at least 20 consecutive trading days within a period of 30 consecutive trading days ending immediately before the notice of redemption. If the Company exercises the right to redeem the Warrants, the Warrants will be exercisable until the close of business on the business day immediately preceding the date for redemption fixed in such notice. If any Warrant called for redemption is not exercised by such time, it will cease to be exercisable and the holder will be entitled only to the redemption price. Transfer, Exchange and Exercise. The Warrants are in registered form and, subject to the Company's redemption rights therefor, may be presented to the Warrant Agent for transfer, exchange or exercise at any time on or before their expiration date five years from the date of this Prospectus, at which time the Warrants become wholly void and of no value. If a market for the Warrants develops, the holder may sell the Warrants instead of exercising them. There can be no assurance, however, that a market for the Warrants will develop or continue. 47 Modification of Warrants. The Company and the Warrant Agent may make such modifications to the Warrants as they deem necessary and desirable that do not adversely affect the interests of the Warrant holders. The Company may, in its sole discretion, lower the exercise price of the Warrants for a period of not less than 30 days on not less than 30 days' prior written notice to the Warrant holders and the Representatives. Modification of the number of securities purchasable upon the exercise of any Warrant, the exercise price (except as described in the preceding sentence) and the expiration date with respect to any Warrant requires the consent of holders of two-thirds of the then outstanding Warrants. Except as described above, no other modifications may be made to the Warrants, without the consent of holders of two-thirds of the then outstanding Warrants. The Warrants are not exercisable unless, at the time of the exercise, the Company has a current prospectus covering the shares of Common Stock issuable upon exercise of the Warrants, and such shares have been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the exercising holder of the Warrants. Although the Company will use its best efforts to have all of the shares of Common Stock issuable upon exercise of the Warrants registered or qualified on or before the exercise date and to maintain a current prospectus relating thereto until the expiration of the Warrants, there can be no assurance that it will be able to do so. The Warrants are separately transferable immediately upon issuance. Although the Warrants will not knowingly be sold to purchasers in jurisdictions in which the Warrants are not registered or otherwise qualified for sale, purchasers may buy Warrants in the aftermarket or may move to jurisdictions in which the shares of Common Stock underlying the Warrants are not so registered or qualified during the period that Warrants are exercisable. In this event, the Company would be unable to issue shares to those persons desiring to exercise their Warrants, and those persons would have no choice but to attempt to sell their Warrants in a jurisdiction where such sale is permissible or allow them to expire unexercised. For the life of the Representatives' Warrants, the Warrants, and the Placement Warrants, respectively, the holders thereof have the opportunity to profit from a rise in the market price of the Common Stock without assuming the risk of ownership of the shares of Common Stock issuable upon the exercise of such warrants, with the resulting potential for dilution in the interest of the Company's shareholders by reason of the likely exercise of such warrants at a time when the exercise price is less than the market price for the Common Stock. Further, the terms on which the Company could obtain additional capital during the life of such warrants may be adversely affected. The holders of such warrants may be expected to exercise the rights thereunder at a time when the Company would, in all likelihood, be able to obtain any needed capital through an offering of Common Stock on terms more favorable than those provided for by such warrants. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following discussion sets forth certain federal income tax consequences, under current law, relating to the purchase and ownership of the Units, the Common Stock and the Warrants constituting the Units. The Company has not requested and does not intend to request a ruling from the Internal Revenue Service or a tax opinion from its counsel on any tax aspect of the offering. This tax discussion does not purport to be a complete analysis or list of all potential federal income tax consequences of the purchase, ownership and sale of the Common Stock or Warrants. The discussion does not address the tax treatment for certain unique taxpayers, such as insurance companies, tax exempt organizations, financial institutions, and dealers in securities which may be subject to special rules not discussed herein. This discussion presents no analysis of the tax attributes of the Company either before or after this offering. PROSPECTIVE PURCHASERS OF THE UNITS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND SALE OF SUCH SECURITIES AND THE APPLICABILITY OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS. An investor must allocate the cost of each Unit between its two elements (one Share and one Warrant to purchase one share of Common Stock) in accordance with their relative fair market values at the time of issuance. 48 The portion of the aggregate cost allocated to each element will constitute the investor's initial federal income tax basis for that element. No gain or loss will be recognized by a holder of a Warrant held for investment on the holder's purchase of Common Stock for cash upon exercise of the Warrant. The adjusted tax basis of the Common Stock so acquired will be equal to the tax basis of the Warrant plus the exercise price. The holding period of the Common Stock acquired upon the exercise of the Warrant will begin on the date the Warrant is exercised and the Common Stock is purchased. The sale of a share of Common Stock or the sale of a Warrant will result in the recognition of gain or loss to the holder in an amount equal to the difference between the amount realized (generally the cash and the fair market value of any other property received) and the holder's adjusted tax basis for the property sold. The sale of Common Stock will result in capital gain or loss, provided the Common Stock is a capital asset in the hands of the holder. The sale of a Warrant (other than a sale to the Company) will also result in a capital gain or loss, provided the Warrant is a capital asset in the hands of the holder and the Common Stock underlying the Warrant would be a capital asset to the holder if acquired by the holder. Such capital gain or loss will be long-term capital gain or loss if the Common Stock or Warrant being sold or exchanged has been held for more than one year at the time of such sale or exchange. If the repurchase of a Warrant by the Company is treated as a sale or exchange of a capital asset, any gain or loss recognized on the transaction will be capital gain or loss and will be long-term capital gain or loss if the holding period of the Warrant exceeds one year at the time of repurchase. However, it is unclear whether the repurchase of a Warrant by the Company will be treated as the sale or exchange of a capital asset, and if such repurchase is not treated as the sale or exchange of a capital asset, the holder of a Warrant could potentially recognize ordinary income on such repurchase because of a constructive distribution recharacterization. Long-term capital gains of individuals, trusts and estates are currently taxed at a maximum rate of 28%, while ordinary income is currently taxed at a maximum rate of 39.6%. Section 1202 of the Code in certain circumstances allows certain noncorporate taxpayers to exclude from income one-half of the gain (up to certain limits) from the sale or exchange of "qualified small business stock" held for more than five years. In addition, 25% of such gain (up to certain limits) is excluded for alternative minimum tax purposes. In order for stock to be "qualified small business stock," the issuer of the stock must meet certain requirements, some of which apply to the period after the stock is issued. Consequently, it is unclear whether the Common Stock acquired upon exercise of a Warrant will qualify as qualified small business stock. Under Section 305 of the Code, certain actual or constructive distributions of stock (including warrants to purchase stock) with respect to such stock (or warrants) may be taxable to the shareholders (or Warrant holders) of the Company. Adjustments in the exercise price of the Warrants, or the number of shares purchasable upon exercise of the Warrants, in each case made pursuant to the anti-dilution provisions of the Warrants, among other things, may result in a distribution which is taxable as a dividend to the holders of Warrants. Distributions may be taxed as ordinary dividend income, return of capital, or gain from the sale or exchange of stock, depending on the earnings and profits of the Company and the tax basis of each of its shareholders or Warrant holders. A Warrant that expires unexercised will be deemed to have been sold or exchanged for no consideration on the expiration date. The holder of an expired Warrant would recognize loss to the extent of the holder's basis in that Warrant. Any loss to the holder of an expired Warrant will be a capital loss if the Warrant was held as a capital asset and if the Common Stock underlying the Warrant would have been a capital asset had such Warrant been exercised. Any capital loss will be long-term if the holding period of the Warrant exceeds one year when it expires. The use of capital losses to offset ordinary income is strictly limited for noncorporate shareholders and prohibited for corporate shareholders. No gain or loss will be recognized by the Company upon the acquisition, exercise or expiration of any Warrants. 49 REGISTRATION RIGHTS In connection with the Placement, the Company agreed to file a registration statement no later than nine months after the date of this Prospectus to register the resale of the Placement Shares. Issuable upon exercise of the Placement Warrants. The Company has also agreed to keep such a registration statement effective until such shares have been sold or until such shares can be sold without restrictions pursuant to Rule 144. If such registration statement does not remain effective, then the Private Investors have certain additional demand registration rights. In addition, the Private Investors have piggyback registration rights to require the Company to include the Placement Shares in registration statements filed by the Company registering Common Stock under the Securities Act, either for its own account or for the account of any other stockholder. The Company has also agreed to register the shares of Common Stock issuable upon exercise of a warrant granted to a law firm. See "Management--Employment and Consulting Agreements." As part of the Registration Statement of which this Prospectus forms a part, the Company has registered the Warrants and the shares of Common Stock obtainable upon exercise of the Representatives' Warrants (including shares obtainable upon exercise of the Warrants included therein). The holders of the Representatives' Warrants have the right to require the Company to file a registration statement on two separate occasions, commencing one year after the date of this Prospectus, to register the resale of the shares of Common Stock issuable upon exercise of the Representatives' Warrants and the warrants included therein. The Company is required to bear all registration expenses, other than underwriting discounts and selling commissions, incurred in connection with the first such registration of the shares underlying Representatives' Warrants, and the second registration is at the expense of the Representatives. These registration rights could result in substantial future expense to the Company and could adversely affect the Company's ability to complete future equity or debt financings. Furthermore, the registration and sale of Common Stock held by or issuable to the holders of registration rights, or even the potential of such sales, could have an adverse effect on the market price of the Common Stock or Warrants. TRANSFER AGENT AND REGISTRAR AND WARRANT AGENT The Transfer Agent and Registrar for the Company's Common Stock and the Warrant Agent for the Warrants is Continental Stock Transfer & Trust Company. LISTING The Company has applied to list the Common Stock and Warrants on the Nasdaq Service SmallCap Market under the trading symbols "ISNX" and "ISNXW," respectively. 50 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for the Common Stock. Future sales of substantial amounts of Common Stock in the public market could adversely affect market prices prevailing from time to time. Upon completion of this offering, and assuming the conversion of the outstanding preferred stock and no exercises of options or warrants after October 1, 1996, the Company will have outstanding approximately 2,765,576 shares of Common Stock. Of these shares, the 850,000 shares sold in this offering and the shares obtainable upon exercise of the Warrants, if and when such Warrants are exercised, will be freely tradeable without restriction under the Securities Act, unless purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act. The remaining 1,915,576 shares of Common Stock held by existing shareholders were issued and sold by the Company in reliance on exemptions from the registration requirements of the Securities Act. These shares may be sold in the public market only if registered or sold pursuant to an exemption from registration such as Rule 144, 144(k) or 701 under the Securities Act. Substantially all of the Company's securities holders have executed lock-up agreements providing that they will not directly or indirectly sell, contract to sell, grant any option to purchase or otherwise transfer or dispose of any securities of the Company until one year from the initial closing of this offering (the "Lock-up Period") without the consent of the Representatives. As a result of the foregoing lock-up agreements and securities law restrictions, assuming no exercises of options or warrants after October 1, 1996, no shares of Common Stock will be eligible for resale without restriction on the effective date of this offering pursuant to Rules 144 or 144(k). All of the presently issued and outstanding 1,915,576 shares (except for 259,852 shares which have been issued but are subject to rights of repurchase) of Common Stock will be eligible for resale, pursuant to Rule 144 or Rule 701 and subject to the volume limit restrictions of Rule 144 or Rule 701, beginning one year from the closing of this offering. An additional 390,943 shares of Common Stock issuable upon exercise of the warrants issued in connection with the Placement and Representatives' Warrants will become eligible for public sale as a result of registration rights agreements with the Company. "Description of Capital Stock--Registration Rights." Shortly after this offering, the Company intends to file a registration statement on Form S-8 covering approximately 547,134 shares of Common Stock subject to certain outstanding options or reserved for issuance under the Existing Plan (and the other Plans), thus permitting the resale of such shares of Common Stock in the public market, except to the extent such shares are subject to the Lock-up Period. Accordingly, shares registered under such registration statement will, if and when issued, be available for sale in the open market immediately following the expiration of the Lock-up Period. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, a person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least two years (including the holding period of any prior owner except an affiliate) is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (i) one percent of the number of shares of Common Stock then outstanding (which will equal approximately 2,765,576 shares immediately after this offering) or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares to be sold for at least three years (including the holding period of any prior owner except an affiliate), is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 701 permits resales of shares in reliance upon Rule 144 but without compliance with the holding period requirements of Rule 144. Any employee, officer or director of or consultant to the Company who purchased his or her shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 further provides that non- affiliates may sell such shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. Each holder of Rule 701 shares is required to wait until 90 days after the date of this Prospectus before selling such shares. 51 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement among the Company and the Underwriters named below, the Company has agreed to sell to the Underwriters for whom Pryor, McClendon, Counts & Co., and National Securities Corporation are acting as representatives (in such capacity, the "Representatives"), and the Underwriters have severally and not jointly agreed to purchase the Securities set forth below.
NUMBER OF UNDERWRITER UNITS ----------- ----------- Pryor, McClendon, Counts & Co., Inc. ............................ National Securities Corporation.................................. ----------- Total........................................................ ===========
The Underwriting Agreement provides that the obligations of the several Underwriters are subject to the approval of certain legal matters by their counsel and various other conditions. The maturing of the Underwriters' obligations are such that they are committed to purchase all of the above Securities if any are purchased. The Company has been advised by the Representatives that the Underwriters propose to offer the Securities to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per Share and $ per Warrant. The Underwriters may allow, and such dealers may allow, a concession not in excess of $ per Share and $ per Warrant to certain other dealers. After this offering, the public offering price and concessions and discounts may be changed by the Representatives. The Company has granted to the Underwriters an option exercisable during the 45-day period commencing on the date of this Prospectus to purchase from the Company, at the initial public offering price less underwriting discounts and the non-accountable expense allowance, up to an aggregate of Shares and Warrants (representing 15% of the Shares and Warrants to be sold in this offering) for the sole purpose of covering over-allotments, if any. To the extent that the Underwriters exercise the option, each Underwriter will have a firm commitment, subject to certain conditions, to purchase the number of the additional Securities proportionate to its initial commitment to purchase under the Underwriting Agreement. The Representatives have informed the Company that they do not expect sales to discretionary accounts by the Underwriters to exceed five percent of the Securities offered hereby. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. The Company has agreed to pay to the Representatives a non-accountable expense allowance equal to 3% of the gross proceeds derived from the sale of the Securities underwritten, of which $25,000 has been advanced. The Company has agreed to sell to the Representatives for $.0001 each the Representatives' Warrants to purchase from the Company up to 10% of the Shares and Warrants offered hereby. Each Representatives' Warrant will entitle the holder to purchase one share of Common Stock at a price of $ per share, which is 120% of the IPO Price Per Share and, upon payment of $ , which is 120% of the initial public offering price of the Warrants, to acquire one Warrant at an exercise price equal to 150% of the IPO Price Per Share. The Representatives' Warrants are, subject to certain conditions, exercisable at any time until the fifth anniversary of the date of this Prospectus, and are restricted from sale, transfer, assignment or hypothecation for a period of 12 months from the date of this Prospectus, except to officers of the Representatives. The Representatives' Warrants provide for adjustment in the exercise price of the Representatives' Warrants in the event of certain mergers, acquisitions, stock dividends and capital changes. The Representatives' Warrants grant to the holders thereof certain rights with respect to the registration under the Securities Act of the securities issuable upon exercise of the Representatives' Warrants. 52 The offering price set forth on the cover page of this Prospectus should not be considered an indication of the actual value of the Common Stock or the Warrants. Such price is subject to change as a result of market conditions and other factors and no assurance can be given that the Common Stock or Warrants can be resold at the offering price. The Company, its officers and directors and other shareholders and option and warrant holders holding approximately 2,618,654 shares of Common Stock have agreed that for a period of 12 months following the closing of this offering, they will not offer, sell, contract to sell, grant any option for the sale or otherwise dispose of any securities of the Company (other than intra-family transfers or transfers to trust for estate planning purposes), without the Representatives' consent. These restrictions do not apply to (i) the issuance of shares of Common Stock pursuant to the Underwriters' over- allotment option, or (ii) the issuance of shares of Common Stock upon the exercise of options and warrants outstanding prior to the sale of the shares of Common Stock offered hereby, and (iii) bona fide pledges of shares of James E. Alexander or Boris Rubizhevsky to banks or other financial institutions as collateral for loans. The Company has agreed that for a period of five years from the closing of the sale of shares of Common Stock offered hereby, it will nominate for election as a director a person designated by the Representatives, and during such time as the Representatives have not exercised such right, the Representatives shall have the right to designate an observer, who shall be entitled to attend all meetings of the Board of Directors and to receive all correspondence and communications sent by the Company to the members of the Board. Larry J. Wells, a director of the Company, has been appointed as such designee of the Representatives. The Company has agreed to reimburse designees of the Representatives for their out-of-pocket expenses incurred in connection with their attendance of meetings of the Board. Upon the exercise of any Warrants, which exercise was solicited by a Representative, the Company has agreed to pay the Representative a commission of 5% of the aggregate exercise price of such Warrants. Unless granted an exemption by the Commission from Rule 10b-6 under the Exchange Act, the Representative and any soliciting broker-dealers will be prohibited from engaging in any market-making activities or solicited brokerage activities with regard to the Company's securities for the periods prescribed by exemption (xi) to Rule 10b-6 before the solicitation activity or the termination (by waiver or otherwise) of any right that the Representative and any soliciting broker-dealer may have to receive a fee for the exercise of the Warrants following such solicitation. As a result, the Representative and any soliciting broker-dealers may be unable to continue to provide a market for the Common Stock or Warrants during certain periods while the Warrants are exercisable. If the Representative has engaged in any of the activities prohibited by Rule 10b-6 during the periods described above, the Representative has undertaken to waive unconditionally its rights to receive a commission on the exercise of such Warrants. The foregoing is a summary of the principal terms of the agreements described above and does not purport to be complete. Reference is made to copies of each such agreement which are filed as exhibits to the Registration Statement, of which this Prospectus forms a part. See "Additional Information." LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered hereby will be passed upon for the Company by Fenwick & West LLP, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Camhy, Karlinsky & Stein LLP, New York, New York. 53 EXPERTS The balance sheets as of April 30, 1995 and 1996, and the statements of operations, shareholders (deficit) equity, and cash flows for the years then ended, have been audited by Grant Thornton LLP, independent certified public accountants, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), Los Angeles, CA, a Registration Statement on Form SB-2 under the Securities Act with respect to the shares of Common Stock and Warrants offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and its exhibits. For further information with respect to the Company and the Units, Common Stock and Warrants offered hereby, reference is made to the Registration Statement and exhibits. Statements contained in this Prospectus regarding the contents of any contract or any other document to which reference is made are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement, including the exhibits thereto, may be inspected without charge at the Commission's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of certain prescribed rates. 54 GLOSSARY OF TERMS CELL GROWTH MEDIA: Substances used in a gel or solution that promote the growth and multiplication of cells from simple or more complex organisms. Organisms grown (fed) cell growth media labeled with enriched stable isotopes result in new and more complex stable isotope labeled compounds. CGMP (CURRENT GOOD MANUFACTURING PRACTICE): Part of quality assurance aimed at ensuring that products are consistently manufactured to a quality appropriate to their intended use; it incorporates manufacturing, engineering, quality control and quality assurance activities. CROSS SECTION: A fundamental property of the nucleus of an isotope, cross section is a measure of the probability of interaction of the nucleus with another nucleus, particle or photon. DEPLETED STABLE ISOTOPE: An isotope of an element whose concentration or "abundance" has been decreased with respect to that of the naturally occurring element. DEPLETED ZINC (DZ): Zinc oxide in which the stable isotope Zn-64 has been depleted for application in nuclear power plants for corrosion control and the mitigation of radiation fields. DOPING: An impurity, such as boron, is added in small amounts to a pure semiconductor to alter its conductive properties. ENRICHED STABLE ISOTOPE: An isotope of an element whose concentration or "abundance" has been increased with respect to that of the naturally occurring element. HIGH PURITY MATERIALS, CHEMICAL: Materials in which the relevant chemical compound makes up more than >99.99% of the material. H.PYLORI (Helicobacter pylori): A pathogenic bacterium found in the human stomach, responsible for most peptic ulcers and some stomach cancers. ISOTOPE: One of two or more naturally occurring species of atom having the same atomic number, hence constituting the same element, but differing in mass number. As atomic number is equivalent to the number of protons in the nucleus, and mass number is the sum total of the protons plus the neutrons in the nucleus, isotopes of the same element differ from one another only in the number of neutrons in their nuclei. Isotopes may be radioactive or stable. Isonics deals only with stable isotopes. ISOTOPICALLY PURE MATERIALS: Materials in which a particular isotope has been enriched to 99.5% abundance or greater in an element or in a compound. ISOTOPICALLY ENGINEERED MATERIALS (IEM): Materials in which the natural abundance of isotopes of constituent elements has been substantially altered to enhance performance characteristics or provide unique properties. MAGNETIC MOMENT: A fundamental property of the nucleus of an isotope, magnetic moment is a vector quantity related to the intrinsic spin of a charged particle. It is unique to each isotope and can be used to describe how a spinning, charged particle will interact with an externally imposed magnetic field (as in an NMR instrument or imaging scanner). MASS SPECTROMETER: An apparatus that converts molecules and atoms into ions and then separates the ions according to their mass-to-charge ratio. Mass spectrometers are used to identify atoms and isotopes, and determine the chemical composition of a sample. 55 NUCLEAR MAGNETIC RESONANCE (NMR): A phenomenon exhibited by a large number of atomic nuclei, in which nuclei in a static magnetic field absorb energy from a radio-frequency field at certain characteristic frequencies. The frequency at which resonance occurs is a function of the chemical form of the nuclei of interest. This property is exploited in NMR instruments used to determine the make-up and structure of chemicals. It is also employed in medicine to produce 3-dimensional images of the distribution of protons (the 1H isotope of hydrogen) incorporated in the chemicals of the human body. SPIN: A fundamental property of all elementary particles, spin is the intrinsic angular momentum of a sub-atomic particle--present even if the particle is not moving. If the particle is charged, the spin results in a magnetic moment. STABLE ISOTOPE LABELED COMPOUND (SILC): Also referred to as a "labeled compound," a chemical which has been "tagged" by substitution of a common isotope with a rare one (i.e., an enriched stable isotope). X-RAY CRYSTALLOGRAPHY: The study of crystal lattices using diffraction patterns of X-ray waves that reflect the atomic structure based on atomic size and position in space. 56 ISONICS CORPORATION INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Certified Public Accountants......................... F-2 Balance Sheets............................................................. F-3 Statements of Operations................................................... F-4 Statements of Shareholders' Equity (Deficit)............................... F-5 Statements of Cash Flows................................................... F-6 Notes to Financial Statements.............................................. F-7
F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Shareholders Isonics Corporation We have audited the accompanying balance sheets of Isonics Corporation as of April 30, 1995 and 1996, and the related statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Isonics Corporation as of April 30, 1995 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Grant Thornton LLP San Jose, California May 10, 1996, (except for the first paragraph of Note 8, as to which the date is September 30, 1996) F-2 ISONICS CORPORATION BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
APRIL 30, -------------- JULY 31, 1995 1996 1996 ------ ------ ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents........................ $ 38 $ 116 $ 147 Accounts receivable.............................. -- 2 13 Note receivable from shareholder................. 27 33 36 Inventories...................................... 283 1,006 1,354 Prepaid expenses................................. 4 10 12 Deferred income taxes............................ 216 114 52 ------ ------ ------ Total current assets........................... 568 1,281 1,614 PROPERTY AND EQUIPMENT, net........................ 9 81 80 OTHER ASSETS....................................... 480 397 406 DEFERRED INCOME TAXES.............................. -- 29 38 ------ ------ ------ TOTAL.............................................. $1,057 $1,788 $2,138 ====== ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current portion of long-term debt................ $ 122 $ 176 $ 232 Accounts payable................................. 414 792 1,299 Accrued liabilities.............................. 280 285 160 Income taxes payable............................. -- 89 57 ------ ------ ------ Total current liabilities...................... 816 1,342 1,748 LONG-TERM DEBT..................................... 352 276 177 COMMITMENTS........................................ -- -- -- STOCKHOLDERS' EQUITY (DEFICIT) Class A Preferred Stock--no par value; 100,000 shares authorized; 6,250 issued and outstanding. 125 125 125 Common stock--$.001 par value; 14,513,788 shares authorized; 1,499,419 shares issued and outstanding..................................... 78 78 78 Retained earnings (deficit)...................... (314) (33) 10 ------ ------ ------ Total stockholders' equity (deficit)........... (111) 170 213 ------ ------ ------ TOTAL.............................................. $1,057 $1,788 $2,138 ====== ====== ======
See Notes to Financial Statements F-3 ISONICS CORPORATION STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED THREE MONTHS ENDED APRIL 30, JULY 31, ------------- -------------------- 1995 1996 1995 1996 ----- ------ --------- --------- (UNAUDITED) Net revenues.............................. $ 738 $5,567 $ 1,190 $ 1,564 Cost of revenues.......................... 626 3,835 807 1,123 ----- ------ --------- --------- Gross margin............................ 112 1,732 383 441 Operating expenses: Selling, general and administrative..... 293 902 186 266 Research and development................ 162 308 59 90 ----- ------ --------- --------- Total operating expenses.............. 455 1,210 245 356 ----- ------ --------- --------- Operating income (loss)................... (343) 522 138 85 Other income (expense) Interest income......................... 2 1 1 1 Interest expense........................ (17) (67) (4) (13) ----- ------ --------- --------- Total other expense, net.............. (15) (66) (3) (12) ----- ------ --------- --------- Income (loss) before income taxes......... (358) 456 135 73 Income tax expense (benefit).............. (215) 175 52 30 ----- ------ --------- --------- NET INCOME (LOSS)......................... $(143) $ 281 $ 83 $ 43 ===== ====== ========= ========= Net income (loss) per share............... $(.06) $ .12 $ .04 $ .02 ===== ====== ========= ========= Shares used in computing per share information.............................. 2,201 2,343 2,342 2,344 ===== ====== ========= =========
See Notes to Financial Statements F-4 ISONICS CORPORATION STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PREFERRED STOCK COMMON STOCK RETAINED ----------------- ---------------- EARNINGS SHARES AMOUNT SHARES AMOUNT (DEFICIT) TOTAL -------- ------- --------- ------ --------- ----- BALANCES, May 1,1994....... 1,451,379 $18 $(171) $(153) Issuance of preferred stock................... 6,250 $ 125 125 Issuance of common stock in connection with acquisition............. 48,040 60 60 Net loss................. (143) (143) -------- ------- --------- --- ----- ----- BALANCES, April 30, 1995... 6,250 125 1,499,419 78 (314) (111) Net income............... 281 281 -------- ------- --------- --- ----- ----- BALANCES, April 30, 1996... 6,250 125 1,499,419 78 (33) 170 Net income *............. 43 43 -------- ------- --------- --- ----- ----- BALANCES, July 31, 1996 *.. 6,250 $ 125 1,499,419 $78 $ 10 $ 213 ======== ======= ========= === ===== =====
- -------- * Unaudited See Notes to Financial Statements F-5 ISONICS CORPORATION STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED THREE MONTHS APRIL 30, ENDED JULY 31, ------------ --------------- 1995 1996 1995 1996 ----- ----- ------- ------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).............................. $(143) $ 281 $ 83 $ 43 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization................. 2 86 22 25 Deferred income taxes......................... (216) 73 52 53 Changes in assets and liabilities: Accounts and notes receivable................ (27) (8) (9) (14) Inventories.................................. (73) (723) (47) (348) Prepaid expenses............................. (2) (6) (1) (2) Other assets................................. 4 5 6 (29) Accounts payable............................. 202 378 12 507 Accrued liabilities.......................... 157 5 6 (125) Income taxes payable......................... -- 89 -- (32) ----- ----- ------ ------- Net cash provided by (used in) operating activities................................. (96) 180 124 78 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Isoserve, Inc................... (50) -- -- -- Purchases of property and equipment............ (7) (7) (2) (4) ----- ----- ------ ------- Net cash used in investing activities....... (57) (7) (2) (4) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt....... 100 142 54 -- Payments on long-term debt..................... (38) (237) (103) (43) Proceeds from issuance of preferred stock...... 125 -- -- -- ----- ----- ------ ------- Net cash provided by (used in) financing activities................................. 187 (95) (49) (43) ----- ----- ------ ------- NET INCREASE IN CASH AND EQUIVALENTS........ 34 78 73 31 Cash and cash equivalents at beginning of period......................................... 4 38 38 116 ----- ----- ------ ------- Cash and cash equivalents at end of period...... $ 38 $ 116 $ 111 $ 147 ===== ===== ====== ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest...................................... $ 7 $ 67 $ 13 $ 15 Income taxes.................................. 1 14 -- 9
See Notes to Financial Statements F-6 ISONICS CORPORATION NOTES TO FINANCIAL STATEMENTS (INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Isonics Corporation (the "Company") develops and markets products worldwide based on enriched stable isotopes for applications in the energy, medical research, diagnostic, pharmaceutical and semiconductor industries. CASH EQUIVALENTS Cash equivalents consist of money market investments with an original maturity of less than ninety days. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents and trade accounts receivable. Cash equivalents are maintained with high quality institutions and are regularly monitored by management. The Company extends credit to its customers, most of whom are large, established companies. Credit risk is mitigated by performing ongoing credit evaluations of its customers' financial condition and generally does not require collateral. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using the straight-line method over five to seven years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the lease term. OTHER ASSETS Other assets include goodwill of $472,000, $393,000 and $373,000 at April 30, 1995 and 1996 and July 31, 1996, respectively (net of accumulated amortization of none, $79,000 and $99,000, respectively) arising from the acquisition of Isoserve, Inc. (see Note 10). Goodwill is being amortized on a straight-line basis over six years. The Company evaluates the realizability of goodwill annually to determine potential impairment by comparing the undiscounted future cash flows of the related assets. The Company modifies or adjusts goodwill if an impairment is indicated. Based upon its most recent evaluation, the Company believes that no material impairment of goodwill exists as of April 30, 1996 and July 31, 1996. INCOME TAXES The Company accounts for income taxes using an asset and liability approach for financial accounting and reporting purposes. REVENUE RECOGNITION Revenue from product sales is recognized upon shipment. Product warranty costs have not been material in any period. F-7 ISONICS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) USE OF ESTIMATES IN THE FINANCIAL STATEMENTS In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUES OF FINANCIAL INSTRUMENTS The fair value of cash and equivalents approximates carrying value due to the short maturity of such instruments. The fair value of long-term debt approximates carrying value based on terms available for similar instruments. NET INCOME (LOSS) PER SHARE Net income (loss) per share is based on the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares include convertible preferred stock (using the if-converted method) and common stock options and warrants (using the treasury stock method). Common equivalent shares are excluded from the computation in loss periods as their effect is antidilutive, except that, pursuant to Securities and Exchange Commission rules, all shares issuable from the exercise of warrants issued and stock options granted by the Company at a price less than the estimated initial public offering price during the twelve months preceding the offering date have been included in the calculation (using the treasury stock method) as if they had been outstanding for all periods. UNAUDITED INTERIM FINANCIAL INFORMATION The unaudited interim financial information as of July 31, 1996 and for the three months ended July 31, 1995 and 1996 has been prepared on the same basis as the 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 for the three months ended July 31, 1996 are not necessarily indicative of the results that may be expected for the entire year ending April 30, 1997. NOTE 2--INVENTORIES Inventories consist of the following (in thousands):
APRIL 30, ----------- JULY 31, 1995 1996 1996 ---- ------ -------- Finished goods.......................................... $ 62 $ 892 $ 369 Work in process......................................... -- 107 983 Raw Materials........................................... 221 7 2 ---- ------ ------ $283 $1,006 $1,354 ==== ====== ======
F-8 ISONICS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) NOTE 3--PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands):
APRIL 30, ---------- JULY 31, 1995 1996 1996 ---- ---- -------- Office furniture and equipment.......................... $10 $88 $91 Leasehold Improvements.................................. 1 3 4 --- --- --- 11 91 95 Accumulated depreciation and amortization............... (2) (10) (15) --- --- --- $ 9 $81 $80 === === ===
NOTE 4--ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):
APRIL 30, --------- JULY 31, 1995 1996 1996 ---- ---- -------- Compensation.............................................. $265 $268 $145 Other..................................................... 15 17 15 ---- ---- ---- $280 $285 $160 ==== ==== ====
F-9 ISONICS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) NOTE 5--INCOME TAXES Deferred tax assets are comprised of the following (in thousands):
APRIL 30, --------- 1995 1996 ---- ---- Deferred tax assets Accruals deductible in future periods........................... $216 $114 Goodwill amortization deductible in future periods.............. -- 29 ---- ---- $216 $143 ==== ====
Income tax expense (benefit) consists of the following (in thousands):
APRIL 30, ------------ 1995 1996 ------ ---- Current Federal....................................................... $ -- $ 78 State......................................................... 1 24 ------ ---- 1 102 Deferred Federal....................................................... (179) 69 State......................................................... (37) 4 ------ ---- (216) 73 ------ ---- $(215) $175 ====== ====
A reconciliation of the statutory federal income tax rate to the effective tax rate is as follows:
1995 1996 ----- ---- Statutory federal income tax rate.............................. (35.0)% 35.0% State income taxes (net of federal income tax benefit)......... (5.0) 3.5 Other.......................................................... -- .3 Change in valuation allowance.................................. (20.1) -- ----- ---- Effective tax rate............................................. (60.1)% 38.8% ===== ====
The valuation allowance for deferred tax assets as of April 30, 1995 and 1996 was $72,000 and none, respectively. The decrease in the valuation allowance resulted from the realization of temporary differences and loss carryforwards during the year and the reevaluation during 1995 that it was more likely than not that the Company would generate taxable income sufficient to realize the tax benefit associated with future deductible temporary differences. F-10 ISONICS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) NOTE 6--LONG TERM DEBT Long term debt consists of the following:
APRIL 30, JULY 31, --------- -------- 1995 1996 1996 ---- ---- -------- (IN THOUSANDS) Note payable, guaranteed by the SBA, payable in monthly installments of $700 including interest at prime (8.25% at April 30, 1996 and July 31, 1996) plus 2.75%, final payment due January 2005................................ $ 49 $ 46 $ 45 Note payable, unsecured; payable in full in February 1997 plus 9% interest........................................ 50 85 85 Notes payable to shareholders............................ 12 -- -- Capital leases (see Note 7).............................. -- 69 65 Royalty payable to Isoserve, Inc. (see Note 10).......... 363 252 214 ---- ---- ---- 474 452 409 Less current maturities.................................. 122 176 232 ---- ---- ---- $352 $276 $177 ==== ==== ====
Maturities of long-term debt are as follows (in thousands):
AS OF ------------------ APRIL 30, JULY 31, 1996 1996 --------- -------- First three months of 1997................................ $ 43 $-- Remaining nine months of 1997............................. 133 232 1998...................................................... 111 121 1999...................................................... 115 28 2000...................................................... 12 5 2001...................................................... 13 5 Thereafter................................................ 25 18 ---- ---- $452 $409 ==== ====
F-11 ISONICS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) NOTE 7--LEASE COMMITMENTS Furniture and equipment with a cost and accumulated amortization of $68,000 and $5,000, at April 30, 1996 ($68,000 and $8,000 at July 31, 1996) has been acquired under capital leases. The Company also rents office and research facilities, equipment and vehicles under operating leases expiring through 1999. Future minimum annual operating and capital lease commitments are as follows (in thousands):
APRIL 30, 1996 JULY 31, 1996 ----------------- ------------- OPERATING CAPITAL CAPITAL --------- ------- ------------- First three months of 1997................... $ 9 $ 9 $ -- Remaining nine months of 1997................ 26 23 23 1998......................................... 35 31 31 1999......................................... 4 25 25 --- --- ----- Total minimum lease payments............... $74 87 79 === Amount representing interest................. (18) (14) --- ----- Present value of minimum lease payments...... 69 65 Current portion.............................. (18) (22) --- ----- Long-term portion............................ $51 $ 43 === =====
Rent expense for operating leases was approximately $6,000, $19,000, $1,000 and $13,000 for the years ended April 30, 1995 and 1996 and for the three months ended July 31, 1995 and 1996, respectively. NOTE 8--STOCKHOLDERS' EQUITY On September 30, 1996, the Board of Directors approved a 1 for 6.89 reverse stock split of its common shares. All per share amounts, number of shares, stock options and warrant data have been restated to reflect the reverse stock split. CONVERTIBLE PREFERRED STOCK The Articles of Incorporation authorize the issuance of 100,000 shares of nonvoting Series A and B convertible preferred stock of which 6,250 shares were outstanding at April 30, 1995 and 1996, respectively. Each 10 shares of Series A preferred stock along with $5 is convertible at the option of the stockholder into 161 shares of common stock. Preferred shares can be redeemed at the option of the Company for $40 per share. The stockholders of Series A convertible preferred stock are entitled to quarterly noncumulative dividends of $1.60 per share, if and when declared by the Company's Board of Directors. At April 30, 1995 and 1996, no such dividends had been declared. In the event of liquidation or winding up of the Company, stockholders of Series A preferred stock shall have a liquidation preference of $5 per share, plus declared and unpaid dividends, over holders of common shares. F-12 ISONICS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) COMMON STOCK
JULY 31, 1996 -------- Conversion of outstanding convertible preferred stock............ 100,780 Exercise of stock options........................................ 725,689 ------- 826,470 =======
STOCK OPTION PLAN The Company's 1996 Stock Option Plan authorizes the granting of 725,689 incentive and nonqualified stock options to key employees, directors or consultants of the Company. Incentive stock options are granted at a price not less than fair market value, and nonqualified stock options are granted at a price not less than 85% of the fair market value, as determined by the Board of Directors. Options generally become exercisable upon issuance and are subject to redemption rights typically over three years and generally expire ten years after the date of grant. Option activity for the Plan is summarized as follows:
NUMBER OF PRICE PER SHARES SHARE --------- ------------- Outstanding, May 1, 1995............................. -- -- Granted............................................ 417,271 $1.38 - $1.52 Exercised.......................................... -- -- Canceled........................................... -- -- ------- Outstanding, April 30, 1996.......................... 417,271 $1.38 - $1.52 Granted............................................ 72,569 $2.07 Exercised.......................................... -- -- Canceled........................................... -- -- ------- Outstanding, July 31, 1996........................... 489,840 $1.38 - $2.07 =======
Options to purchase 14,514 and 33,563 shares of common stock were not subject to rights of repurchase at April 30, 1996 and July 31, 1996, respectively. RECENTLY ISSUED ACCOUNTING STANDARD In October, 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation. The new standard establishes financial accounting and reporting standards for stock-based compensation, including stock-based employee compensation plans. The Statement defines a fair value-based method of accounting for an employee stock option or similar equity instrument. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value-based method of accounting prescribed by APB Opinion No, 25, Accounting for Stock Issued to Employees. Entities electing to remain with the accounting in Opinion No. 25 must make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in the Statement had been applied. The Company will be required to adopt SFAS No. 123 for its year ended April 30, 1997. Management of the Company has elected to make the pro forma disclosure as allowed by SFAS No. 123. F-13 ISONICS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) NOTE 9--SIGNIFICANT CUSTOMERS AND SUPPLIERS In 1995, three customers accounted for approximately 59%, 26%, and 11% of net revenues. In 1996, two customers accounted for 88% and 11% of net revenues. In the three months ended July 31, 1996, three customers accounted for 66%, 20%, and 10% of net revenues. Export sales were 14%, 13%, 18% and 20% of net revenues in 1995 and 1996 and for the three months ended July 31, 1995 and 1996, respectively. Export sales are principally to Asia. The Company currently uses a single source processor in its manufacturing process; a disruption of this relationship could have an adverse impact on the operating results of the Company. The Company has not experienced a disruption; however, the Company recognizes the risks and is actively pursuing alternative sources. NOTE 10--BUSINESS ACQUISITION In March 1995, the Company acquired certain assets and assumed certain liabilities of Isoserve, Inc., a stable isotope supplier. The acquisition was accounted for as a purchase in the accompanying financial statements for the year ending April 30, 1995, and include the operations related to Isoserve from March 28, 1995. The fair value of the consideration paid is summarized as follows (in thousands): Cash................................................................ $ 50 Acquisition debt.................................................... 110 Assumed liabilities................................................. 100 Future royalties payable............................................ 363 Common stock........................................................ 60 ---- $683 ====
The purchase price was allocated $211,000 to inventory and $472,000 to goodwill. The Company is required to make royalty payments to Isoserve, Inc., of $0.50 per gram of depleted zinc metal sold during the five years following the acquisition. Minimum annual royalty payments of $100,000 are required regardless of sales volume until the Company has paid $500,000 in aggregate. The maximum royalty payments under the agreement are $1,000,000. The Company has accrued a liability for the present value of the expected royalty payments. The royalty payments are secured by the assets of the Company. The Company paid royalties of $196,000 and $45,000 for the year ended April 30, 1996 and the three month period ended July 31, 1996, respectively. F-14 ISONICS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) NOTE 11--SUBSEQUENT EVENTS (UNAUDITED) In August and September 1996, the Company issued $1,261,000 in nonconvertible promissory notes, collateralized by the Company's assets. Interest is payable monthly at 12%. The principal is due the earlier of five business days after the Company receives funds from an initial public offering or May 1, 1998. If the notes are not paid in full by May 1, 1998, principal and interest at 15% is payable in equal monthly payments from June 1997 through May 1998. In connection with the issuance of the promissory notes, the Company issued warrants to the noteholders to purchase a total of 263,222 shares of common stock, exercisable for a period of five years commencing in August 1996. Of the warrants issued, 131,611 are exercisable at $0.4217 per share and 131,611 are exercisable at $3.3727 per share. If the Company defaults in its payment obligations, then additional warrants totaling 325,500 are exercisable at $.0689 per share. In conjunction with the financing, the Company issued warrants to purchase 127,721 shares of common stock exercisable for a period of five years, at $1.38 per share to a financial advisor. The aggregate fair value of the warrants issued in connection with the financing was $373,000 and will be amortized to operations as additional interest expense over the term of the promissory notes. F-15 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. --------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 5 Use of Proceeds........................................................... 12 Dividend Policy........................................................... 12 Capitalization............................................................ 13 Dilution.................................................................. 15 Selected Financial Data................................................... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 17 Business.................................................................. 21 Management................................................................ 37 Certain Transactions...................................................... 44 Principal Shareholders.................................................... 45 Description of Capital Stock.............................................. 46 Shares Eligible for Future Sale........................................... 51 Underwriting.............................................................. 52 Legal Matters............................................................. 53 Experts................................................................... 54 Additional Information.................................................... 54 Index to Financial Statements............................................. F-1
--------------- UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OR WARRANTS OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 850,000 SHARES OF COMMON STOCK AND 850,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS [LOGO OF ISONICS CORPORATION APPEARS HERE] --------------- PROSPECTUS --------------- PRYOR, MCCLENDON, COUNTS & CO., INC. NATIONAL SECURITIES CORPORATION , 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24 INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Articles of Incorporation include a provision that eliminates to the fullest extent permitted by law the personal liability of its directors to the Company and its shareholders for monetary damages for breach of the directors fiduciary duties. This limitation has no effect on a director's liability (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that a director believes to be contrary to the best interests of the Company or its shareholders or that involved the absence of good faith on the part of the director, (iii) for any transaction from which the director derived an improper personal benefit, (iv) for acts or omissions that show a reckless disregard for the director's duty to the Company or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the Company or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Company or its shareholders, (vi) under Section 310 of the California Corporations Code (the "California Code") concerning contracts or transactions between the Company and a director or (vii) under Section 316 of the California Code concerning directors liability for improper dividends, loans and guarantees. The provision does not extend to acts or omissions of a director in his capacity as an officer. Further, the provision will not affect the availability of injunctions and other equitable remedies available to the Company's shareholders for any violation of a director's fiduciary duty to the Company or its shareholders. The Company's Articles of Incorporation further authorize the Company to indemnify its agents (as defined in Section 317(a) of the Code which includes directors and officers) through Bylaw provisions, agreements with agents, votes of shareholders or disinterested directors or otherwise, to the fullest extent permissible under California law. Pursuant to this provision, the Company's Bylaws provide for indemnification of directors and officers. The Bylaws also permit the Company to enter into indemnity agreements with individual directors, officers, employees and other agents. The Company intends to enter into such agreements with its directors and executive officers effective upon the closing of this offering. These Agreements, together with the Company's Bylaws and Articles, may require the Company, among other things, to indemnify directors or officers against certain liabilities that may arise by reason of their status or service as directors (other than liabilities resulting from willful misconduct of a culpable nature), to advance expenses to them as they are incurred, provided that they undertake to repay the amount advanced if it is ultimately determined by a court that they are not entitled to indemnification, and to obtain and maintain directors and officers' insurance if available on reasonable terms. In addition to the rights to indemnification provided under California law, in the Articles of Incorporation and in the Bylaws, the 1996 Stock Option Plan provides indemnification to members of the Board of Directors, officers, or employees of the Company to whom authority to act for the Board in connection with the Existing Plan is delegated shall be indemnified against all reasonable expenses, including attorneys' fees, actually and necessarily incurred in defense of any proceeding to which he or she is made a party because of any action allegedly taken or alleged failure to act in connection with the Plan., and against amounts paid in settlement (if approved by independent legal counsel), or in satisfaction of any judgment in such proceeding, unless the director, officer, or employee, as the case may be, is adjudged to have behaved in bad faith, in a grossly negligent manner, or with intentional misconduct as to duties. The Company currently has directors and officers' liability insurance. At present, there is no pending litigation or proceeding involving a director, officer or employee of the Company pursuant to which indemnification is sought, nor is the Company aware of any threatened litigation that may result in claims for indemnification. II-1 Section 317 of the Code and the Company's Bylaws make provision for the indemnification of officers, directors and other corporate agents in terms sufficiently broad to indemnify such persons, under certain circumstances, for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:
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. All amounts are estimates except for the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq SmallCap National Market filing fee. Securities and Exchange Commission registration fee................ $ 7,322 NASD filing fee.................................................... 2,643 Nasdaq SmallCap Market filing fee.................................. 10,000 Accounting fees and expenses....................................... 75,000 Legal fees and expenses............................................ 165,000 Printing fees and expenses......................................... 100,000 Blue sky fees and expenses......................................... 50,000 Transfer agent and registrar fees and expenses..................... 50,000 Miscellaneous...................................................... 40,035 -------- Total.............................................................. $500,000 ========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
NUMBER AGGREGATE FORM OF CLASS OF PURCHASERS DATE OF SALE TITLE OF SECURITIES OF SHARES PURCHASE PRICE CONSIDERATION - ------------------- ------------ ------------------- --------- -------------- ------------- 2 Founders 5/10/93 Common Stock 1,378,810 $ 12,000 Property 1 Investor 11/20/93 Common Stock 72,569 $ 6,000 Cash 2 Investors 12/1/94 and 12/7/94 Preferred Stock 6,250 $125,000 Cash 1 Acquired Entity 3/31/95 Common Stock 48,041 $ 60,000 Property 1 Advisor 9/96 Warrants 127,721 $141,000 Services Lenders 9/96 Warrants 263,222 $232,000 Loans
All sales of Common Stock, Preferred Stock and warrants were made in reliance on Section 4(2) of the Securities Act. The purchasers were sophisticated investors who represented to the Registrant that the shares were being acquired for investment. All issuances of shares and options under the Company's existing plan were made in reliance on Section 4(2) or Rule 701. Between January 1996 and the date of this registration statement, the Company issued options under the Company's Existing Plan to purchase a total of 587,511 shares of Common Stock at exercise prices ranging from $1.38 to $2.07 per share, to a limited number of employees. No consideration was paid to the Company by any recipient of any of the foregoing options for the grant of any such options. As of the date of this Prospectus, such options have been exercised to acquire a total of 315,376 shares of Common Stock. II-2 ITEM 27. EXHIBITS.
EXHIBIT NUMBER EXHIBIT TITLE ------- ------------- 1.01 Form of Underwriting Agreement. 3.01 Registrant's Restated Articles of Incorporation. 3.02 Registrant's Bylaws. 4.01 Specimen Common Stock Certificate.* 4.02 Form of Representatives' Warrant Agreement.* 4.03 Form of Warrant Agreement between the Registrant and Continental Stock Transfer & Trust Company, National Securities Corporation and Pryor, McClendon, Counts & Co, Inc.* 4.04 Specimen Warrant Certificate.* 5.01 Form of Opinion of Fenwick & West LLP.* 10.01 Registrant's 1996 Stock Option Plan. 10.02 Form of Employment Agreement between the registrant and certain officers of the Registrant. 10.03 Registrant's 1996 Executives Equity Incentive Plan. 10.04 Registrant's 1996 Equity Incentive Plan. 10.05 Memorandum of Agreement between Electrochemical Plant, AO Techsnabexport, Co., Ltd. and Registrant. 10.06 Option Agreement between the Registrant and Yale University.** 10.07 Office Lease Agreement between Paulsen Properties and the Registrant as of January 1, 1996, as amended. 10.08 Letter from Yale University to Registrant dated February 10, 1996. 10.09 Form of Indemnity Agreement to be entered into by Registrant with each of its directors and executive officers. 10.10 Warrant Agreement dated as of September 27, 1996 by and among Registrant and certain investors. 10.11 Registration Rights Agreement dated as of September 27, 1996 by and among Registrant and certain investors.* 10.12 Employment Agreement between the Registrant and James E. Alexander.* 10.13 Employment Agreement between the Registrant and Boris Rubizhevsky.* 11.01 Statement regarding computation of per share earnings. 23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01). 23.02 Consent of Grant Thornton LLP, independent certified public accountants. 24.01 Power of Attorney (see Page II-5 of this Registration Statement).
- -------- *To be supplied. **Confidential Treatment Requested. II-3 ITEM 28. UNDERTAKINGS. The Registrant hereby undertakes the following: (1) To file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and (iii) include any additional or changed material information of the plan of distribution. (2) To provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (3) For determining liability under the Securities Act, to treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective. (4) For determining liability under the Securities Act, each post- effective amendment that contains a form of prospectus shall be deemed as a new registration statement for the securities offered therein, and that offering of the securities at that time shall be deemed to be the initial bona fide offering of those securities. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under Item 24 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-4 SIGNATURES IN ACCORDANCE WITH TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENT FOR FILING ON FORM SB-2 AND AUTHORIZED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN THE CITY OF SAN JOSE, STATE OF CALIFORNIA, ON OCTOBER 1, 1996. Isonics Corporation By: /s/ James E. Alexander --------------------------------- JAMES E. ALEXANDER, PRESIDENT AND CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS THAT EACH INDIVIDUAL WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS JAMES E. ALEXANDER AND PAUL CATUNA, AND EACH OF THEM, HIS OR HER TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF SUBSTITUTION, FOR HIM OR HER AND IN HIS OR HER NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT, AND TO SIGN ANY REGISTRATION STATEMENT FOR THE SAME OFFERING COVERED BY THE REGISTRATION STATEMENT THAT IS TO BE EFFECTIVE UPON FILING PURSUANT TO RULE 462(B) PROMULGATED UNDER THE SECURITIES ACT, AND ALL POST-EFFECTIVE AMENDMENTS THERETO, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO AND ALL DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND PURPOSES AS HE OR SHE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR HIS, HER OR THEIR SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION STATEMENT WAS SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES STATED. SIGNATURES TITLE DATE ---------- ----- ---- PRINCIPAL EXECUTIVE OFFICER: /s/ James E. Alexander President, Chief October 1, 1996 - ------------------------------- Executive Officer JAMES E. ALEXANDER PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER: /s/ Paul J. Catuna Chief Financial October 1, 1996 - ------------------------------- Officer and PAUL J. CATUNA Director of Administration ADDITIONAL DIRECTORS /s/ Boris Rubizhevsky Senior Vice October 1, 1996 - ------------------------------- President and BORIS RUBIZHEVSKY Director /s/ Lindsay A. Gardner Director October 1, 1996 - ------------------------------- LINDSAY A. GARDNER /s/ Larry J. Wells Director October 1, 1996 - ------------------------------- LARRY J. WELLS II-5
EXHIBIT NUMBER EXHIBIT TITLE PAGE ------- ------------- ---- 1.01 Form of Underwriting Agreement. 3.01 Registrant's Restated Articles of Incorporation. 3.02 Registrant's Bylaws. 4.01 Specimen Common Stock Certificate.* 4.02 Form of Representatives' Warrant Agreement.* 4.03 Form of Warrant Agreement between the Registrant and Continental Stock Transfer & Trust Company, National Securities Corporation and Pryor, McClendon, Counts & Co, Inc.* 4.04 Specimen Warrant Certificate.* 5.01 Form of Opinion of Fenwick & West LLP.* 10.01 Registrant's 1996 Stock Option Plan. 10.02 Form of Employment Agreement between the registrant and certain officers of the Registrant. 10.03 Registrant's 1996 Executives Equity Incentive Plan. 10.04 Registrant's 1996 Equity Incentive Plan. 10.05 Memorandum of Agreement between Electrochemical Plant, AO Techsnabexport, Co., Ltd. and Registrant. 10.06 Option Agreement between the Registrant and Yale University.** 10.07 Office Lease Agreement between Paulsen Properties and the Registrant as of January 1, 1996, as amended. 10.08 Letter from Yale University to Registrant dated February 10, 1996. 10.09 Form of Indemnity Agreement to be entered into by Registrant with each of its directors and executive officers. 10.10 Warrant Agreement dated as of September 27, 1996 by and among Registrant and certain investors. 10.11 Registration Rights Agreement dated as of September 27, 1996 by and among Registrant and certain investors.* 10.12 Employment Agreement between the Registrant and James E. Alexander.* 10.13 Employment Agreement between the Registrant and Boris Rubizhevsky.* 11.01 Statement regarding computation of per share earnings. 23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01). 23.02 Consent of Grant Thornton LLP, independent certified public accountants. 24.01 Power of Attorney (see Page II-5 of this Registration Statement).
- -------- *To be supplied. **Confidential Treatment Requested. EX-1.01 2 UNDERWRITING AGREEMENT EXHIBIT 1.1 ___________________ Shares of Common Stock and ______________________Redeemable Warrants ISONICS CORPORATION UNDERWRITING AGREEMENT San Jose, California September ___, 1996 Pryor, McClendon, Counts & Co., Inc. National Securities Corporation As Representatives of the Several Underwriters c/o Pryor, McClendon, Counts & Co., Inc. 3 Penn Plaza 1515 Market Street, Suite 819 Philadelphia, Pennsylvania 19102 Ladies and Gentlemen: Isonics Corporation, a California corporation (the "Company"), hereby agrees with Pryor, McClendon, Counts & Co., Inc. ("Pryor, McClendon") and National Securities Corporation ("National") and each of the underwriters named in Schedule A hereto (collectively, the "Underwriters," which term shall also include any underwriter substituted as hereinafter provided in Section 11), for whom Pryor, McClendon and National are acting as representatives (in such capacity, Pryor, McClendon and National shall hereinafter be referred to jointly as "you" or the "Representatives") with respect to the sale by the Company and the purchase by the Underwriters, acting severally and not jointly, of the respective amount of shares (the "Shares") set forth in said Schedule A of the Company's common stock, par value $.001 per share (the "Common Stock"), and redeemable common stock purchase warrants (the "Warrants"), each to purchase one share of Common Stock, set forth in Schedule A hereto. The aggregate __________________ Shares and __________________ Warrants will be separately tradeable upon issuance and are hereinafter referred to as the "Firm Securities." Each Warrant is exercisable commencing on _________, 1996 and until 5:30 p.m., New York City time on ________________________, 2001, unless previously redeemed by the Company, at an initial exercise price of $_______ per share of Common Stock. The Warrants may be redeemed by the Company at a redemption price of $.05 per Warrant at any time after _________, 1997 on thirty (30) days' prior written notice, provided that the closing sale price of the Common Stock equals or exceeds $_________ per share (subject to adjustment under certain circumstances), for any twenty (20) consecutive trading days immediately preceding the date of the notice of redemption, all in accordance with the terms and conditions of the Warrant Agreement (herein defined). Upon your request, as provided in Section 2(b) of this Agreement, the Company shall also issue and sell to the Underwriters, acting severally and not jointly, up to an additional __________________________ shares of Common Stock and ____________________ Warrants for the purpose of covering over-allotments, if any. Such _________________ shares of Common Stock and ___________________ Warrants are hereinafter collectively to as the "Option Securities." The Company also proposes to issue and sell to you warrants (the "Representatives' Warrants") pursuant to the Representatives' Warrant Agreement (the "Representatives' Warrant Agreement") for the purchase of an additional ________________ shares of Common Stock and/or ___________________ Warrants. The shares of Common Stock and Warrants issuable upon exercise of the Representatives' Warrants are hereinafter referred to as the "Representative's Securities." The Firm Securities, the Option Securities, the Representatives' Warrants and the Representative's Securities (collectively, hereinafter referred to as the "Securities") are more fully described in the Registration Statement and the Prospectus referred to below. 1. Representations and Warranties of the Company. The Company --------------------------------------------- represents and warrants to, and agrees with, each of the Underwriters as of the date hereof, and as of the Closing Date and the Option Closing Date, if any, as follows: (a) The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement, and an amendment or amendments thereto, on Form SB-2 (No. _____________________), including any related preliminary prospectus (the "Preliminary Prospectus"), for the registration of the Firm Securities, the Option Securities and the Representative's Securities under the Securities Act of 1933, as amended (the "Act"), which registration statement and amendment or amendments have been prepared by the Company in conformity with the requirements of the Act, and the Regulations (as defined below) of the Commission under the Act. The Company will not file any other amendment thereto to which the Underwriters shall have objected in writing after having been furnished with a copy thereof. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement becomes effective (including the prospectus, financial statements, schedules, exhibits and all other documents filed as a part thereof or incorporated therein and all information deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule 430(A) of the Regulations), is hereinafter called the "Registration Statement," and the form of prospectus in the form first filed with the Commission pursuant to Rule 424(b) of the Regulations, is hereinafter called the "Prospectus." For purposes hereof, "Regulations" mean the rules and regulations adopted by the Commission under either the Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable. (b) Neither the Commission nor any state regulatory authority has issued any order preventing or suspending the use of any preliminary prospectus, the Registration Statement or the Prospectus and no proceedings for a stop order suspending the effectiveness of the -2- Registration Statement have been instituted, or, to the Company's knowledge, are threatened. Each of any preliminary prospectus, the Registration Statement and the Prospectus at the time of filing thereof conformed in all material respects with the requirements of the Act and Regulations, and none of any preliminary prospectus, the Registration Statement or the Prospectus at the time of filing thereof contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein and necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that this representation and warranty does not apply to statements made in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriters by or on behalf of the Underwriters expressly for use in such preliminary prospectus, Registration Statement or Prospectus. (c) When the Registration Statement becomes effective and at all times subsequent thereto up to the Closing Date (as defined in Section 2(c) hereof) and each Option Closing Date (as defined in Section 2(b) hereof), if any, and during such longer period as the Prospectus may be required to be delivered in connection with sales by the Underwriters or a dealer, the Registration Statement and the Prospectus, as amended or supplemented as required, will contain all statements which are required to be stated therein in accordance with the Act and the Regulations, and will conform in all material respects to the requirements of the Act and the Regulations; neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, provided, however, that this representation and warranty does not apply to - -------- ------- statements made or statements omitted in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of any Underwriter expressly for use in the Registration Statement or the Prospectus or any amendment thereof or supplement thereto. (d) The Company and each of its subsidiaries have been duly organized and are validly existing as corporations in good standing under the laws of the respective states of their incorporation. The Company does not own or control, directly or indirectly, any corporation, partnership, trust, joint venture or other business entity other than the subsidiaries listed in Exhibit 21 of the Registration Statement. Each of the Company and its subsidiaries is duly qualified and licensed and in good standing as a foreign corporation in each jurisdiction in which its ownership or leasing of any properties or the character of its operations require such qualification or licensing, except where the failure to be so qualified or licensed would not have a material and adverse effect on the condition, financial or otherwise, or the business affairs, operations, properties, or results of operations of the Company and its subsidiaries, taken as a whole (the "Business"). Each of the Company and its subsidiaries has all requisite power and authority (corporate and other), and has obtained any and all necessary authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental or regulatory officials and bodies (including, without limitation, those having jurisdiction over environmental or similar matters), to own or lease its properties and conduct its business as described in the Prospectus; the Company and each of its subsidiaries have been doing business in compliance -3- in all material respects with all such authorizations, approvals, orders, licenses, certificates, franchises and permits and all federal, state, local and foreign laws, rules and regulations; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such authorization, approval, order, license, certificate, franchise, or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would materially and adversely affect the Business. The disclosures in the Registration Statement concerning the effects of federal, state, local, and foreign laws, rules and regulations on the Company's business as currently conducted and as contemplated are correct in all material respects and do not omit to state a material fact necessary to make the statements contained therein not misleading in light of the circumstances in which they were made. (e) The Company has a duly authorized, issued and outstanding capitalization as set forth in the Prospectus under the headings "Capitalization" and "Description of Capital Stock" and will have the adjusted capitalization set forth therein on the Closing Date and the Option Closing Date, if any, based upon the assumptions set forth therein, and the Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement and as described in the Prospectus. The Securities and all other securities issued or issuable by the Company conform or, when issued and paid for, will conform, in all material respects to all statements with respect thereto contained in the Registration Statement and the Prospectus. All issued and outstanding shares of capital stock of each subsidiary of the Company have been duly authorized and validly issued and are fully paid and nonassessable. Except as disclosed in or contemplated by the Prospectus and the financial statements of the Company and the related notes thereto included in the Prospectus, neither the Company nor any subsidiary has outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements and the options or other rights granted and exercised thereunder as set forth in the Prospectus conforms in all material respects with the requirements of the Act. All issued and outstanding securities of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and the holders thereof have no rights of rescission with respect thereto and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company. (f) The Securities are not and will not be subject to any preemptive or other similar rights of any stockholder, have been duly authorized and, when issued, paid for and delivered in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and will conform in all material respects to the description thereof contained in the Prospectus; the holders thereof will not be subject to any liability solely as such holders; all corporate action required to be taken for the authorization, issue and sale of the Securities has been duly and validly taken; and the certificates representing the Securities will be in due and proper form. Upon the issuance and delivery pursuant to the terms hereof of the Securities to -4- be sold by the Company hereunder, the Underwriters or the Representatives, as the case may be, will acquire good and marketable title to such Securities free and clear of any lien, charge, claim, encumbrance, pledge, security interest, defect, or other restriction or equity of any kind whatsoever. No stockholder of the Company has any right which has not been waived in writing to require the Company to register the sale of any shares owned by such stockholder under the Act in the public offering contemplated by this Agreement. No further approval or authority of the stockholders or the Board of Directors of the Company will be required for the issuance and sale of the Shares, the Option Shares and the Representatives' Warrants to be sold by the Company as contemplated herein. (g) The consolidated financial statements of the Company and its consolidated subsidiaries, together with the related notes and schedules thereto, included in the Registration Statement, each Preliminary Prospectus and the Prospectus fairly present the consolidated financial position, changes in stockholders' equity and the results of operations of the Company and its consolidate subsidiaries at the respective dates and for the respective periods to which they apply and such financial statements have been prepared in conformity with generally accepted accounting principles and the Regulations, consistently applied throughout the periods involved. There has been no material adverse change or development involving a material prospective change in the Business, whether or not arising in the ordinary course of business since the date of the financial statements included in the Registration Statement and the Prospectus and the outstanding debt, the property, both tangible and intangible, and the business of the Company and its subsidiaries taken as a whole conform in all material respects to the descriptions thereof contained in the Registration Statement and the Prospectus. Financial information set forth in the Prospectus under the headings "Prospectus Summary - Selected Financial Data," "Capitalization," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," fairly present, on the basis stated in the Prospectus, the information set forth therein and have been derived from or compiled on a basis consistent with that of the audited consolidated financial statements included in the Prospectus. (h) The Company (i) has paid all federal, state, local, franchise, and foreign taxes for which it is liable, including, but not limited to, withholding taxes and amounts payable under Chapters 21 through 24 of the Internal Revenue Code of 1986, as amended (the "Code"), and has furnished all information returns it is required to furnish pursuant to the Code, (ii) has established adequate reserves for such taxes which are not due and payable, and (iii) does not have any tax deficiency or claims outstanding, proposed or assessed against it. (i) No transfer tax, stamp duty or other similar tax is payable by or on behalf of the Underwriters in connection with (i) the issuance by the Company of the Securities, (ii) the purchase by the Underwriters of the Firm Securities and the Option Securities from the Company and the purchase by the Representatives of the Representatives' Warrants from the Company, (iii) the consummation by the Company of any of its obligations under this Agreement, or (iv) resales of the Firm Securities and the Option Securities in connection with the distribution contemplated hereby. -5- (j) There is no action, suit, proceeding, inquiry, arbitration, mediation, investigation, litigation or governmental proceeding (including, without limitation, any involving environmental or similar matters), domestic or foreign, pending or threatened against (or circumstances that may give rise to the same), or involving the properties or businesses of, the Company which (i) questions the validity of the capital stock of the Company, this Agreement or the Representatives' Warrant Agreement, or of any action taken or to be taken by the Company pursuant to or in connection with this Agreement or the Representatives' Warrant Agreement, (ii) is required to be disclosed in the Registration Statement which is not so disclosed (and such proceedings as are summarized in the Registration Statement are accurately summarized in all material respects), or (iii) might materially and adversely affect the condition, financial or otherwise, or the business, affairs, position, stockholders' equity, operation, properties, or results of operations of the Company and its subsidiaries taken as a whole. (k) The Company has the corporate power and authority to authorize, issue, deliver, and sell the Securities and to enter into this Agreement, the Warrant Agreement, and the Representatives' Warrant Agreement, and to consummate the transactions provided for in such agreements; and this Agreement, the Warrant Agreement and the Representatives' Warrant Agreement have each been duly and properly authorized, executed, and delivered by the Company. Each of this Agreement, the Warrant Agreement and the Representatives' Warrant Agreement constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its respective terms (except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law), and none of the issue and sale of the Securities, execution, delivery or performance by the Company of this Agreement, the Warrant Agreement, and the Representatives' Warrant Agreement, the consummation by the Company of the transactions contemplated herein and therein, or the conduct of the Company's businesses as described in the Registration Statement, the Prospectus, and any amendments or supplements thereto, conflicts with or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitutes or will constitute a default under, or result in the creation or imposition of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction or equity of any kind whatsoever upon, any property or assets (tangible or intangible) of the Company pursuant to the terms of (i) the articles of incorporation or by-laws of the Company, as amended and restated, (ii) any license, contract, indenture, mortgage, deed of trust, voting trust agreement, stockholders agreement, note, loan or credit agreement or any other agreement or instrument to which the Company is a party or by which it is or may be bound or to which its properties or assets (tangible or intangible) is or may be subject, or (iii) any statute, judgment, decree, order, rule or regulation applicable to the Company of any arbitrator, court, regulatory body or administrative agency or other governmental agency or body (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, having jurisdiction over the Company or any of its activities or properties. -6- (l) No consent, approval, authorization or order of, and no filing with, any court, regulatory body, government agency or other body, domestic or foreign, is required for the issuance and sale of the Securities pursuant hereto, to the Prospectus and the Registration Statement, the performance of this Agreement, the Warrant Agreement, and the Representatives' Warrant Agreement, and the transactions contemplated hereby and thereby, including without limitation, any waiver of any preemptive, first refusal or other rights that any entity or person may have for the issue and/or sale of any of the Securities, except such as have been or may be obtained under the Act or may be required under state securities or Blue Sky laws in connection with the Underwriters' purchase and distribution of the Firm Securities, the Option Securities, and the Representatives' Warrants to be sold by the Company hereunder. (m) All executed agreements, contracts or other documents or copies of executed agreements, contracts or other documents filed as exhibits to the Registration Statement to which the Company is a party or by which it may be bound or to which its assets, properties or businesses may be subject have been duly and validly authorized, executed and delivered by the Company and constitute the legal, valid and binding agreements of the Company enforceable against the Company in accordance with their respective terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law). The descriptions in the Registration Statement of such agreements, contracts and other documents are accurate in all material respects and fairly present the information required to be shown with respect thereto by Form SB-2, and there are no contracts or other documents which are required by the Act to be described in the Registration Statement or filed as exhibits to the Registration Statement which are not described or filed as required, and the exhibits which have been filed are complete and correct copies of the documents of which they purport to be copies. (n) Since the respective dates as of which information is given in the Registration Statement and Prospectus, and except as described in or specifically contemplated by the Prospectus (i) the Company has not incurred any material liabilities or obligations, indirect, direct or contingent, or entered into any material verbal or written agreement or other transaction which is not in the ordinary course of business or which could result in a material reduction in the future earnings of the Company; (ii) the Company has not sustained any material loss or interference with its business or properties from fire, flood, windstorm, accident or other calamity, whether or not covered by insurance; (iii) the Company has not paid or declared any dividends or other distributions with respect to its capital stock, and the Company is not in default in the payment of principal or interest on any outstanding debt obligations; (iv) there has not been any change in the capital stock (other than upon the sale of the Firm Securities, the Option Securities and the Representatives' Warrants hereunder and upon the exercise of options and warrants described in the Registration Statement) of, or indebtedness material to, the Company (other than in the ordinary course of business); (v) the Company has not issued any securities or incurred any liability or obligation, primary or contingent, for borrowed money; -7- and (vi) there has not been any material adverse change in the condition (financial or otherwise), business, properties, results of operations, or prospects of the Company and its subsidiaries. (o) Except as disclosed in or specifically contemplated by the Prospectus, and subject to the risks and uncertainties described in the Prospectus under the headings entitled "Risk Factors - Protection of Intellectual Property" and "Business - Patents and Proprietary Rights," (i) the Company has sufficient trademarks, trade names, patent rights, copyrights, licenses, approvals and governmental authorizations to conduct its business as now conducted; (ii) the expiration of any trademarks, trade names, patent rights, copyrights, licenses, approvals or governmental authorizations would not have a material adverse effect on the condition (financial or otherwise), business, results of operations or prospects of the Company; (iii) the Company has no knowledge of any infringement by it or its subsidiaries of trademark, trade name rights, patent rights, copyrights, licenses, trade secret or other similar rights of others; and (iv) there is no claim being made against the Company regarding trademark, trade name, patent, copyright, license, trade secret or other infringement which could have a material adverse effect on the condition (financial or otherwise), business, results of operations or prospects of the Company. (p) No default exists in the due performance and observance of any term, covenant or condition of any material license, contract, indenture, mortgage, installment sale agreement, lease, deed of trust, voting trust agreement, stockholders agreement, note, loan or credit agreement, or any other material agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company is a party or by which the Company may be bound or to which the property or assets (tangible or intangible) of the Company are subject or affected, except for such defaults, if any, which individually and in the aggregate would not have a material adverse effect on the Business. (q) To the Company's knowledge, there are no investigations involving the Company by any governmental agency. There is no unfair labor practice charge or complaint against the Company pending before the National Labor Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage pending or to its knowledge threatened against or involving the Company. No representation question exists respecting the employees of the Company. No collective bargaining agreement, or modification thereof is currently being negotiated by the Company. No grievance or arbitration proceeding is pending under any expired or existing collective bargaining agreements of the Company. No labor dispute with the employees of the Company exists or to its knowledge is imminent. (r) Except as described in the Prospectus, the Company does not maintain, sponsor or contribute to any program or arrangement that is an "employee pension benefit plan," an "employee welfare benefit plan," or a "multiemployer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company does not maintain or contribute to a defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a "prohibited transaction" within the meaning of -8- Section 406 of ERISA or Section 4975 of the Code, which could subject the Company to any tax penalty on prohibited transactions and which has not adequately been corrected. Each ERISA Plan is in compliance with all material reporting, disclosure and other requirements of the Code and ERISA as they relate to any such ERISA Plan. Determination letters have been received from the Internal Revenue Service with respect to each ERISA Plan which is intended to comply with Code Section 401(a), stating that such ERISA Plan and the attendant trust are qualified thereunder. The Company has never completely or partially withdrawn from a "multiemployer plan." (s) Neither the Company nor any of its employees, directors, stockholders, or affiliates (within the meaning of the Regulations) of any of the foregoing has taken or will take, directly or indirectly, any action designed to or which has constituted or which might be expected to cause or result in unlawful stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. (t) The Company has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property stated in the Prospectus to be owned or leased by it, free and clear of all liens, charges, claims, encumbrances, pledges, security interests, or other restrictions or equities of any kind whatsoever, other than those referred to in the Prospectus and liens for taxes not yet due and payable. (u) Grant Thornton ("Grant Thornton"), whose report is filed with the Commission as a part of the Registration Statement, is an independent certified public accountant as required by the Act and the Regulations. (v) The Company has caused to be duly executed legally binding and enforceable agreements pursuant to which all persons or entities, other than David Ross who has entered into a modified agreement as described in the Prospectus, and Lee Millard who has refused to sign any such agreement, that directly or beneficially own Common Stock, as of the effective date of the Registration Statement, have agreed not to, directly or indirectly, offer, offer to sell, sell, grant any option for the sale of, transfer, assign, pledge, hypothecate or otherwise encumber or dispose of any shares of Common Stock or securities convertible into Common Stock, exercisable or exchangeable for or evidencing any right to purchase or subscribe for any shares of Common Stock (either pursuant to Rule 144 of the Regulations or otherwise) or dispose of any interest therein for a period from the date of the Prospectus until and including the day of like number in the twelfth consecutive month next following the date that the Registration Statement becomes effective, without the prior written consent of Pryor, McClendon (the "Lock-up Agreements"). The Company will cause the Transfer Agent (as defined herein) to place "stop transfer" orders on the Company's stock ledgers in order to effect the Lock-up Agreements. (w) There are no claims, payments, arrangements or understandings, whether oral or written, for services in the nature of a finder's or origination fee with respect to the sale of the Securities hereunder or any other arrangements, agreements, understandings, payments -9- or issuance with respect to the Company or any of its officers, directors, stockholders, employees or affiliates that may affect the Underwriters' compensation as determined by the Commission and the National Association of Securities Dealers, Inc. (the "NASD"). (x) The Securities have been approved for quotation on the Nasdaq SmallCap Market. (y) Neither the Company nor any of its officers, employees, agents or any other person acting on behalf of the Company has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency (domestic or foreign) or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company (or assist the Company in connection with any actual or proposed transaction) which might subject the Company or any other such person to any damage or penalty in any civil, criminal or governmental litigation or proceeding (domestic or foreign). The Company's internal accounting controls are sufficient to cause the Company to comply with the Foreign Corrupt Practices Act of 1977, as amended. (z) Except as set forth in the Prospectus, no officer, director or stockholder of the Company, or any "affiliate" or "associate" (as these terms are defined in Rule 405 of the Regulations) of any of the foregoing persons or entities has or has had, either directly or indirectly, (i) an interest in any person or entity which (A) furnishes or sells services or products which are furnished or sold or are proposed to be furnished or sold by the Company, or (B) purchases from or sells or furnishes to the Company any goods or services, or (ii) a beneficial interest in any contract or agreement to which the Company is a party or by which it may be bound or affected. Except as set forth in the Prospectus, there are no existing agreements, arrangements, understandings or transactions, or proposed agreements, arrangements, understandings or transactions, between or among the Company, and any officer, director, principal shareholder (as such term is used in the Prospectus) of the Company, or any affiliate or associate of any of the foregoing persons or entities which are required to be disclosed in the Prospectus. (aa) The Company is not, and does not intend to conduct its business in a manner in which it would become an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (ab) Any certificate signed by any officer of the Company and delivered to the Underwriters or to the Underwriters' Counsel (as defined in Section 4(d) herein) shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby. -10- (ac) The minute books of the Company have been made available to the Underwriters and contain a complete summary of all meetings and actions of the directors and stockholders of the Company since the time of its incorporation, and reflect all transactions referred to in such minutes accurately in all material respects. (ad) The Company has not distributed and will not distribute any offering material in connection with the offering and sale of the Shares in this offering other than the Prospectus, the Registration Statement and the other materials permitted by the Act. Except as described in the Prospectus, no holders of any securities of the Company or of any options, warrants or other convertible or exchangeable securities of the Company have the right to include any securities issued by the Company as part of the Registration Statement or to require the Company to file a registration statement under the Act and no person or entity holds any anti-dilution rights with respect to any securities of the Company. (ae) Each of the Company and its subsidiaries maintains insurance by insurers of recognized financial responsibility of the types and in the amounts as the Company believes are prudent and adequate for the business in which it is engaged, including, but not limited to, insurance covering real and personal property owned or leased by the Company and its subsidiaries against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. The Company has delivered to the Underwriter's Counsel satisfactory summaries of these insurance policies. The Company has no reason to believe that it will not be able to renew existing insurance coverage with respect to the Company as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business, in either case, at a cost that would not have a material adverse effect on the financial condition, operations, business, assets or properties of the Company. The Company has not failed to file any material claims, has no material disputes with its insurance company regarding any claims submitted under its insurance policies, and has complied in material respects with all material provisions contained in its insurance policies. 2. Purchase, Sale and Delivery of the Securities. ---------------------------------------------- (a) On the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to each Underwriter, and each Underwriter, severally and not jointly agrees to purchase from the Company, at a price equal to $_______________ per Share and $_____________ per Warrant, that number of Firm Securities set forth in Schedule A opposite the name of such Underwriter, subject to such adjustment as the Representatives in their discretion shall make to eliminate any sales or purchases of fractional shares, plus any additional numbers of Shares which such Underwriter may become obligated to purchase pursuant to the provisions of Section 11 hereof. (b) In addition, on the basis of the representations, warran- ties, covenants and agreements, herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters, severally and not jointly, to purchase all -11- or any part of an additional _______________ shares of Common Stock at a price of $__________ per share of Common Stock and an additional ___________________ Warrants at a price of $__________ per Warrant. The option granted hereby will expire 45 days after (i) the date the Registration Statement becomes effective, if the Company has elected not to rely on Rule 430A under the Regulations, or (ii) the date of this Agreement if the Company has elected to rely upon Rule 430A under the Regulations, and may be exercised in whole or in part from time to time (but not on more than two (2) occasions) only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Firm Securities upon notice by the Representatives to the Company setting forth the number of Option Securities as to which the several Underwriters are then exercising the option and the time and date of payment and delivery for any such Option Securities. Any such time and date of delivery (an "Option Closing Date") shall be determined by the Representatives, but shall not be later than three full business days after the exercise of said option, nor in any event prior to the Closing Date, as hereinafter defined, unless otherwise agreed upon by the Representatives and the Company. Nothing herein contained shall obligate the Underwriters to exercise the over-allotment option described above. No Option Securities shall be delivered unless the Firm Securities shall be simultaneously delivered or shall theretofore have been delivered as herein provided. (c) Payment of the purchase price for, and delivery of certificates for, the Firm Securities shall be made at the offices of Pryor, McClendon, Counts & Co., Inc., 3 Penn Plaza, 1515 Market Street, Suite 819, Philadelphia, Pennsylvania, or at such other place as shall be agreed upon by the Representatives and the Company. Such delivery and payment shall be made at 9:00 a.m. (New York time) on ______________, 1996, or at such other time and date as shall be agreed upon by the Representatives and the Company, but no more than four (4) business days after the date hereof (such time and date of payment and delivery being herein called the "Closing Date"). In addition, in the event that any or all of the Option Securities are purchased by the Underwriters, payment of the purchase price for, and delivery of certificates for, such Option Securities shall be made at the above mentioned office of Pryor, McClendon or at such other place as shall be agreed upon by the Representatives and the Company on each Option Closing Date as specified in the notice from the Representatives to the Company. Delivery of the certificates for the Firm Securities and the Option Securities, if any, shall be made to the Underwriters against payment by the Underwriters of the purchase price for the Firm Securities and the Option Securities, if any, to the order of the Company. In the event Option Securities are to be purchased by the Underwriters, each of the Underwriters, acting severally and not jointly, shall purchase that proportion of the total number of Option Securities then being purchased which the number of Firm Securities set forth in Schedule A hereto opposite the name of such Underwriter bears to the total number of Firm Securities, subject in each case to such adjustments as the Representatives in their discretion shall make to eliminate any sales or purchases of fractional shares. Certificates for the Firm Securities and the Option Securities, if any, shall be in definitive, fully registered form, shall bear no restrictive legends and shall be in such denominations and registered in such names as the Underwriters may request in writing at least three (3) business days prior to Closing Date or the relevant Option Closing Date, as the case may be. The certificates for the Firm Securities and the Option Securities, if any, shall be made available to the Representatives at such office or such other -12- place as the Representatives may designate for inspection, checking and packaging no later than 9:30 a.m. on the last business day prior to Closing Date or the relevant Option Closing Date, as the case may be. (d) On the Closing Date, the Company shall issue and sell the Representatives' Warrants to the Representatives at a purchase price of $0.0001 per warrant, which warrants shall entitle the holders thereof to purchase an aggregate of _________________ shares of Common Stock and _________________ Warrants. The Representatives' Warrants shall expire five (5) years after the effective date of the Registration Statement and shall be exercisable for a period of four (4) years commencing on the first anniversary of the effective date of the Registration Statement at a price equaling one hundred twenty percent (120%) of the initial public offering price of the Shares. The Representatives' Warrant Agreement and form of Warrant Certificate shall be substantially in the form filed as Exhibit 4.2 to the Registration Statement. Payment for the Representatives' Warrants shall be made on the Closing Date. 3. Public Offering of the Shares and the Warrants. As soon after the ---------------------------------------------- Registration Statement becomes effective as the Representatives deem advisable, the Underwriters shall make a public offering of the Shares and the Warrants (other than to residents of or in any jurisdiction in which qualification of the Shares and the Warrants is required and has not become effective) at the price and upon the other terms set forth in the Prospectus. The Representatives may from time to time increase or decrease the public offering price to such extent as the Representatives, in their sole discretion, deem advisable and as permitted by the Act and Regulations. The Underwriters may enter into one or more agreements as the Underwriters, in each of their sole discretion, deem advisable with one or more broker-dealers who shall act as dealers in connection with such public offering. 4. Covenants of the Company. The Company covenants and agrees with ------------------------ each of the Underwriters as follows: (a) The Company shall use its best efforts to cause the Registration Statement and any amendments thereto to become effective as promptly as practicable and will not at any time, whether before or after the effective date of the Registration Statement, file any amendment to the Registration Statement or supplement to the Prospectus or file any document under the Act or Exchange Act before termination of the offering of the Shares and the Warrants by the Underwriters of which the Representatives shall not previously have been advised and furnished with a copy, or to which the Representatives shall have objected or which is not in compliance with the Act, the Exchange Act or the Regulations. (b) As soon as the Company is advised or obtains knowledge thereof, the Company will advise the Representatives and confirm the notice in writing, (i) when the Registration Statement, as amended, becomes effective, if the provisions of Rule 430A promulgated under the Act will be relied upon, when the Prospectus has been filed in accordance with said Rule 430A and when any post-effective amendment to the Registration Statement becomes effective, (ii) of the issuance by the Commission of any stop order or of the initiation, -13- or the threatening, of any proceeding, suspending the effectiveness of the Registration Statement or any order preventing or suspending the use of any preliminary prospectus or the Prospectus, or any amendment or supplement thereto, or the institution of proceedings for that purpose, (iii) of the issuance by the Commission or by any state securities commission of any proceedings for the suspension of the qualification of any of the Securities for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose, (iv) of the receipt of any comments from the Commission; and (v) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information. If the Commission or any state securities commission shall enter a stop order or suspend such qualification at any time, the Company will use its best efforts to obtain promptly the lifting of such order. (c) The Company shall file the Prospectus (in form and substance satisfactory to the Representatives) in accordance with the requirements of the Act. (d) The Company will give the Representatives notice of its intention to file or prepare any amendment to the Registration Statement (including any post-effective amendment) or any amendment or supplement to the Prospectus (including any revised prospectus which the Company proposes for use by the Underwriters in connection with the offering of the Securities which differs from the corresponding prospectus on file at the Commission at the time the Registration Statement becomes effective, whether or not such revised prospectus is required to be filed pursuant to Rule 424(b) of the Regulations), and will furnish the Representatives with copies of any such amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such amendment or supplement to which the Representatives or Camhy Karlinsky & Stein LLP ("Underwriters' Counsel") shall reasonably object. (e) The Company shall endeavor in good faith, in cooperation with the Representatives, at or prior to the time the Registration Statement becomes effective, to qualify the Securities for offering and sale under the securities laws of such jurisdictions as the Representatives may reasonably designate to permit the sales and dealings therein for as long as may be necessary to complete the distribution, and shall make such applications, file such documents and furnish such information as may be required for such purpose; provided, -------- however, the Company shall not be required to qualify as a foreign corporation - ------- or become subject to service of process in any such jurisdiction. In each jurisdiction where such qualification shall be effected, the Company will, unless the Representatives agree that such action is not at the time necessary or advisable, use all reasonable efforts to file and make such statements or reports at such times as are required by the laws of such jurisdiction to continue such qualification. (f) During the time when a prospectus is required to be delivered under the Act, the Company shall use all reasonable efforts to comply with all requirements imposed upon it by the Act, as now and hereafter amended, and by the Regulations, as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Securities in -14- accordance with the provisions hereof and the Prospectus, or any amendments or supplements thereto. If at any time when a prospectus relating to the Securities is required to be delivered under the Act, any event shall have occurred as a result of which, in the opinion of counsel for the Company or Underwriters' Counsel, the Prospectus, as then amended or supplemented, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend or supplement the Prospectus to comply with the Act, the Company will notify the Representatives promptly and prepare and file with the Commission an appropriate amendment or supplement in accordance with Section 10 of the Act, each such amendment or supplement to be satisfactory to Underwriters' Counsel, and the Company will furnish to the Underwriters copies of such amendment or supplement as soon as available and in such quantities as the Underwriters may request. (g) As soon as practicable, but in any event not later than 45 days after the end of the 12-month period beginning on the day after the end of the fiscal quarter of the Company during which the effective date of the Registration Statement occurs (90 days in the event that the end of such fiscal quarter is the end of the Company's fiscal year), the Company shall make generally available to its security holders, in the manner specified in Rule 158(b) of the Regulations, and to the Representatives, an earnings statement which will be in the detail required by, and will otherwise comply with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Regulations, which statement need not be audited unless required by the Act, covering a period of at least 12 consecutive months after the effective date of the Registration Statement. (h) During a period of five (5) years after the date hereof, until and including the like day and month in 2001, the Company will furnish to its stockholders, as soon as practicable, annual reports (including consolidated financial statements of the Company and its consolidated subsidiaries audited by independent public accountants) and will make available to its stockholders consolidated unaudited quarterly reports (except for the last quarter of each fiscal year) of earnings of the Company and its consolidated subsidiaries, and will deliver to the Representatives: (i) concurrently with furnishing such quarterly reports to its stockholders, a consolidated statement of income of the Company and its consolidated subsidiaries for each quarter in the form furnished to the Company's stockholders; (ii) concurrently with furnishing such annual reports to its stockholders, a consolidated balance sheet of the Company and its consolidated subsidiaries as at the end of the preceding fiscal year, together with statements of consolidated operations, stockholders' equity, and cash flows of the Company and its consolidated subsidiaries for such fiscal year, accompanied by a copy of the report thereon of independent certified public accountants; -15- (iii) as soon as they are available, copies of all other reports (financial or other) mailed to stockholders; (iv) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, Nasdaq or any securities exchange; (v) every press release and every material news item or article of interest to the financial community in respect of the Company or its affairs which was released or prepared by or on behalf of the Company; and (vi) any additional information of a public nature concerning the Company and its Businesses which the Representatives may reasonably request. During such five-year period, the foregoing financial statements will be accompanied by similar financial statements for any significant subsidiary which is not consolidated. (i) The Company will maintain a transfer agent (the "Transfer Agent") and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for the Securities and the Representatives' Warrants. (j) The Company will furnish to the Representatives, without charge, at such place as the Representatives may designate, copies of each preliminary prospectus, the Registration Statement, the Prospectus and any pre- effective or post-effective amendments thereto (two of which copies will be signed and will include all financial statements and exhibits), in each case as soon as available and in such quantities as the Representatives may reasonably request. (k) On or before the effective date of the Registration Statement, the Company shall provide the Representatives with true copies of duly executed Lock-up Agreements. On or before the Closing Date, the Company shall deliver instructions to the Transfer Agent authorizing it to place appropriate stop transfer orders on the Company's ledgers. (l) The Company shall use its best efforts to cause its officers, directors, stockholders or affiliates (within the meaning of the Regulations) not to take, directly or indirectly, any action designed to, or which might in the future reasonably be expected to cause or result in, unlawful stabilization or manipulation of the price of any securities of the Company. (m) The Company shall apply the net proceeds from the sale of the Securities substantially in the manner, and subject to the conditions, set forth under "Use of Proceeds" in the Prospectus. -16- (n) The Company shall timely file all such reports, forms or other documents as may be required (including, but not limited to, a Form SR as may be required pursuant to Rule 463 under the Act) from time to time, under the Act, the Exchange Act, and the Regulations, and all such reports, forms and documents filed will comply as to form and substance with the applicable requirements under the Act, the Exchange Act, and the Regulations. (o) The Company shall use its best efforts to cause the Securities to be quoted on the Nasdaq SmallCap Market, and for a period of two (2) years from the date hereof shall use its best efforts to maintain the quotation of the Securities to the extent outstanding. (p) For a period of two (2) years from the Closing Date, the Company shall furnish to the Representatives, at the Company's sole expense, monthly transfer sheets relating to the Common Stock and Warrants. (q) For a period of five (5) years after the effective date of the Registration Statement the Company shall, at the Company's sole expense, take all necessary and appropriate action to qualify the Common Stock and Warrants in all jurisdictions of the United States which do not require the Company to qualify as a foreign corporation or to file a general consent to service of process in order to permit secondary sales of such securities pursuant to the Blue Sky laws of those jurisdictions. (r) The Company (i) prior to the effective date of the Registration Statement has filed a Form 8-A with the Commission providing for the registration of the Common Stock and Redeemable Warrants under the Exchange Act and (ii) as soon as practicable will use its best efforts to take all necessary and appropriate actions to be included in Standard and Poor's Corporation Descriptions and Moody's OTC Manual and to continue such inclusion for a period of not less than five (5) years. (s) The Company agrees that for a period of twelve (12) months following the effective date of the Registration Statement it will not, without the prior written consent of Pryor, McClendon, offer, issue, sell, contract to sell, grant any option for the sale of or otherwise dispose of any Common Stock or securities convertible into Common Stock, except for the issuance of shares of Common Stock registered under the Act pursuant to the registration Statement. (t) Until the completion of the distribution of the Securities, the Company shall not without the prior written consent of Pryor, McClendon or Underwriters' Counsel, issue, directly or indirectly any press release or other communication or hold any press conference with respect to the Company or its activities or the offering contemplated hereby, other than trade releases issued in the ordinary course of the Company's business consistent with past practices. -17- (u) For a period equal to the lesser of (i) five (5) years from the date hereof, and (ii) the sale to the public of the Representatives's Securities, the Company will not take any action or actions which may prevent or disqualify the Company's use of an appropriate form for the registration under the Act of the Representatives's Securities. (v) The Company agrees that it shall use its best efforts, which shall include, but shall not be limited to, the solicitation of proxies, to elect one (1) designee of Pryor, McClendon and National to the Company's Board of Directors for a period of five (5) years following the Closing Date, provided that such designee is reasonably acceptable to the Company and that such director may be excluded from consideration of certain confidential matters which, in the good faith judgment of a majority of the other directors, make such director's presence not appropriate. (w) The Company agrees that within forty-five (45) days after the Closing Date it shall retain a public relations firm which is reasonably acceptable to Pryor, McClendon and National. The Company shall keep such public relations firm and any replacement for a total period of two (2) years from the Closing Date. Any replacement public relations firm shall be retained only with the consent of Pryor, McClendon and National, which shall not be unreasonably withheld. (x) The Company agrees that any and all future transactions between the Company and any of its officers, directors, principal stockholders and the affiliates of the foregoing persons will be on terms no less favorable to the Company than could reasonably be obtained in arm's length transactions with independent third parties, and that any such transactions also be approved by a majority of the Company's outside independent directors disinterested in the transaction. (y) The Company shall prepare and deliver, at the Company's sole expense, to Pryor, McClendon and National within the one hundred and twenty (120) day period after the later of the effective date of the Registration Statement and the latest Option Closing Date, as the case may be, one bound volume each containing all correspondence with regulatory officials, agreements, documents and all other materials in connection with the offering to which such Registration Statement relates as requested by the Underwriters' Counsel. 5. Payment of Expenses. ------------------- (a) The Company hereby agrees to pay on each of the Closing Date and each Option Closing Date (to the extent not previously paid) all expenses and fees (other than fees of Underwriters' Counsel, except as provided in (iv) below of this Section 5) incident to the performance of the obligations of the Company under this Agreement, the Warrant Agreement, and the Representatives' Warrant Agreement, including, without limitation, (i) the fees and expenses of accountants and counsel for the Company, (ii) all costs and expenses incurred in connection with the preparation, duplication, printing, filing, delivery and mailing (including the payment of postage with respect thereto) of the Registration Statement and the Prospectus and -18- any amendments and supplements thereto and the duplication, mailing (including the payment of postage with respect thereto) and delivery of this Agreement, the Warrant Agreement, the Agreement Among Underwriters, the Selected Dealers Agreements, the Powers of Attorney, and related documents, including the cost of all copies thereof and of the preliminary prospectuses and of the Prospectus and any amendments thereof or supplements thereto supplied to the Underwriters and such dealers as the Underwriters may request, in quantities as hereinabove stated, (iii) the printing, engraving, issuance and delivery of the certificates representing the Securities, (iv) the qualification of the Securities under state or foreign securities or "Blue Sky" laws and determination of the status of such securities under legal investment laws, including the costs of word processing and mailing the "Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky Memorandum" and "Legal Investments Survey," if any, and reasonable disbursements and fees of counsel in connection therewith, (v) advertising costs and expenses, including but not limited to the costs and expenses incurred by the Company and the Representatives in connection with the "road show," information meetings and presentations, bound volumes and prospectus memorabilia and reasonable "tombstone" advertisement expenses, (vi) experts, (vii) the fees and expenses of the transfer agent and registrar, (viii) the fees payable to the Commission and the NASD, (ix) issue and transfer taxes, if any and (x) the fees and expenses incurred in connection with the listing of the Securities on the Nasdaq Small Cap Market and any other market or exchange. (b) If this Agreement is terminated by the Underwriters in accordance with the provisions of Section 6, Section 10(a) or Section 11, the Company shall reimburse and indemnify the Representatives for all of their actual out-of-pocket expenses on an accountable basis, including the fees and disbursements of Underwriters' Counsel, less any amounts already paid pursuant to Section 5(c) hereof provided that Pryor, McClendon and National shall notify the Company of any single expense or any series of similar expenses which in the aggregate exceed $5,000 (provided further that such notice requirement shall not apply to Pryor, McClendon's and National's actual out-of-pocket legal expenses). (c) The Company further agrees that, in addition to the expenses payable pursuant to subsection (a) of this Section 5, it will pay to the Representatives on the Closing Date by certified or bank cashier's check or, at the election of the Representatives, by deduction from the proceeds of the offering contemplated herein a non-accountable expense allowance equal to three percent (3%) of the gross proceeds received by the Company from the sale of the Firm Securities, $30,000 of which has been paid to date. In the event the Representatives elect to exercise the over-allotment option described in Section 2(b) hereof, the Company further agrees to pay to the Representatives on each Option Closing Date (by certified or bank cashier's check or, at the Representatives's election, by deduction from the proceeds of the offering) a non-accountable expense allowance equal to three percent (3%) of the gross proceeds received by the Company from the sale of the Option Securities. 6. Conditions of the Underwriters' Obligations. The obligations of ------------------------------------------- the Underwriters hereunder shall be subject to the continuing accuracy of the representations and warranties of the Company herein as of the date hereof and as of the Closing Date and each -19- Option Closing Date, if any, as if they had been made on and as of the Closing Date or each Option Closing Date, as the case may be; the accuracy on and as of the Closing Date or Option Closing Date, if any, of the statements of officers of the Company made pursuant to the provisions hereof; and the performance by the Company on and as of the Closing Date and each Option Closing Date, if any, of its covenants and obligations hereunder and to the following further conditions: (a) The Registration Statement shall have become effective not later than 5:00 p.m., New York City time, on the date prior to the date of this Agreement or such later date and time as shall be consented to in writing by the Representatives, and, at the Closing Date and each Option Closing Date, if any, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending or threatened by the Commission and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of Underwriters' Counsel. If the Company has elected to rely upon Rule 430A of the Regulations, the price of the Shares and Warrants and any price-related information previously omitted from the effective Registration Statement pursuant to such Rule 430A shall have been transmitted to the Commission for filing pursuant to Rule 424(b) of the Regulations within the prescribed time period, and prior to the Closing Date the Company shall have provided evidence satisfactory to the Representatives of such timely filing, or a post-effective amendment providing such information shall have been promptly filed and declared effective in accordance with the requirements of Rule 430A of the Regulations. (b) The Representatives shall not have advised the Company that the Registration Statement, or any amendment thereto, contains an untrue statement of fact which, in the Representatives's opinion, is material, or omits to state a fact which, in the Representatives's opinion, is material and is required to be stated therein or is necessary to make the statements therein not misleading, or that the Prospectus, or any supplement thereto, contains an untrue statement of fact which, in the Representatives's reasonable opinion, is material, or omits to state a fact which, in the Representatives's reasonable opinion, is material and is required to be stated therein or is necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (c) On or prior to the Closing Date, the Underwriters shall have received from Underwriters' Counsel such opinion or opinions with respect to the organization of the Company, the validity of the Securities, the Registration Statement, the Prospectus and other related matters as the Representatives may request and Underwriters' Counsel shall have received from the Company such papers and information as they request to enable them to pass upon such matters. (d) At the Closing Date, the Underwriters shall have received the favorable opinion of Fenwick & West LLP ("Fenwick & West"), counsel to the Company, dated the Closing Date, addressed to the Underwriters and in form and substance satisfactory to Underwriters' Counsel, to the effect that: -20- (i) the Company (A) has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, (B) is duly qualified and licensed and in good standing as a foreign corporation in each jurisdiction in which its ownership or leasing of any properties or the character of its operations requires such qualification or licensing, and (C) to the best of such counsel's knowledge, has all requisite corporate power and authority and has obtained any and all necessary authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental or regulatory officials and bodies (including, without limitation, those having jurisdiction over environmental or similar matters), to own or lease its properties and conduct its business as described in the Prospectus. (ii) except as described in the Prospectus, and to the best of such counsel's knowledge after reasonable investigation, the Company does not own an interest in any corporation, limited liability company, partnership, joint venture, trust or other business entity; (iii) the Company has a duly authorized, issued and outstanding capitalization as set forth in the Prospectus, and any amendment or supplement thereto, under "Capitalization" and "Description of Capital Stock," and to the knowledge of such counsel, the Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement, the Warrant Agreement, the Representatives' Warrant Agreement, and as described in the Prospectus. The Securities and all other securities issued or issuable by the Company conform in all material respects to the statements with respect thereto contained in the Registration Statement and the Prospectus. All issued and outstanding securities of the Company have been duly authorized and validly issued and are fully paid and nonassessable; the holders thereof are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company. The Securities to be sold by the Company hereunder, under the Warrant Agreement, and under the Representatives' Warrant Agreement are not and will not be subject to any preemptive or other similar rights of any stockholder, have been duly authorized and, when issued, paid for and delivered in accordance with their terms, will be validly issued, fully paid and nonassessable and will conform in all material respects to the description thereof contained in the Prospectus; the holders thereof will not be subject to any liability solely as such holders; all corporate action required to be taken for the authorization, issue and sale of the Securities has been duly and validly taken; and the certificates representing the Securities are in due and proper form. The -21- Representatives' Warrants and the Warrants constitute valid, binding and enforceable obligations of the Company to issue and sell, upon exercise thereof and payment therefor, the number and type of securities of the Company called for thereby (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law). Upon the issuance and delivery pursuant to this Agreement of the Securities to be sold by the Company, the Company will convey, against payment therefor as provided herein, to the Underwriters and the Representatives, respectively, good and marketable title to the Securities free and clear of all liens and other encumbrances; (iv) the Registration Statement is effective under the Act, and, if applicable, filing of all pricing information has been timely made in the appropriate form under Rule 430A, and no stop order suspending the use of any preliminary prospectus, the Registration Statement or Prospectus or any part of any thereof or suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or, to the best of such counsel's knowledge, threatened or contemplated under the Act; (v) each of any preliminary prospectus, the Registration Statement, and the Prospectus and any amendments or supplements thereto (other than the financial statements and other financial and statistical data included therein as to which no opinion need be rendered) comply as to form in all material respects with the requirements of the Act and the Regulations. Such counsel shall state that such counsel has participated in conferences with officers and other representatives of the Company and the Representatives and representatives of the independent public accountants for the Company, at which conferences the contents of any preliminary prospectus, the Registration Statement, the prospectus, and any amendments or supplements thereto were discussed, and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the preliminary prospectus, the Registration Statement and Prospectus, and any amendments or supplements thereto, on the basis of the foregoing, no facts have come to the attention of such counsel which lead them to believe that either the Registration Statement or any amendment thereto, at the time such Registration Statement or amendment became effective or the Preliminary Prospectus or Prospectus or amendment or supplement thereto as of the date of such opinion contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the -22- statements therein not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and schedules and other financial and statistical data included in the Preliminary Prospectus, the Registration Statement or Prospectus, and any amendments or supplements thereto); (vi) to the best of such counsel's knowledge after reasonable investigation, (A) there are no agreements, contracts or other documents required by the Act to be described in the Registration Statement and the Prospectus and filed as exhibits to the Registration Statement other than those described in the Registration Statement and the Prospectus and filed as exhibits thereto; (B) the descriptions in the Registration Statement and the Prospectus and any supplement or amendment thereto of contracts and other documents to which the Company is a party or by which it is bound are accurate in all material respects and fairly represent the information required to be shown by Form SB- 2; (C) there is not pending or threatened against the Company any action, arbitration, suit, proceeding, litigation, governmental or other proceeding (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, which (x) is required to be disclosed in the Registration Statement which is not so disclosed (and such proceedings as are summarized in the Registration Statement are accurately summarized in all material respects), (y) questions the validity of the capital stock of the Company or this Agreement, the Warrant Agreement, or the Representatives' Warrant Agreement, or of any action taken or to be taken by the Company pursuant to or in connection with any of the foregoing; and (D) there is no action, suit or proceeding pending or threatened against the Company before any court or arbitrator or governmental body, agency or official in which there is a reasonable possibility of an adverse decision which may result in a material adverse change in the financial condition, business, affairs, stockholders' equity, operations, properties, business or results of operations of the Company, which could adversely affect the present or prospective ability of the Company to perform its obligations under this Agreement, the Warrant Agreement, or the Representatives' Warrant Agreement, or which in any manner draws into question the validity or enforceability of this Agreement, the Warrant Agreement or the Representatives' Warrant Agreement; (vii) the Company has the corporate power and authority to enter into each of this Agreement, the Warrant Agreement, and the Representatives' Warrant Agreement and to consummate the transactions provided for therein; and each of this Agreement, the Warrant Agreement, and the Representatives' Warrant Agreement has been duly authorized, executed and delivered by the Company. Each of this Agreement, the Warrant -23- Agreement, and the Representatives' Warrant Agreement, assuming due authorization, execution and delivery by each other party thereto, constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms (except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law), and none of the Company's execution, delivery or performance of this Agreement, the Warrant Agreement, and the Representatives' Warrant Agreement, the consummation by the Company of the transactions contemplated herein or therein, or the conduct of the Company's business as described in the Registration Statement, the Prospectus, and any amendments or supplements thereto conflicts with or results in any breach or violation of any of the terms or provisions of, or constitutes a default under, or result in the creation or imposition of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction or equity of any kind whatsoever upon, any property or assets (tangible or intangible) of the Company pursuant to the terms of (A) the articles of incorporation or by-laws of the Company, as amended, (B) any license, contract, indenture, mortgage, deed of trust, voting trust agreement, stockholders' agreement, note, loan or credit agreement or any other agreement or instrument known to such counsel to which the Company is a party or by which it is bound, or (C) any federal, state or local statute, rule or regulation applicable to the Company or any judgment, decree or order known to such counsel of any arbitrator, court, regulatory body or administrative agency or other governmental agency or body (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, having jurisdiction over the Company or any of its activities or properties; (viii) no consent, approval, authorization or order, and no filing with, any court, regulatory body, government agency or other body (other than such as may be required under Blue Sky laws, as to which no opinion need be rendered or under federal securities laws, as to which no opinion need be rendered pursuant to this subsection (viii)) is required in connection with the issuance of the Securities pursuant to the Prospectus and the Registration Statement, the performance of this Agreement, the Warrant Agreement, and the Representatives' Warrant Agreement, and the transactions contemplated hereby and thereby; (ix) to the best of such counsel's knowledge after reasonable investigation, the properties and business of the Company conform in all -24- material respects to the description thereof contained in the Registration Statement and the Prospectus; (x) to the best knowledge of such counsel, and except as disclosed in the Registration Statement and the Prospectus, the Company is not in breach of, or in default under, any term or provision of any license, contract, indenture, mortgage, installment sale agreement, deed of trust, lease, voting trust agreement, stockholders' agreement, note, loan or credit agreement or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which the Company is a party or by which the Company is bound or to which the property or assets (tangible or intangible) of the Company is subject; and the Company is not in violation of any term or provision of its articles of incorporation or by-laws, as amended, and to the best of such counsel's knowledge after reasonable investigation, not in violation of any franchise, license, permit, judgment, decree, order, statute, rule or regulation; (xi) the statements in the Prospectus under "Dividend Policy," "Description of Capital Stock," and "Shares Eligible for Future Sale" have been reviewed by such counsel, and insofar as they refer to statements of law, descriptions of statutes, licenses, rules or regulations or legal conclusions, are correct in all material respects; (xii) the Common Stock has been accepted for quotation on the Nasdaq SmallCap Market; (xiii) to the best of such counsel's knowledge and based upon a review of the outstanding securities and the contracts furnished to such counsel by the Company, no person, corporation, trust, partnership, association or other entity has the right to include and/or register any securities of the Company in the Registration Statement, require the Company to file any registration statement or, if filed, to include any security in such registration statement; (xiv) assuming due execution by the parties thereto other than the Company, each Lock-up Agreement is a legal, valid and binding obligation of the party thereto, enforceable against the party and any subsequent holder of the securities subject thereto in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law); -25- In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws other than the laws, rules and regulations of the United States and the laws, rules and regulations of the State of Delaware, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance satisfactory to Underwriters' Counsel) of other counsel acceptable to Underwriters' Counsel, familiar with the applicable laws; (B) as to matters of fact, to the extent they deem proper, on certificates and written statements of responsible officers of the Company and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company, provided that copies of any such statements or certificates shall be delivered to Underwriters' Counsel if requested. The opinion of such counsel shall state that knowledge shall not include the knowledge of a director or officer of the Company who is affiliated with such firm in his or her capacity as an officer or director of the Company. The opinion of such counsel for the Company shall state that the opinion of any such other counsel is in form satisfactory to such counsel. At each Option Closing Date, if any, the Underwriters shall have received the favorable opinion of Fenwick & West, counsel to the Company, dated the Option Closing Date, addressed to the Underwriters and in form and substance satisfactory to Underwriters' Counsel confirming as of such Option Closing Date the statements made by Fenwick & West in its opinion delivered on the Closing Date. (e) On or prior to each of the Closing Date and the Option Closing Date, if any, Underwriters' Counsel shall have been furnished such documents, certificates and opinions as they may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in subsection (c) of this Section 6, or in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties or conditions of the Company or herein contained. (f) Prior to each of the Closing Date and each Option Closing Date, if any, (i) there shall have been no material adverse change nor development involving a prospective material adverse change in the condition, financial or otherwise, prospects, stockholders' equity or the business activities of the Company, whether or not in the ordinary course of business, from the latest dates as of which such condition is set forth in the Registration Statement and Prospectus; (ii) there shall have been no transaction, not in the ordinary course of business, entered into by the Company, from the latest date as of which the financial condition of the Company is set forth in the Registration Statement and Prospectus which is adverse to the Company; (iii) the Company shall not be in default under any provision of any instrument relating to any outstanding indebtedness which default has not been waived; (iv) the Company shall not have issued any securities (other than the Securities) or declared or paid any dividend or made any distribution in respect of its capital stock of any class and there has not been any change in the capital stock, or any material increase in the debt (long or short term) or liabilities or obligations of the Company (contingent or otherwise) except for the issuance of the Option Securities, the Representatives' Warrants, and shares of Common Stock issued upon the exercise -26- of currently outstanding warrants or options, or options and warrants granted in the ordinary course of business consistent with prior practice; (v) no material amount of the assets of the Company shall have been pledged or mortgaged, except as set forth in the Registration Statement and Prospectus; (vi) no action, suit or proceeding, at law or in equity, shall have been pending or threatened (or circumstances giving rise to same) against the Company, or affecting any of its respective properties or businesses before or by any court or federal, state or foreign commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may materially adversely affect the business, operations, prospects or financial condition or income of the Company, except as set forth in the Registration Statement and Prospectus; and (vii) no stop order shall have been issued under the Act and no proceedings therefor shall have been initiated, threatened or contemplated by the Commission. (g) At each of the Closing Date and each Option Closing Date, if any, the Underwriters shall have received a certificate of the Company signed on behalf of the Company by the principal executive officer of the Company, dated the Closing Date or Option Closing Date, as the case may be, to the effect that such executive has carefully examined the Registration Statement, the Prospectus and this Agreement, and that: (i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the Closing Date or the Option Closing Date, as the case may be, and the Company has complied with all agreements and covenants and satisfied all conditions contained in this Agreement on its part to be performed or satisfied at or prior to such Closing Date or Option Closing Date, as the case may be; (ii) No stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued, and no proceedings for that purpose have been instituted or are pending or, to the best of each of such person's knowledge after due inquiry, are contemplated or threatened under the Act; (iii) The Registration Statement and the Prospectus and, if any, each amendment and each supplement thereto, contain all statements and information required by the Act to be included therein, and none of the Registration Statement, the Prospectus nor any amendment or supplement thereto includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading and neither the Preliminary Prospectus or any supplement, as of their respective dates, thereto included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and -27- (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (a) the Company has not incurred up to and including the Closing Date or the Option Closing Date, as the case may be, other than in the ordinary course of its business, any material liabilities or obligations, direct or contingent; (b) the Company has not paid or declared any dividends or other distributions on its capital stock; (c) the Company has not entered into any transactions not in the ordinary course of business; (d) there has not been any change in the capital stock as described in the Registration Statement and Prospectus or material increase in long-term debt or any increase in the short-term borrowings (other than any increase in the short-term borrowings in the ordinary course of business) of the Company, (e) the Company has not sustained any loss or damage to its property or assets, whether or not insured, (f) there is no litigation which is pending or threatened (or circumstances giving rise to same) against the Company or any affiliated party of any of the foregoing which is required to be set forth in an amended or supplemented Prospectus which has not been set forth, and (g) there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been set forth. References to the Registration Statement and the Prospectus in this subsection (g) are to such documents as amended and supplemented at the date of such certificate. (h) By the Closing Date, the Underwriters will have received clearance from the NASD as to the amount of compensation allowable or payable to the Underwriters. (i) At the time this Agreement is executed, the Underwriters shall have received a letter, dated such date, addressed to the Underwriters in form and substance satisfactory in all respects (including the non-material nature of the changes or decreases, if any, referred to in clause (iii) below) to the Underwriters and Underwriters' Counsel, from Grant Thornton: (i) confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable Rules and Regulations; (ii) stating that it is their opinion that the financial statements and supporting schedules of the Company included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act and the Regulations thereunder and that the Representatives may rely upon the opinion of Grant Thornton with respect to the financial statements and supporting schedules included in the Registration Statement; -28- (iii) stating that, on the basis of a limited review which included a reading of the latest available unaudited interim financial statements of the Company (with an indication of the date of the latest available unaudited interim financial statements), a reading of the latest available minutes of the stockholders and board of directors and the various committees of the board of directors of the Company, consultations with officers and other employees of the Company responsible for financial and accounting matters and other specified procedures and inquiries, nothing has come to their attention which would lead them to believe that (A) the unaudited financial statements and supporting schedules of the Company included in the Registration Statement, if any, do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Regulations or are not fairly presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements of the Company included in the Registration Statement, or (B) at a specified date not more than five (5) days prior to the effective date of the Registration Statement, there has been any change in the capital stock or material increase in long-term debt of the Company, or any material decrease in the stockholders' equity or net current assets or net assets of the Company as compared with amounts shown in the most recent balance sheet included in the Registration Statement, other than as set forth in or contemplated by the Registration Statement, or, if there was any change or decrease, setting forth the amount of such change or decrease. (iv) stating that they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings, statements and other financial information pertaining to the Company set forth in the Prospectus in each case to the extent that such amounts, numbers, percentages, statements and information may be derived from the general accounting records, including work sheets, of the Company and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter and found them to be in agreement; and (v) statements as to such other material matters incident to the transaction contemplated hereby as the Representatives may reasonably request. (j) At the Closing Date and each Option Closing Date, if any, the Underwriters shall have received from Grant Thornton a letter, dated as of the Closing Date or the Option Closing Date, as the case may be, to the effect that they reaffirm that statements made in the letter furnished pursuant to Subsection (i) of this Section 6, except that the specified -29- date referred to shall be a date not more than five (5) days prior to the Closing Date or the Option Closing Date, as the case may be, and, if the Company has elected to rely on Rule 430A of the Rules and Regulations, to the further effect that they have carried out procedures as specified in clause (iv) of Subsection (i) of this Section 6 with respect to certain amounts, percentages and financial information as specified by the Representatives and deemed to be a part of the Registration Statement pursuant to Rule 430A(b) and have found such amounts, percentages and financial information to be in agreement with the records specified in such clause (iv). (k) On each of Closing Date and Option Closing Date, if any, there shall have been duly tendered to the Representatives for the several Underwriters' accounts the appropriate number of Securities. (l) No order suspending the sale of the Securities in any jurisdiction designated by the Representatives pursuant to subsection (e) of Section 4 hereof shall have been issued on either the Closing Date or the Option Closing Date, if any, and no proceedings for that purpose shall have been instituted or shall be contemplated. (m) On or before the Closing Date, the Company shall have executed and delivered to the Representatives, (i) the Representatives' Warrant Agreement, substantially in the form filed as Exhibit 4(b), to the Registration Statement, in final form and substance satisfactory to the Representatives, and (ii) the Representatives' Warrants in such denominations and to such designees as shall have been provided to the Company. (n) On or before the Closing Date, the Common Stock shall have been duly approved for quotation on the Nasdaq SmallCap Market. (o) On or before the Closing Date, there shall have been delivered to the Representatives all of the Lock-up Agreements in final form and substance satisfactory to Underwriters' Counsel. If any condition to the Underwriters' obligations hereunder to be fulfilled prior to or at the Closing Date or the relevant Option Closing Date, as the case may be, is not so fulfilled, the Representatives may terminate this Agreement or, if the Representatives so elect, they may waive any such conditions which have not been fulfilled or extend the time for their fulfillment. 7. Indemnification. --------------- (a) The Company agrees to indemnify and hold harmless each of the Underwriters (for purposes of this Section 7 "Underwriters" shall include the officers, directors, partners, employees, agents and counsel of the Underwriters, including specifically each person who may be substituted for an Underwriter as provided in Section 11 hereof), and each person, if any, who controls the Underwriter ("controlling person") within the meaning of Section 15 -30- of the Act or Section 20(a) of the Exchange Act, from and against any and all loss, liability, claim, damage, and expense whatsoever (including, but not limited to, reasonable attorneys' fees and any and all reasonable expense whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever and any and all amounts paid in settlement of any claim or litigation provided that the indemnified persons may not agree to any such settlement without the prior written consent of the Company), as and when incurred, arising out of, based upon or in connection with (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any preliminary prospectus, the Registration Statement or the Prospectus (as from time to time amended and supplemented); or (B) in any application or other document or communication (in this Section 7 collectively called "application") executed by or on behalf of the Company or based upon written information furnished by or on behalf of the Company in any jurisdiction in order to qualify the Securities under the securities laws thereof or filed with the Commission, any state securities commission or agency, The Nasdaq Stock Market, Inc. or any securities exchange; or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading (in the case of the Prospectus, in the light of the circumstances under which they were made), unless such statement or omission was made in reliance upon and in conformity with written information furnished to the Company with respect to any Underwriter by or on behalf of such Underwriter expressly for use in any preliminary prospectus, the Registration Statement or Prospectus, or any amendment thereof or supplement thereto, or in any application, as the case may be; or (ii) any breach of any representation, warranty, covenant or agreement of the Company contained in this Agreement. The indemnity agreement in this subsection (a) shall be in addition to any liability which the Company may have at common law or otherwise. (b) Each of the Underwriters agrees severally, but not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the Registration Statement, and each other person, if any, who controls the Company, within the meaning of the Act, to the same extent as the foregoing indemnity from the Company to the Underwriters but only with respect to statements or omissions, if any, made in any preliminary prospectus, the Registration Statement or Prospectus or any amendment thereof or supplement thereto or in any application made in reliance upon, and in strict conformity with, written information furnished to the Company with respect to any Underwriter by such Underwriter or the Representatives expressly for use in such preliminary prospectus, the Registration Statement or Prospectus or any amendment thereof or supplement thereto or in any such application, provided that such written information or omissions only pertain to disclosures in the preliminary prospectus, the Registration Statement or Prospectus directly relating to the transactions effected by the Underwriters in connection with this Offering. The Company acknowledges that the statements with respect to the public offering of the Securities set forth under the heading "Underwriting" and the stabilization legend in the Prospectus have been furnished by the Underwriters expressly for use therein and constitute the only information furnished in writing by or on behalf of the Underwriters or the Representatives for inclusion in the Prospectus. -31- (c) Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, suit or proceeding, such indemnified party shall, if a claim in respect thereof is to be made against one or more indemnifying parties under this Section 7, notify each party against whom indemnification is to be sought in writing of the commencement thereof (but the failure to so notify an indemnifying party shall not relieve it from any liability which it may have otherwise or which it may have under this Section 7, except to the extent that it has been prejudiced in any material respect by such failure). In case any such action is brought against any indemnified party, and it notifies an indemnifying party or parties of the commencement thereof, the indemnifying party or parties will be entitled to participate therein, and to the extent it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by the indemnifying parties in connection with the defense of such action at the expense of the indemnifying party, (ii) the indemnifying parties shall not have employed counsel reasonably satisfactory to such indemnified party to have charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events the reasonable fees and expenses of one additional counsel shall be borne by the indemnifying parties. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. Anything in this Section 7 to the contrary notwithstanding, an indemnifying party shall not be liable for any settlement of any claim or action effected without its written consent; provided, however, that such consent was not -------- ------- unreasonably withheld. (d) In order to provide for just and equitable contribution in any case in which (i) an indemnified party makes claim for indemnification pursuant to this Section 7, but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Section 7 provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any indemnified party, then each indemnifying party shall contribute to the amount paid as a result of such losses, claims, damages, expenses or liabilities (or actions in respect thereof) (A) in such proportion as is appropriate to reflect the relative benefits received by each of the contributing parties, on the one hand, and the party to be indemnified on the other hand, from the offering of the Securities or (B) if the allocation provided by clause (A) above is not permitted by applicable law, in such proportion as is -32- appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each of the contributing parties, on the one hand, and the party to be indemnified on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. In any case where the Company is a contributing party and the Underwriters are the indemnified party, the relative benefits received by the Company on the one hand, and the Underwriters, on the other, shall be deemed to be in the same proportion as the total net proceeds from the offering of the Securities (before deducting expenses other than underwriting discounts and commissions) bear to the total underwriting discounts received by the Underwriters hereunder, in each case as set forth in the table on the Cover Page of the Prospectus. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriters, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, expenses or liabilities (or actions in respect thereof) referred to above in this subdivision (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subdivision (d) the Underwriters shall not be required to contribute any amount in excess of the underwriting discount applicable to the Securities purchased by the Underwriters hereunder. No person guilty of fraudulent misrepresentation (within the meaning of Section 12(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls the Company within the meaning of the Act, each officer of the Company who has signed the Registration Statement, and each director of the Company shall have the same rights to contribution as the Company, subject in each case to this subparagraph (d). Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect to which a claim for contribution may be made against another party or parties under this subparagraph (d), notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have hereunder or otherwise than under this subparagraph (d), or to the extent that such party or parties were not adversely affected by such omission. The contribution agreement set forth above shall be in addition to any liabilities which any indemnifying party may have at common law or otherwise. 8. Representations and Agreements to Survive Delivery. All -------------------------------------------------- representations, warranties and agreements contained in this Agreement or contained in certificates of officers of the Company submitted pursuant hereto, shall be deemed to be representations, warranties and agreements of the Company at the Closing Date and the Option Closing Date, as the case may be, and such representations, warranties and agreements of the Company and the respective indemnity and contribution agreements contained in Section 7 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter, the Company, any controlling person of either the Underwriter or the Company, and shall -33- survive termination of this Agreement or the issuance and delivery of the Securities to the Underwriters and the Representatives, as the case may be. 9. Effective Date. -------------- (a) This Agreement shall become effective at 5:00 p.m., New York City time, on the date hereof. For purposes of this Section 9, the Securities to be purchased hereunder shall be deemed to have been so released upon the earlier of dispatch by the Representatives of telegrams to securities dealers releasing such shares for offering or the release by the Representatives for publication of the first newspaper advertisement which is subsequently published relating to the Securities. 10. Termination. ----------- (a) Subject to subsection (b) of this Section 10, the Representatives shall have the right to terminate this Agreement, if between the date of this Agreement and the Closing Date or the Option Closing Date, as the case may be, (i) if any domestic or international event or act or occurrence has materially disrupted, or in the Representatives's reasonable opinion will in the immediate future materially disrupt the financial markets; or (ii) any material adverse change in the financial markets shall have occurred; or (iii) if trading on the New York Stock Exchange, the American Stock Exchange, or in the over-the-counter market shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required on the over-the-counter market by the NASD or by order of the Commission or any other government authority having jurisdiction; or (iv) if the United States shall have become involved in a war or major hostilities, or if there shall have been an escalation in an existing war or major hostilities or a national emergency shall have been declared in the United States; or (v) if a banking moratorium has been declared by a state or federal authority; or (vi) if the Company shall have sustained a loss material or substantial to the Company by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in the Representatives's opinion, make it inadvisable to proceed with the delivery of the Securities; or (viii) if there shall have been such a material adverse change in the prospects or conditions of the Company, or such material adverse change in the general market, political or economic conditions, in the United States or elsewhere as in the Representatives's judgment would make it inadvisable to proceed with the offering, sale and/or delivery of the Securities. (b) If this Agreement is terminated by the Representatives in accordance with any of the provisions of Section 6, Section 10(a) or Section 11, the Company shall promptly reimburse and indemnify the Underwriters pursuant to Section 5(b) hereof. Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement (including, without limitation, pursuant to Sections 6, 10, 11 and 12 hereof), and whether or not this Agreement is otherwise carried out, the provisions of Section 5 and Section 7 shall not be in any way affected by such election or termination or failure to carry out the terms of this Agreement or any part hereof. -34- 11. Substitution of Underwriters. If one or more of the Underwriters ---------------------------- shall fail (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 6, Section 10 or Section 12 hereof) to purchase the Securities which it or they are obligated to purchase on such date under this Agreement (the "Defaulted Securities"), the Representatives shall have the right, within 24 hours thereafter, to make arrangement for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth. If, however, the Representatives shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the total number of Firm Securities to be purchased on such date, the non- defaulting Underwriters shall be obligated to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters, or (b) if the number of Defaulted Securities exceeds 10% of the total number of Firm Securities to be purchased on such date, this Agreement shall terminate without liability on the part of any nondefaulting Underwriters. No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of any default by such Underwriter under this Agreement. In the event of any such default which does not result in a termination of this Agreement, the Representatives shall have the right to postpone the Closing Date for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. 12. Default by the Company. If the Company shall fail at the Closing ---------------------- Date or any Option Closing Date, as applicable, to sell and deliver the number of Securities which it is obligated to sell hereunder on such date, then this Agreement shall terminate (or, if such default shall occur with respect to any Option Securities to be purchased on an Option Closing Date, the Underwriters may at the Representatives's option, by notice from the Representatives to the Company, terminate the Underwriters' obligation to purchase Option Securities from the Company on such date) without any liability on the part of any non- defaulting party other than pursuant to Section 5, Section 7 and Section 10 hereof. No action taken pursuant to this Section shall relieve the Company from liability, if any, in respect of such default. 13. Notices. All notices and communications hereunder, except as ------- herein otherwise specifically provided, shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be directed to the Representatives, c/o Pryor, McClendon, Counts & Co., Inc., 3 Penn Plaza, 1515 market Street, Suite 819, Philadelphia, Pennsylvania 19102, with a copy, which shall not constitute notice, to Camhy Karlinsky & Stein LLP, 1740 Broadway, 16th -35- Floor, New York, New York 10019, Attention: Daniel I. De Wolf, Esq. Notices to the Company shall be directed to the Company at James E. Alexander, Isonics Corporation, 4010 Moorpark Avenue, Suite 119, San Jose, California 95117, with a copy, which shall not constitute notice, to Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California 94306, Attention: C. Kevin Kelso, Esq. 14. Parties. This Agreement shall inure solely to the benefit of and ------- shall be binding upon the Underwriters, the Company and the controlling persons, directors and officers referred to in Section 7 hereof and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. No purchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase. 15. Construction. This Agreement shall be governed by and construed ------------ and enforced in accordance with the laws of the State of New York without giving effect to the choice of law or conflict of laws principles. 16. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed to be an original, and all of which taken together shall be deemed to be one and the same instrument. 17. Entire Agreement; Amendments. This Agreement, the Warrant ---------------------------- Agreement, and the Representatives' Warrant Agreement constitute the entire agreement of the parties hereto and supersede all prior written or oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may not be amended except in a writing, signed by the Representatives and the Company. -36- If the foregoing correctly sets forth the understanding between the Underwriters and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us. Very truly yours, ISONICS CORPORATION By: ------------------------------------ Name: James E. Alexander Title: Chief Executive Officer CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN: PRYOR, McCLENDON, COUNTS & CO., INC. By: ------------------------------------ Name: Title: NATIONAL SECURITIES CORPORATION By: ------------------------------------ Name: Steven A. Rothstein Title: Chairman For themselves and as Representatives respectively of the Underwriters named in Schedule A hereto. -37- SCHEDULE A
Number of Shares of Common Number of Warrants Name of Underwriters Stock to be Purchased to be Purchased -------------------- -------------------------- ------------------ Pryor, McClendon, Counts & Co., Inc. National Securities Corporation TOTAL
SCH. A-1 EX-3.01 3 REGISTRANT'S RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.01 RESTATED ARTICLES OF INCORPORATION OF A&R MATERIALS, INC. James E. Alexander and Joe Friscia certify that: 1. They are the President and the Secretary, respectively of A&R Materials, Inc., a California Corporation. 2. The Articles of Incorporation of this corporation are amended and restated to read as set forth in Annex "A" hereto. --------- 3. The foregoing amendment and restatement of the Articles of Incorporation has been duly approved by the board of directors. 4. The foregoing amendment and restatement of the Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Sections 902 and 903 of the California Corporations Code. The total number of outstanding shares of the corporation entitled to vote is 10,664,333 shares of Common Stock. The number of shares voting in favor of the amendment and restatement equaled or exceeded the vote required. The percentage vote required was more than fifty percent (50%) of the outstanding shares of Common Stock. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our knowledge. Dated: September , 1996 - ----------------------------- James E. Alexander, President - ----------------------------- Joe Friscia, Secretary Annex A RESTATED ARTICLES OF INCORPORATION ARTICLE I The name of this corporation is: Isonics Corporation. ARTICLE II The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE III The aggregate number of shares of capital stock which this corporation shall be authorized to issue is One Hundred Million Two Hundred Thousand (100,200,000), which shall consist of: (a) One Hundred Million (100,000,000) shares which shall be designated as Common Stock, $1.00 par value per share; (b) One Hundred Thousand (100,000) shares which shall be designated as Class A Preferred Stock; and (c) One Hundred Thousand (100,000) shares which shall be designated as Class B Preferred Stock. ARTICLE IV (a) The shares of each and any class of this corporation's preferred stock may be issued from time to time in one or more series, and the board of directors is authorized to fix the number of shares of any such series and to determine the designation of any such series. The board of directors may determine or alter the rights, preferences, privileges and restrictions granted to or imposed on any wholly unissued series of any class of preferred stock. As to any series of any class of preferred stock, the board of directors may increase or decrease (but not below the number of shares then outstanding) the number of shares of such series subsequent to the issuance of shares of that series. 2 (b) A series of Class A Non-Voting Preferred Stock is hereby authorized as set forth in this subparagraph (b) with the following rights, preferences, restrictions and other terms: I. Title of Series and Number of Shares. ------------------------------------ A. Title of Series. The series of the Class A Preferred Stock shall be --------------- designated and known as the "Class A, Series 1 Nonvoting Preferred Stock" (hereinafter referred to as the "Class A, Series 1 Preferred Stock"). B. Number of Shares in the Series. The number of shares constituting the ------------------------------ Class A, Series 1 Preferred Stock shall be an aggregate of 3,750 shares. II. Rights, Preferences, Restrictions and Other Matters. --------------------------------------------------- A. Dividends. The holders of record of the outstanding shares of Class --------- A, Series 1 Preferred Stock on the date 30 days prior to each dividend payment date shall be entitled to receive, out of any funds legally available therefor, noncumulative dividends at a rate per annum equal to $1.60 per share, which dividends shall be payable in cash quarter-annually in advance on the 31st day of March, the 30th day of June, the 30th day of September and the 31st day of December in each year, when and as declared by the Board of Directors, commencing January 1, 1995. Such dividends shall be non-cumulative and shall not accrue; provided, however, that, with respect to any particular calendar year, such dividends shall be paid or set apart for payment before the payment of any dividends on the Common Stock of the Corporation. B. Redemption. The Class A, Series 1 Preferred Stock may be redeemed, in ---------- whole or in part, at the option of the Corporation, out of funds legally available therefor, by resolution of its Board of Directors, at any time and from time to time on or after January 1, 1996, at $40.00 per share. (1) If less than the entire amount of Class A, Series 1 Preferred Stock outstanding is to be redeemed at any one time, the Corporation shall select the shares to be redeemed by lot such that, to the maximum extent feasible, all shares of Class A, Series 1 Preferred Stock owned by a particular holder will be redeemed if any are redeemed. (2) Not less than thirty (30) days nor more than sixty (60) days prior to the date fixed for redemption of the Class A, Series 1 Preferred Stock or any part thereof, a notice specifying the time, place and redemption price thereof shall be given by first class mail, postage prepaid, to the holders of record of the shares of Class A, Series 1 Preferred Stock to be redeemed at their respective addresses as the same shall appear on the stock books of the Corporation. No defect in such notice nor any defect in the mailing thereof shall in and of itself affect the validity of the proceedings for redemption, except as to any 3 holder to whom the Corporation has failed to mail such notice, or as to whom the notice was defective. (3) If, on or prior to the date fixed for such redemption, the Corporation shall deposit with any bank or trust company in the State of California as a trust fund a sum sufficient to redeem the shares of Class A, Series 1 Preferred Stock thus called for redemption, with irrevocable instructions and authority to such bank or trust company to pay, on and after the date fixed for redemption, the redemption price of the Class A, Series 1 Preferred Stock thus called for redemption to the respective holders thereof upon the surrender of their share certificates, then from and after the later of the date of such deposit or the date fixed for redemption, the Class A, Series 1 Preferred Stock so called shall be deemed to be redeemed. The deposit shall be deemed to constitute full payment for the shares of Class A, Series 1 Preferred Stock thus called for redemption and from and after the later of the date of such deposit or the date fixed for redemption, such shares shall be deemed to be no longer outstanding, and the holders thereof (to whom notice has been given in accordance with subparagraph (2) of this Paragraph B) shall cease to be shareholders of the Corporation with respect to such shares and shall have no rights with respect thereto except the right to receive from the bank or trust company payment of the redemption price of such shares without interest, upon surrender of their certificates therefor. No interest shall be allowed or paid to the holders of the redeemed Class A, Series 1 Preferred Stock on the funds so deposited, and any such interest earned thereon shall be paid by such bank or trust company from time to time on demand to the Corporation. (4) All shares of Class A, Series 1 Preferred Stock redeemed pursuant to this Paragraph B shall assume the status of authorized but unissued shares of Class A, Series 1 Preferred Stock, subject to reissuance by the Corporation as shares of Class A, Series 1 Preferred Stock. C. Voting Rights. The holders of the Class A, Series 1 Preferred Stock ------------- shall not be entitled to vote on any matter, except as otherwise required by law in effect at the time of such vote. D. Liquidation Preference. In the event of the liquidation, dissolution ---------------------- or winding up of the affairs of the Corporation, whether voluntary or otherwise, the rights, powers, designations and preferences, and the qualifications, restrictions and limitations thereof, of the holders of Class A, Series 1 Preferred Stock shall be as follows: (1) The holders of Class A, Series 1 Preferred Stock shall be entitled to receive out of the assets of the Corporation, except as otherwise provided hereinafter, before any assets of the Corporation shall be distributed among or paid over to the holders of the Common Stock of the Corporation, whether such liquidation, dissolution or winding up is voluntary or involuntary, the amount of $5.00 per share. 4 (2) If the assets of the Corporation available for distribution with respect to the Class A, Series 1 Preferred Stock are not sufficient to provide to the holders of Class A, Series 1 Preferred Stock the full payment specified in subparagraph (1) above (the "liquidation preference" of each share of Class A, Series 1 Preferred Stock) and to provide to the holders of any other series of Class A Preferred Stock having liquidation rights in parity with the liquidation rights of the Class A, Series 1 Preferred Stock the full amounts payable for shares of such series upon such liquidation, dissolution or winding up as specified for such series by the Board of Directors in connection with the creation of such series (the "liquidation preference" of each share of such series of Class A Preferred Stock), then such assets shall be distributed pro rata, according to their respective liquidation preferences, to the holders of all such series of Class A Preferred Stock. If, after distributing or providing to the holders of all such series of Class A Preferred Stock the full liquidation preference of each share of each such series of Class A Preferred Stock, the Corporation has assets available for distribution with respect to its Common Stock, then such assets shall be distributed pro rata, according to the number of shares held, to the holders of Common Stock and the holders of all such series of Class A Preferred Stock. (3) Neither the merger nor the consolidation of this Corporation with or into another corporation, nor the merger or consolidation of any other corporation with or into this Corporation, nor the sale, lease or conveyance of all or part of this Corporation's assets, shall be deemed to be a liquidation, dissolution or winding up of this Corporation within the meaning of this Paragraph D. E. Conversion Rights: ------------------ (1) The holder of record of all, but not less than all, of the then- outstanding shares of Class A, Series 1 Preferred Stock shall have the right, at his option at any time on or after January 1, 1996 (except that conversion rights with respect to shares called for redemption shall terminate at the close of business on the fifth day prior to the specified redemption date), to convert all, but not less than all, of the then-outstanding shares of Class A, Series 1 Preferred Stock into fully paid and non assessable shares of Common Stock of the Corporation, at the conversion rate of ten (10) shares of Class A, Series 1 Preferred Stock for one thousand one hundred eleven (1,111) shares of Common Stock (the "Conversion Rate"), upon payment to the Corporation of an amount equal to $5.00 per share of Class A, Series 1 Preferred Stock to be converted; provided, however, that the Conversion Rate shall be subject to adjustment, as provided in subparagraph (2) below. (a) In order to convert shares of Class A, Series 1 Preferred Stock into Common Stock, the holder thereof shall (i) surrender the certificate or certificates representing all then-outstanding shares of Class A, Series 1 Preferred Stock, duly endorsed to the Corporation, at the Corporation's principal office, (ii) deliver to the Corporation, at such office, cash or a bank cashier's check payable to the Corporation in an amount (hereinafter referred to as the "Conversion Price") equal to the product of (x) 5 $5.00 times (y) the aggregate number of shares of Class A, Series 1 Preferred Stock then outstanding, and (iii) give written notice to the Corporation at said office that he elects to convert all then-outstanding shares of Class A, Series 1 Preferred Stock, setting forth his name and tax identification number. (b) The Corporation shall make no payment or adjustment on account of declared and unpaid dividends, if any, on the shares of Class A, Series 1 Preferred Stock surrendered for conversion, but if the holder surrenders Class A, Series 1 Preferred Stock for conversion between the record date for the payment of a dividend and the next dividend payment date (unless a redemption date with respect thereto occurs during such period), such Class A, Series 1 Preferred Stock when surrendered for conversion must be accompanied by payment of an amount equal to the dividend thereon which the holder of record on such record date is to receive. (c) As promptly as practicable after the surrender for conversion of all then-outstanding shares of Class A, Series 1 Preferred Stock, the Corporation shall deliver or cause to be delivered at its principal office to the holder of such shares of Class A, Series 1 Preferred Stock, a certificate or certificates representing the shares of Common Stock issuable upon such conversion, issued in the name of such holder, subject to the right of the Corporation, at its option, to pay cash in lieu of the issuance of any fraction of a share of Common Stock as provided in subparagraph (d) hereof. Shares of Class A, Series 1 Preferred Stock shall be deemed to have been converted as of the close of business on the date on which the Corporation receives the surrender of such shares for conversion and the payment of the Conversion Price as provided above, if the stock books of the Corporation are open on that date, and if they are not, then as of the close of business on the first date on which they are open after the surrender of such shares for conversion and the payment of the Conversion Price. At and after the time when the shares of Class A, Series 1 Preferred Stock shall be deemed to have been converted, the person who surrendered such shares shall no longer have any rights to such Class A, Series 1 Preferred Stock (except to receive dividends if such shares are surrendered between the record date for the payment of a dividend and the next dividend payment date) and such person shall be treated for all purposes as having become the record holder of Common Stock at such time. (d) The Corporation may, but shall not be obligated to, issue fractions of shares of Common Stock upon the conversion of shares of Class A, Series 1 Preferred Stock. If any interest in a fractional share of Common Stock would otherwise be deliverable upon conversion of shares of Class A, Series 1 Preferred Stock, the Corporation may, at its option, as determined from time to time by the Board of Directors, make adjustment for such fractional share interest by payment of an amount of cash equal to the same fraction of the market value of a full share of Common Stock of the Corporation. For such purpose, the market value of a share of Common Stock shall be the closing sale price of a share of Common Stock (or, if not available, the last quoted bid price per share of the Common Stock) on the last day preceding the date of the conversion of such shares of Class A, Series 1 Preferred Stock of the Common Stock is 6 then quoted on the NASDAQ, or if the Common Stock is then listed or admitted to trading on a national securities exchange, the last recorded sale price regular way of a share of such stock on such exchange on the last trading day preceding the date of the conversion of such shares of Class A, Series 1 Preferred Stock, or if there were no such sales or bids on such day, or if the Common Stock is neither listed on a national securities exchange nor quoted on NASDAQ, such market value of the Common Stock shall be that value which the Board of Directors determines (in good faith in accordance with generally accepted valuation principles and such other factors as the Board of Directors deems relevant) to be the market value of the Common Stock, which determination shall be conclusive. (e) The Corporation shall at all times reserve for issuance such number of shares of Common Stock, either authorized but unissued or treasury shares, as shall be issuable upon the conversion of all outstanding shares of Class A, Series 1 Preferred Stock. (2) The Conversion Rate shall be adjusted, rounded to the nearest one-thousandth (.001) of a share, from time to time, only to the following extent: (a) Whenever the Corporation shall, at any time, (i) declare or pay a dividend to the holders of it shares of Common Stock in shares of its Common Stock, or in other securities convertible into shares of Common Stock, (ii) split the outstanding shares of its Common Stock into a greater number of outstanding shares of Common Stock, (iii) combine the outstanding shares of its Common Stock into a smaller number of outstanding shares of Common Stock, (iv) pursuant to a reclassification of the outstanding shares of Common Stock issue any shares of capital stock of the Corporation in exchange for the outstanding shares of Common Stock (all shares so issued being included in the term "Common Stock" as used in this Paragraph E), the Conversion Rate in effect immediately prior to the effective date of such action shall be adjusted effective at the opening of business on the next following business day, so that a holder of all then-outstanding shares of Class A, Series 1 Preferred Stock shall thereafter be entitled to receive upon the conversion of such shares the number of shares of Common Stock which he would have held had such shares of Class A, Series 1 Preferred Stock been converted immediately prior to the effective date of such action. For purposes of this subparagraph (a), the effective date for any stock dividend referred to in clause (i) above shall be deemed to be the record date fixed for the determination of the holders of Common Stock entitled to receive such dividend. (b) If the Corporation shall, at any time, issue rights or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock (or securities convertible into Common Stock) at a price per share (or having a conversion price per share) less than the "current market price" per share of the Common Stock (as determined pursuant to subparagraph (d) below on the date of issuance of such rights or warrants), then the Conversion Rate shall be adjusted so that the same shall equal the Conversion Rate determined by multiplying the Conversion Rate 7 in effect immediately prior to the date of issuance of such rights or warrants by a fraction whose numerator shall be the sum of (x) the number of shares of Common Stock outstanding on such date of issuance plus (y) the number of shares of Common Stock so offered for subscription or purchase (or into which the convertible securities so offered are convertible) and whose denominator shall be the sum of (x) the number of shares of Common stock outstanding on such date of issuance plus (z) the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase (or the aggregate offering price of the convertible securities so offered) would purchase at such "current market price." Subject to this subparagraph (b), such adjustment shall be made whenever such rights or warrants are issued and shall be retroactively effective as of immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. If any of such rights or warrants are not exercised prior to the expiration thereof, then as of such expiration the Conversion Rate shall be readjusted pursuant to this subparagraph (b) to the Conversion Rate determined on the basis of the number of rights or warrants actually exercised. (c) If the corporation shall, at any time, distribute to all holders of its Common Stock evidences of its indebtedness or assets or rights to subscribe for or warrants to purchase (excluding those referred to in the immediately preceding subparagraph) shares of Common Stock, then in each such case the Conversion Rate shall be adjusted so that the same shall equal the Conversion Rate determined by multiplying the Conversion Rate in effect immediately prior to the date of such distribution by a fraction whose numerator shall be the "current market price" per share of the Common Stock on the date of distribution and whose denominator shall be the difference of (x) the "current market price" per share of the Common Stock on such date of distribution less (y) the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive and evidenced by a Board resolution) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights or warrants applicable to one share of Common Stock. Subject to this subparagraph (c), such adjustment shall be made whenever any such distribution is made and shall be retroactively effective as of immediately after the record date for the determination of stockholders entitled to receive such distribution. (d) For purposes of any computation under (b) and (c) of this subparagraph E(2), the "current market price" per share of Common Stock on any date shall be deemed to be the average of the daily closing sale prices of a share of Common Stock (or, if not available, the average of the daily last quoted bid prices per share of the Common Stock) for the 30 consecutive business days selected by the Corporation commencing not more than 45 business days before the day in question if the Common Stock is then quoted on the NASDAQ, or if the Common Stock is then listed or admitted to trading on a national securities exchange, the average of the daily last recorded sale prices regular way of a share of such stock on such exchange for the 30 consecutive business days selected by the Corporation commencing not more than 45 business days before the day in question, or if there were not 30 consecutive business days of sales or 8 bids during such 45 business day period, or if the Common Stock is neither listed on a national securities exchange nor quoted on NASDAQ, such market value of the Common Stock shall be that value which the Board of Directors determines (in good faith in accordance with generally accepted valuation principles and such other factors as the Board of Directors deems relevant) to be the market value of the Common Stock, which determination shall be conclusive. (e) In addition to the adjustments described in the foregoing subparagraphs, the Corporation may make such adjustments in the Conversion Rate as the Board of Directors, in its discretion, may determine so as to increase the number of shares issuable on conversion in order that any event treated for federal income tax purposes as a dividend shall not be taxable to the recipients. (f) Notwithstanding any other provision hereof, no adjustment in the Conversion Rate shall be made unless such adjustment would require an increase or decrease of at least one-thousandth (.001) of a share; provided, however, that any adjustments which by reason of this sentence are not required to be made shall be carried forward and taken into account in any subsequent adjustment. (g) Whenever there is an adjustment in the Conversion Rate, as provided herein, the Corporation shall promptly cause a notice disclosing such adjustment to be mailed to the holder of record of all then-outstanding shares of Class A, Series 1 Preferred Stock at the close of business on the day preceding the effective date of such adjustment. F. Additional Notice Provisions. ---------------------------- (1) In case: (a) the Corporation shall propose to pay any dividend on its Common Stock in stock or to make any other distribution other than cash dividends, to the holders of its Common Stock; or (b) the Corporation shall propose to offer to the holders of its Common Stock rights to subscribe to any additional shares of any class or any other rights or options; or (c) the Corporation shall propose to effect any reclassification of its Common Stock or to effect any capital reorganization, or shall propose to consolidate with or merge into another corporation, or to sell, transfer or otherwise dispose of all or substantially all of its property, assets or business; or (d) the Corporation shall propose to liquidate, dissolve or wind-up, 9 then in each such case, the Corporation shall mail to the holder of all then- outstanding shares of Class A, Series 1 Preferred Stock, at such holder's address then appearing on the record books of the Corporation (x) at least 10 days' prior written notice of the date on which the books of the corporation shall close or a record shall be taken for such dividend, distribution or subscription rights and (y) in the case of any such reclassification, reorganization, consolidation, merger, sale, disposition, liquidation, dissolution or winding up, at least 10 days' prior written notice of the date or the estimated date when the same shall take place. Such notice in accordance with the foregoing clause (x) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and such notice in accordance with the foregoing clause (y) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, sale, disposition, liquidation, dissolution or winding up, as the case may be. The notice required by this Paragraph F shall not be applicable to shares or rights issued to any person in connection with his employment nor to shares issued to shareholders of the Corporation in accordance with any dividend reinvestment plan. No defect in such notice nor any defect in the mailing thereof shall in and of itself affect the validity of the proceedings applicable thereto. (c) A series of Class A Non-Voting Preferred Stock is hereby authorized as set forth in this subparagraph (c) with the following rights, preferences restrictions and other terms: I. Title of Series and Number of Shares. ------------------------------------- A. The series of the Class A Preferred Stock shall be designated and known as the "Class A, Series 2 Nonvoting Preferred Stock" (hereinafter referred to as the "Class A, Series 2 Preferred Stock"). B. Number of Shares in the Series. The number of shares constituting the ------------------------------ Class A, Series 2 Preferred Stock shall be an aggregate of 2,500 shares. II. Rights, Preferences, Restrictions and Other Matters. --------------------------------------------------- A. Dividends. The holders of record of the outstanding shares of Class --------- A, Series 2 Preferred Stock on the date 30 days prior to each dividend payment date shall be entitled to receive, out of any funds legally available therefor, noncumulative dividends at a rate per annum equal to $1.60 per share, which dividends shall be payable in cash quarter-annually in advance on the 31st day of March, the 30th day of June, the 30th day of September and the 31st day of December in each year, when and as declared by the Board of Directors, commencing January 1, 1995. Such dividends shall be non- 10 cumulative and shall not accrue; provided, however, that, with respect to any particular calendar year, such dividends shall be paid or set apart for payment before the payment of any dividends on the Common Stock of the Corporation. B. Redemption. The Class A, Series 2 Preferred Stock may be redeemed, in ---------- whole or in part, at the option of the Corporation, out of funds legally available therefor, by resolution of its Board of Directors, at any time and from time to time on or after January 1, 1996, at $40.00 per share. (1) If less than the entire amount of Class A, Series 2 Preferred Stock outstanding is to be redeemed at any one time, the Corporation shall select the shares to be redeemed by lot such that, to the maximum extent feasible, all shares of Class A, Series 2 Preferred Stock owned by a particular holder will be redeemed if any are redeemed. (2) Not less than thirty (30) days nor more than sixty (60) days prior to the date fixed for redemption of the Class A, Series 2 Preferred Stock or any part thereof, a notice specifying the time, place and redemption price thereof shall be given by first class mail, postage prepaid, to the holders of record of the shares of Class A, Series 2 Preferred Stock to be redeemed at their respective addresses as the same shall appear on the stock books of the Corporation. No defect in such notice nor any defect in the mailing thereof shall in and of itself affect the validity of the proceedings for redemption, except as to any holder to whom the Corporation has failed to mail such notice, or as to whom the notice was defective. (3) If, on or prior to the date fixed for such redemption, the Corporation shall deposit with any bank or trust company in the State of California as a trust fund a sum sufficient to redeem the shares of Class A, Series 2 Preferred Stock thus called for redemption, with irrevocable instructions and authority to such bank or trust company to pay, on and after the date fixed for redemption, the redemption price of the Class A, Series 2 Preferred Stock thus called for redemption to the respective holders thereof upon the surrender of their share certificates, then from and after the later of the date of such deposit or the date fixed for redemption, the Class A, Series 2 Preferred Stock so called shall be deemed to be redeemed. The deposit shall be deemed to constitute full payment for the shares of Class A, Series 2 Preferred Stock thus called for redemption and from and after the later of the date of such deposit or the date fixed for redemption, such shares shall be deemed to be no longer outstanding, and the holders thereof (to whom notice has been given in accordance with subparagraph (2) of this Paragraph B) shall cease to be shareholders of the Corporation with respect to such shares and shall have no rights with respect thereto except the right to receive from the bank or trust company payment of the redemption price of such shares without interest, upon surrender of their certificates therefor. No interest shall be allowed or paid to the holders of the redeemed Class A, Series 2 Preferred Stock on the funds so deposited, and any such interest earned thereon shall be paid by such bank or trust company from time to time on demand to the Corporation. 11 (4) All shares of Class A, Series 2 Preferred Stock redeemed pursuant to this Paragraph B shall assume the status of authorized but unissued shares of Class A, Series 2 Preferred Stock, subject to reissuance by the Corporation as shares of Class A, Series 2 Preferred Stock. C. Voting Rights. The holders of the Class A, Series 2 Preferred Stock ------------- shall not be entitled to vote on any matter, except as otherwise required by law in effect at the time of such vote. D. Liquidation Preference. In the event of the liquidation, dissolution ---------------------- or winding up of the affairs of the Corporation, whether voluntary or otherwise, the rights, powers, designations and preferences, and the qualifications, restrictions and limitations thereof, of the holders of Class A, Series 2 Preferred Stock shall be as follows: (1) The holders of Class A, Series 2 Preferred Stock shall be entitled to receive out of the assets of the Corporation, except as otherwise provided hereinafter, before any assets of the Corporation shall be distributed among or paid over to the holders of the Common Stock of the Corporation, whether such liquidation, dissolution or winding up is voluntary or involuntary, the amount of $5.00 per share. The foregoing liquidation rights shall be deemed to be in parity with the liquidation rights of the Corporation's Class A, Series 1 Nonvoting Preferred Stock. (2) If the assets of the Corporation available for distribution with respect to the Class A, Series 2 Preferred Stock are not sufficient to provide to the holders of Class A, Series 2 Preferred Stock the full payment specified in subparagraph (1) above (the "liquidation preference" of each share of Class A, Series 2 Preferred Stock) and to provide to the holders of any other series of Class A Preferred Stock having liquidation rights in parity with the liquidation rights of the Class A, Series 2 Preferred Stock the full amounts payable for shares of such series upon such liquidation, dissolution or winding up as specified for such series by the Board of Directors in connection with the creation of such series (the "liquidation preference" of each share of such series of Class A Preferred Stock), then such assets shall be distributed pro rata, according to their respective liquidation preferences, to the holders of all such series of Class A Preferred Stock. If, after distributing or providing to the holders of all such series of Class A Preferred Stock the full liquidation preference of each share of each such series of Class A Preferred Stock, the Corporation has assets available for distribution with respect to its Common Stock, then such assets shall be distributed pro rata, according to the number of shares held, to the holders of Common Stock and the holders of all such series of Class A Preferred Stock. (3) Neither the merger nor the consolidation of this Corporation with or into another corporation, nor the merger or consolidation of any other corporation with or into this Corporation, nor the sale, lease or conveyance of all or part of this Corporation's 12 assets, shall be deemed to be a liquidation, dissolution or winding up of this Corporation within the meaning of this Paragraph D. E Conversion Rights. ----------------- (1) The holder of record of all, but not less than all, of the then- outstanding shares of Class A, Series 2 Preferred Stock shall have the right, at his option at any time on or after January 1, 1996 (except that conversion rights with respect to shares called for redemption shall terminate at the close of business on the fifth day prior to the specified redemption date), to convert all, but not less than all, of the then-outstanding shares of Class A, Series 2 Preferred Stock into fully paid and non assessable shares of Common Stock of the Corporation, at the conversion rate of ten (10) shares of Class A, Series 2 Preferred Stock for one thousand one hundred eleven (1,111) shares of Common Stock (the "Conversion Rate"), upon payment to the Corporation of an amount equal to $5.00 per share of Class A, Series 2 Preferred Stock to be converted; provided, however, that the Conversion Rate shall be subject to adjustment, as provided in subparagraph (2) below. (a) In order to convert shares of Class A, Series 2 Preferred Stock into Common Stock, the holder thereof shall (i) surrender the certificate or certificates representing all then-outstanding shares of Class A, Series 2 Preferred Stock, duly endorsed to the Corporation, at the Corporation's principal office, (ii) deliver to the Corporation, at such office, cash or a bank cashier's check payable to the Corporation in an amount (hereinafter referred to as the "Conversion Price") equal to the product of (x) $5.00 times (y) the aggregate number of shares of Class A, Series 2 Preferred Stock then outstanding, and (iii) give written notice to the Corporation at said office that he elects to convert all then-outstanding shares of Class A, Series 2 Preferred Stock, setting forth his name and tax identification number. (b) The Corporation shall make no payment or adjustment on account of declared and unpaid dividends, if any, on the shares of Class A, Series 2 Preferred Stock surrendered for conversion, but if the holder surrenders Class A, Series 2 Preferred Stock for conversion between the record date for the payment of a dividend and the next dividend payment date (unless a redemption date with respect thereto occurs during such period), such Class A, Series 2 Preferred Stock when surrendered for conversion must be accompanied by payment of an amount equal to the dividend thereon which the holder of record on such record date is to receive. (c) As promptly as practicable after the surrender for conversion of all then-outstanding shares of Class A, Series 2 Preferred Stock, the Corporation shall deliver or cause to be delivered at its principal office to the holder of such shares of Class A, Series 2 Preferred Stock, a certificate or certificates representing the shares of Common Stock issuable upon such conversion, issued in the name of such holder, subject to the right of the Corporation, at its option, to pay cash in lieu of the issuance of any fraction of a share of Common Stock as provided in subparagraph (d) hereof. Shares of 13 Class A, Series 2 Preferred Stock shall be deemed to have been converted as of the close of business on the date on which the Corporation receives the surrender of such shares for conversion and the payment of the Conversion Price as provided above, if the stock books of the Corporation are open on that date, and if they are not, then as of the close of business on the first date on which they are open after the surrender of such shares for conversion and the payment of the Conversion Price. At and after the time when the shares of Class A, Series 2 Preferred Stock shall be deemed to have been converted, the person who surrendered such shares shall no longer have any rights to such Class A, Series 2 Preferred Stock (except to receive dividends if such shares are surrendered between the record date for the payment of a dividend and the next dividend payment date) and such person shall be treated for all purposes as having become the record holder of Common Stock at such time. (d) The Corporation may, but shall not be obligated to, issue fractions of shares of Common Stock upon the conversion of shares of Class A, Series 2 Preferred Stock. If any interest in a fractional share of Common Stock would otherwise be deliverable upon conversion of shares of Class A, Series 2 Preferred Stock, the Corporation may, at its option, as determined from time to time by the Board of Directors, make adjustment for such fractional share interest by payment of an amount of cash equal to the same fraction of the market value of a full share of Common Stock of the Corporation. For such purpose, the market value of a share of Common Stock shall be the closing sale price of a share of Common Stock (or, if not available, the last quoted bid price per share of the Common Stock) on the last day preceding the date of the conversion of such shares of Class A, Series 2 Preferred Stock of the Common Stock is then quoted on the NASDAQ, or if the Common Stock is then listed or admitted to trading on a national securities exchange, the last recorded sale price regular way of a share of such stock on such exchange on the last trading day preceding the date of the conversion of such shares of Class A, Series 2 Preferred Stock, or if there were no such sales or bids on such day, or if the Common Stock is neither listed on a national securities exchange nor quoted on NASDAQ, such market value of the Common Stock shall be that value which the Board of Directors determines (in good faith in accordance with generally accepted valuation principles and such other factors as the Board of Directors deems relevant) to be the market value of the Common Stock, which determination shall be conclusive. (e) The Corporation shall at all times reserve for issuance such number of shares of Common Stock, either authorized but unissued or treasury shares, as shall be issuable upon the conversion of all outstanding shares of Class A, Series 2 Preferred Stock. (2) The Conversion Rate shall be adjusted, rounded to the nearest one-thousandth (.001) of a share, from time to time, only to the following extent: (a) Whenever the Corporation shall, at any time, (i) declare or pay a dividend to the holders of it shares of Common Stock in shares of its Common Stock, or 14 in other securities convertible into shares of Common Stock, (ii) split the outstanding shares of its Common Stock into a greater number of outstanding shares of Common Stock, (iii) combine the outstanding shares of its Common Stock into a smaller number of outstanding shares of Common Stock, (iv) pursuant to a reclassification of the outstanding shares of Common Stock issue any shares of capital stock of the Corporation in exchange for the outstanding shares of Common Stock (all shares so issued being included in the term "Common Stock" as used in this Paragraph E), the Conversion Rate in effect immediately prior to the effective date of such action shall be adjusted effective at the opening of business on the next following business day, so that a holder of all then- outstanding shares of Class A, Series 2 Preferred Stock shall thereafter be entitled to receive upon the conversion of such shares the number of shares of Common Stock which he would have held had such shares of Class A, Series 2 Preferred Stock been converted immediately prior to the effective date of such action. For purposes of this subparagraph (a), the effective date for any stock dividend referred to in clause (i) above shall be deemed to be the record date fixed for the determination of the holders of Common Stock entitled to receive such dividend. (b) If the Corporation shall, at any time, issue rights or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock (or securities convertible into Common Stock) at a price per share (or having a conversion price per share) less than the "current market price" per share of the Common Stock (as determined pursuant to subparagraph (d) below on the date of issuance of such rights or warrants), then the Conversion Rate shall be adjusted so that the same shall equal the Conversion Rate determined by multiplying the Conversion Rate in effect immediately prior to the date of issuance of such rights or warrants by a fraction whose numerator shall be the sum of (x) the number of shares of Common Stock outstanding on such date of issuance plus (y) the number of shares of Common Stock so offered for subscription or purchase (or into which the convertible securities so offered are convertible) and whose denominator shall be the sum of (x) the number of shares of Common stock outstanding on such date of issuance plus (z) the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase (or the aggregate offering price of the convertible securities so offered) would purchase at such "current market price." Subject to this subparagraph (b), such adjustment shall be made whenever such rights or warrants are issued and shall be retroactively effective as of immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. If any of such rights or warrants are not exercised prior to the expiration thereof, then as of such expiration the Conversion Rate shall be readjusted pursuant to this subparagraph (b) to the Conversion Rate determined on the basis of the number of rights or warrants actually exercised. (c) If the corporation shall, at any time, distribute to all holders of its Common Stock evidences of its indebtedness or assets or rights to subscribe for or warrants to purchase (excluding those referred to in the immediately preceding subparagraph) shares of Common Stock, then in each such case the Conversion Rate shall 15 be adjusted so that the same shall equal the Conversion Rate determined by multiplying the Conversion Rate in effect immediately prior to the date of such distribution by a fraction whose numerator shall be the "current market price" per share of the Common Stock on the date of distribution and whose denominator shall be the difference of (x) the "current market price" per share of the Common Stock on such date of distribution less (y) the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive and evidenced by a Board resolution) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights or warrants applicable to one share of Common Stock. Subject to this subparagraph (c), such adjustment shall be made whenever any such distribution is made and shall be retroactively effective as of immediately after the record date for the determination of stockholders entitled to receive such distribution. (d) For purposes of any computation under (b) and (c) of this subparagraph E(2), the "current market price" per share of Common Stock on any date shall be deemed to be the average of the daily closing sale prices of a share of Common Stock (or, if not available, the average of the daily last quoted bid prices per share of the Common Stock) for the 30 consecutive business days selected by the Corporation commencing not more than 45 business days before the day in question if the Common Stock is then quoted on the NASDAQ, or if the Common Stock is then listed or admitted to trading on a national securities exchange, the average of the daily last recorded sale prices regular way of a share of such stock on such exchange for the 30 consecutive business days selected by the Corporation commencing not more than 45 business days before the day in question, or if there were not 30 consecutive business days of sales or bids during such 45 business day period, or if the Common Stock is neither listed on a national securities exchange nor quoted on NASDAQ, such market value of the Common Stock shall be that value which the Board of Directors determines (in good faith in accordance with generally accepted valuation principles and such other factors as the Board of Directors deems relevant) to be the market value of the Common Stock, which determination shall be conclusive. (e) In addition to the adjustments described in the foregoing subparagraphs, the Corporation may make such adjustments in the Conversion Rate as the Board of Directors, in its discretion, may determine so as to increase the number of shares issuable on conversion in order that any event treated for federal income tax purposes as a dividend shall not be taxable to the recipients. (f) Notwithstanding any other provision hereof, no adjustment in the Conversion Rate shall be made unless such adjustment would require an increase or decrease of at least one-thousandth (.001) of a share; provided, however, that any adjustments which by reason of this sentence are not required to be made shall be carried forward and taken into account in any subsequent adjustment. (g) Whenever there is an adjustment in the Conversion Rate, as provided herein, the Corporation shall promptly cause a notice disclosing such adjustment to be 16 mailed to the holder of record of all then-outstanding shares of Class A, Series 2 Preferred Stock at the close of business on the day preceding the effective date of such adjustment. F. Additional Notice Provisions. ---------------------------- (1) In case: (a) the Corporation shall propose to pay any dividend on its Common Stock in stock or to make any other distribution other than cash dividends, to the holders of its Common Stock; or (b) the Corporation shall propose to offer to the holders of its Common Stock rights to subscribe to any additional shares of any class or any other rights or options; or (c) the Corporation shall propose to effect any reclassification of its Common Stock or to effect any capital reorganization, or shall propose to consolidate with or merge into another corporation, or to sell, transfer or otherwise dispose of all or substantially all of its property, assets or business; or (d) the Corporation shall propose to liquidate, dissolve or wind-up, then in each such case, the Corporation shall mail to the holder of all then- outstanding shares of Class A, Series 2 Preferred Stock, at such holder's address then appearing on the record books of the Corporation (x) at least 10 days' prior written notice of the date on which the books of the corporation shall close or a record shall be taken for such dividend, distribution or subscription rights and (y) in the case of any such reclassification, reorganization, consolidation, merger, sale, disposition, liquidation, dissolution or winding up, at least 10 days' prior written notice of the date or the estimated date when the same shall take place. Such notice in accordance with the foregoing clause (x) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and such notice in accordance with the foregoing clause (y) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, sale, disposition, liquidation, dissolution or winding up, as the case may be. The notice required by this Paragraph F shall not be applicable to shares or rights issued to any person in connection with his employment nor to shares issued to shareholders of the Corporation in accordance with any dividend reinvestment plan. No defect in such notice nor any defect in the mailing thereof shall in and of itself affect the validity of the proceedings applicable thereto. 17 ARTICLE V (a) The liability of directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California Law. (b) The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through Bylaw provisions, agreements with agents, votes of shareholders or disinterested directors, or otherwise, to the fullest extent permissible under California law. (c) Any amendment, repeal or modification of any provision of this Article V shall not adversely affect any right or protection of an agent of this corporation existing at the time of such amendment, repeal or modification. 18 EX-3.02 4 REGISTRANT'S BYLAWS EXHIBIT 3.02 BYLAWS OF A & R MATERIALS, INC. History of Actions Taken Related to Bylaws Date - ------------------------ ---- Bylaws Adopted April 14, 1993 Bylaws Amended and Restated in Entirety October 3, 1994 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- BYLAWS OF A & R MATERIALS, INC. TABLE OF CONTENTS Page ---- ARTICLE I CORPORATE OFFICES.................................................1 1.1 PRINCIPAL OFFICE............................................1 1.2 OTHER OFFICES...............................................1 ARTICLE II MEETINGS OF SHAREHOLDERS..........................................1 2.1 PLACE OF MEETINGS...........................................1 2.2 ANNUAL MEETING..............................................1 2.3 SPECIAL MEETING.............................................1 2.4 NOTICE OF SHAREHOLDERS' MEETINGS............................2 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE................2 2.6 QUORUM......................................................3 2.7 ADJOURNED MEETING; NOTICE...................................3 2.8 VOTING......................................................4 2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT...........4 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING....5 2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS.........................................................6 2.12 PROXIES....................................................6 2.13 INSPECTORS OF ELECTION.....................................7 ARTICLE III DIRECTORS.........................................................7 3.1 POWERS......................................................7 3.2 NUMBER OF DIRECTORS.........................................7 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS....................8 3.4 REMOVAL.....................................................8 3.5 RESIGNATION AND VACANCIES...................................8 3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE....................9 3.7 REGULAR MEETINGS............................................9 3.8 SPECIAL MEETINGS; NOTICE....................................9 3.9 QUORUM......................................................9 3.10 WAIVER OF NOTICE...........................................10 3.11 ADJOURNMENT................................................10 3.12 NOTICE OF ADJOURNMENT......................................10 3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING..........10 3.14 FEES AND COMPENSATION OF DIRECTORS.........................10 3.15 APPROVAL OF LOANS TO OFFICERS..............................11 ARTICLE IV COMMITTEES........................................................11 4.1 COMMITTEES OF DIRECTORS.....................................11 4.2 MEETINGS AND ACTION OF COMMITTEES...........................12 i ARTICLE V OFFICERS..........................................................12 5.1 OFFICERS....................................................12 5.2 APPOINTMENT OF OFFICERS.....................................12 5.3 SUBORDINATE OFFICERS........................................12 5.4 REMOVAL AND RESIGNATION OF OFFICERS.........................13 5.5 VACANCIES IN OFFICES........................................13 5.6 CHAIRMAN OF THE BOARD.......................................13 5.7 PRESIDENT...................................................13 5.8 VICE PRESIDENTS.............................................13 5.9 SECRETARY...................................................14 5.10 CHIEF FINANCIAL OFFICER....................................14 ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS..................................................14 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS...................15 6.2 INDEMNIFICATION OF OTHERS...................................15 6.3 PAYMENT OF EXPENSES IN ADVANCE..............................15 6.4 INDEMNITY NOT EXCLUSIVE.....................................15 6.5 INSURANCE INDEMNIFICATION...................................16 6.6 CONFLICTS...................................................16 6.7 RIGHT TO BRING SUIT.........................................16 6.8 INDEMNITY AGREEMENTS........................................16 6.9 AMENDMENT, REPEAL OR MODIFICATION...........................17 ARTICLE VII RECORDS AND REPORTS...............................................17 7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER................17 7.2 MAINTENANCE AND INSPECTION OF BYLAWS........................18 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS.......18 7.4 INSPECTION BY DIRECTORS.....................................18 7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER.......................18 7.6 FINANCIAL STATEMENTS........................................19 7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS..............19 ARTICLE VIII GENERAL MATTERS...................................................20 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING.......20 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS...................20 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED..........20 8.4 CERTIFICATES FOR SHARES.....................................20 8.5 LOST CERTIFICATES...........................................21 8.6 CONSTRUCTION; DEFINITIONS...................................21 ARTICLE IX AMENDMENTS........................................................21 9.1 AMENDMENT BY SHAREHOLDERS...................................21 9.2 AMENDMENT BY DIRECTORS......................................21 9.3 RECORD OF AMENDMENTS........................................22 ARTICLE X - INTERPRETATION............................................18 ii BYLAWS OF A & R MATERIALS, INC. ARTICLE I CORPORATE OFFICES ----------------- 1.1 PRINCIPAL OFFICE ---------------- The Board of Directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside California and the corporation has one or more business offices in California, then the Board of Directors shall fix and designate a principal business office in California. 1.2 OTHER OFFICES ------------- The Board of Directors may at any time establish branch or subordinate offices at any place or places. ARTICLE II MEETINGS OF SHAREHOLDERS ------------------------ 2.1 PLACE OF MEETINGS ----------------- Meetings of shareholders shall be held at any place within or outside the State of California designated by the Board of Directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation or at any place consented to in writing by all persons entitled to vote at such meeting, given before or after the meeting and filed with the Secretary of the corporation. 2.2 ANNUAL MEETING -------------- An annual meeting of shareholders shall be held each year on a date and at a time designated by the Board of Directors. At that meeting, directors shall be elected. Any other proper business may be transacted at the annual meeting of shareholders. 2.3 SPECIAL MEETINGS ---------------- Special meetings of the shareholders may be called at any time, subject to the provisions of Sections 2.4 and 2.5 of these Bylaws, by the Board of Directors, the Chairman of the Board, the President or the holders of shares entitled to cast not less than ten percent (10%) of the votes at that meeting. 1 If a special meeting is called by anyone other than the Board of Directors or the President or the Chairman of the Board, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by other written communication to the Chairman of the Board, the President, any Vice President or the Secretary of the corporation. The officer receiving the request forthwith shall cause notice to be given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these Bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the Board of Directors may be held. 2.4 NOTICE OF SHAREHOLDERS' MEETINGS -------------------------------- All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 2.5 of these Bylaws not less than ten (10) (or, if sent by third-class mail pursuant to Section 2.5 of these Bylaws, not less than thirty (30)) nor more than sixty (60) days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date, and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, and no business other than that specified in the notice may be transacted, or (ii) in the case of the annual meeting, those matters which the Board of Directors, at the time of the mailing of the notice, intends to present for action by the shareholders, but, subject to the provisions of the next paragraph of this Section 2.4, any proper matter may be presented at the meeting for such action. The notice of any meeting at which Directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by the Board for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the California Corporations Code (the "Code"), (ii) an amendment of the Articles of Incorporation, pursuant to Section 902 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of the Code, or (v) a distribution in dissolution other than in accordance with the rights of any outstanding preferred shares, pursuant to Section 2007 of the Code, then the notice shall also state the general nature of that proposal. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE -------------------------------------------- Notice of a shareholders' meeting shall be given either personally or by first-class mail, or, if the corporation has outstanding shares held of record by five hundred (500) or more persons (determined as provided in Section 605 of the Code) on the record date for the shareholders' meeting, notice may be sent by third-class mail, or other means of written communication, addressed to the shareholder at the address of the shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice; or if no such address appears or is given, at the place where the principal executive office of the corporation is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. The notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. 2 If any notice (or any report referenced in Article VII of these Bylaws) addressed to a shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one (1) year from the date of the giving of the notice. An affidavit of mailing of any notice or report in accordance with the provisions of this Section 2.5, executed by the Secretary, Assistant Secretary or any transfer agent, shall be prima facie evidence of the giving of the notice or report. 2.6 QUORUM ------ Unless otherwise provided in the Articles of Incorporation of the corporation, a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of the shareholders. The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. In the absence of a quorum, any meeting of shareholders may be adjourned from time to time by the vote of a majority of the shares represented either in person or by proxy, but no other business may be transacted, except as provided in the last sentence of the preceding paragraph. 2.7 ADJOURNED MEETING; NOTICE ------------------------- Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if its time and place are announced at the meeting at which the adjournment is taken. However, if the adjournment is for more than forty-five (45) days from the date set for the original meeting or if a new record date for the adjourned meeting is fixed, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.4 and 2.5 of these Bylaws. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. 2.8 VOTING ------ The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 2.11 of these Bylaws, subject to the provisions of Sections 702 through 704 of the Code (relating to voting shares held by a fiduciary, in the name of a corporation, or in joint ownership). 3 Elections for directors and voting on any other matter at a shareholders' meeting need not be by ballot unless a shareholder demands election by ballot at the meeting and before the voting begins. Except as provided in the last paragraph of this Section 2.8, or as may be otherwise provided in the Articles of Incorporation, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of the shareholders. Any holder of shares entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or may vote them against the proposal other than elections to office, but, if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares which the shareholder is entitled to vote. The affirmative vote of the majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the Code or by the Articles of Incorporation. At a shareholders' meeting at which directors are to be elected, a shareholder shall be entitled to cumulate votes either (i) by giving one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are normally entitled or (ii) by distributing the shareholder's votes on the same principle among as many candidates as the shareholder thinks fit, if the candidate or candidates' names have been placed in nomination prior to the voting and the shareholder has given notice prior to the voting of the shareholder's intention to cumulate the shareholder's votes. If any one shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination. The candidates receiving the highest number of affirmative votes, up to the number of directors to be elected, shall be elected; votes against any candidate and votes withheld shall have no legal effect. 2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT ------------------------------------------------- The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, are as valid as though they had been taken at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. Neither the business to be transacted at nor the purpose of any annual or special meeting of shareholders need be specified in any written waiver of notice or consent to the holding of the meeting or approval of the minutes thereof, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 2.4 of these Bylaws, the waiver of notice or consent or approval shall state the general nature of the proposal. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of and presence at that meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of 4 matters required by the Code to be included in the notice of such meeting but not so included, if such objection is expressly made at the meeting. 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING ------------------------------------------------------- Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the election of directors. However, a director may be elected at any time to fill any vacancy on the Board of Directors, provided that it was not created by removal of a director and that it has not been filled by the directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares, or a personal representative of the shareholder, or their respective proxy holders, may revoke the consent by a writing received by the Secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the Secretary. If the consents of all shareholders entitled to vote have not been solicited in writing, the Secretary shall give prompt notice of any corporate action approved by the shareholders without a meeting by less than unanimous written consent to those shareholders entitled to vote who have not consented in writing. Such notice shall be given in the manner specified in Section 2.5 of these Bylaws. In the case of approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Code, (ii) indemnification of a corporate "agent," pursuant to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval, unless the consents of all shareholders entitled to vote have been solicited in writing. 2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS ----------------------------------------------------------- In order that the corporation may determine the shareholders entitled to notice of any meeting or to vote, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days prior to the date of such meeting nor more than sixty (60) days before any other action. Shareholders at the close of business on the record date are entitled to notice and to vote, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Articles of Incorporation or the Code. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting, but the Board of Directors shall fix a new record 5 date if the meeting is adjourned for more than forty-five (45) days from the date set for the original meeting. If the Board of Directors does not so fix a record date: (a) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the Board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action by the Board has been taken, shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later. The record date for any other purpose shall be as provided in Section 8.1 of these Bylaws. 2.12 PROXIES ------- Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the Secretary of the corporation. A proxy shall be deemed signed if the shareholder's name or other authorization is placed on the proxy (whether by manual signature, typewriting, telegraphic or electronic transmission or otherwise) by the shareholder or the shareholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) the person who executed the proxy revokes it prior to the time of voting by delivering a writing to the corporation stating that the proxy is revoked or by executing a subsequent proxy and presenting it to the meeting or by attendance at such meeting and voting in person, or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date thereof, unless otherwise provided in the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Code. 2.13 INSPECTORS OF ELECTION ---------------------- In advance of any meeting of shareholders, the Board of Directors may appoint inspectors of election to act at the meeting and any adjournment thereof. If inspectors of election are not so appointed or designated or if any persons so appointed fail to appear or refuse to act, then the Chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election (or persons to replace those who so fail to appear) at the meeting. The number of inspectors shall be either one (1) or three (3). If appointed at a meeting on the request of one (1) or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one (1) or three (3) inspectors are to be appointed. 6 The inspectors of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies, receive votes, ballots or consents, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes or consents, determine when the polls shall close, determine the result and do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE III DIRECTORS --------- 3.1 POWERS ------ Subject to the provisions of the Code and any limitations in the Articles of Incorporation and these Bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. The Board may delegate the management of the day-to-day operation of the business of the corporation to a management company or other person provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board. 3.2 NUMBER OF DIRECTORS ------------------- The authorized number of directors of the corporation shall be three (3). Any amendment to these Bylaws which would have the effect of specifying or changing a fixed number of directors or the maximum or minimum number or changing from a variable to a fixed board or vice versa may only be adopted by approval of the outstanding shares (as defined in Section 152 of the Code); provided, however, that an amendment to these Bylaws or an amendment to the Articles of Incorporation which would have the effect of reducing the fixed number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS ---------------------------------------- At each annual meeting of shareholders, directors shall be elected to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified, except in the case of the death, resignation, or removal of such a director. 3.4 REMOVAL ------- The entire Board of Directors or any individual director may be removed from office without cause by the affirmative vote of a majority of the outstanding shares entitled to vote on 7 such removal; provided, however, that unless the entire Board is removed, no individual director may be removed when the votes cast against such director's removal, or not consenting in writing to such removal, would be sufficient to elect that director if voted cumulatively at an election at which the same total number of votes cast were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of such director's most recent election were then being elected. 3.5 RESIGNATION AND VACANCIES ------------------------- Any director may resign effective upon giving oral or written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation of a director is effective at a future time, the Board of Directors may elect a successor to take office when the resignation becomes effective. Vacancies on the Board of Directors may be filled by a majority of the remaining directors, or if the number of directors then in office is less than a quorum by (i) unanimous written consent of the directors then in office, (ii) the affirmative vote of a majority of the directors then in office at a meeting held pursuant to notice or waivers of notice, or (iii) a sole remaining director; however, a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum), or by the unanimous written consent of all shares entitled to vote thereon. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified, or until his or her death, resignation or removal. A vacancy or vacancies in the Board of Directors shall be deemed to exist (i) in the event of the death, resignation or removal of any director, (ii) if the Board of Directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, (iii) if the authorized number of directors is increased, or (iv) if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be elected at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election by written consent, other than to fill a vacancy created by removal, shall require the consent of the holders of a majority of the outstanding shares entitled to vote thereon. A director may not be elected by written consent to fill a vacancy created by removal except by unanimous consent of all shares entitled to vote for the election of directors. 3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE ---------------------------------------- Regular meetings of the Board of Directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the Board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the Board may be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. 8 Members of the Board may participate in a meeting through the use of conference telephone or similar communications equipment, so long as all directors participating in such meeting can hear one another. Participation in a meeting pursuant to this paragraph constitutes presence in person at such meeting. 3.7 REGULAR MEETINGS ---------------- Regular meetings of the Board of Directors may be held without notice if the time and place of such meetings are fixed by the Board of Directors. 3.8 SPECIAL MEETINGS; NOTICE ------------------------ Subject to the provisions of the following paragraph, special meetings of the Board of Directors for any purpose or purposes may be called at any time by the Chairman of the Board, the President, any Vice President, the Secretary or any two (2) directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail, telegram, charges prepaid, or by telecopier, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telecopier or telegram, it shall be delivered personally or by telephone or by telecopier or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the meeting. 3.9 QUORUM ------ A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.11 of these Bylaws. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present is the act of the Board of Directors, subject to the provisions of Section 310 of the Code (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of the Code (as to appointment of committees), Section 317(e) of the Code (as to indemnification of directors), the Articles of Incorporation, and other applicable law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. 3.10 WAIVER OF NOTICE ---------------- Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. A waiver 9 of notice need not specify the purpose of any regular or special meeting of the Board of Directors. 3.11 ADJOURNMENT ----------- A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. 3.12 NOTICE OF ADJOURNMENT --------------------- If the meeting is adjourned for more than twenty-four (24) hours, notice of any adjournment to another time and place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. 3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING ------------------------------------------------- Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the same force and effect as a unanimous vote of the Board of Directors. 3.14 FEES AND COMPENSATION OF DIRECTORS ---------------------------------- Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the Board of Directors. This Section 3.14 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. 3.15 APPROVAL OF LOANS TO OFFICERS ----------------------------- If these Bylaws have been approved by the corporation's shareholders in accordance with the Code, the corporation may, upon the approval of the Board of Directors alone, make loans of money or property to, or guarantee the obligations of, any officer of the corporation or of its parent, if any, whether or not a director, or adopt an employee benefit plan or plans authorizing such loans or guaranties provided that (i) the Board of Directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the corporation, (ii) the corporation has outstanding shares held of record by 100 or more persons (determined as provided in Section 605 of the Code) on the date of approval by the Board of Directors, and (iii) the approval of the Board of Directors is by a vote sufficient without counting the vote of any interested director or directors. Notwithstanding the foregoing, the corporation shall have the power to make loans permitted by the Code. 10 ARTICLE IV COMMITTEES ---------- 4.1 COMMITTEES OF DIRECTORS ----------------------- The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two (2) or more directors, to serve at the pleasure of the Board. The Board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any such committee shall have authority to act in the manner and to the extent provided in the resolution of the Board and may have all the authority of the Board, except with respect to: (a) The approval of any action which, under the Code, also requires shareholders' approval or approval of the outstanding shares. (b) The filling of vacancies on the Board of Directors or in any committee. (c) The fixing of compensation of the directors for serving on the Board or on any committee. (d) The amendment or repeal of these Bylaws or the adoption of new Bylaws. (e) The amendment or repeal of any resolution of the Board of Directors which by its express terms is not so amendable or repealable. (f) A distribution to the shareholders of the corporation, except at a rate, in a periodic amount or within a price range set forth in the Articles of Incorporation or determined by the Board of Directors. (g) The appointment of any other committees of the Board of Directors or the members thereof. 4.2 MEETINGS AND ACTION OF COMMITTEES --------------------------------- Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these Bylaws, Section 3.6 (place of meetings), Section 3.7 (regular meetings), Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10 (waiver of notice), Section 3.11 (adjournment), Section 3.12 (notice of adjournment), and Section 3.13 (action without meeting), with such changes in the context of those Bylaws as are necessary to substitute the committee and its members for the Board of Directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the Board of Directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. 11 ARTICLE V OFFICERS -------- 5.1 OFFICERS -------- The officers of the corporation shall be a President, a Secretary, and a Chief Financial Officer. The corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.3 of these Bylaws. Any number of offices may be held by the same person. 5.2 APPOINTMENT OF OFFICERS ----------------------- The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these Bylaws, shall be chosen by the Board and serve at the pleasure of the Board, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS -------------------- The Board of Directors may appoint, or may empower the Chairman of the Board or the President to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board of Directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS ----------------------------------- Subject to the rights, if any, of an officer under any contract of employment, all officers serve at the pleasure of the Board of Directors and any officer may be removed, either with or without cause, by the Board of Directors at any regular or special meeting of the Board or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES -------------------- A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to that office. 5.6 CHAIRMAN OF THE BOARD --------------------- The Chairman of the Board, if such an officer be elected, shall, if present, preside at meetings of the Board of Directors and exercise and perform such other powers and duties as 12 may from time to time be assigned by the Board of Directors or as may be prescribed by these Bylaws. If there is no President, then the Chairman of the Board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these Bylaws. 5.7 PRESIDENT --------- Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and the officers of the corporation. The President shall preside at all meetings of the shareholders and, in the absence or nonexistence of a Chairman of the Board, at all meetings of the Board of Directors. The President shall have the general powers and duties of management usually vested in the office of President of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. 5.8 VICE PRESIDENTS --------------- In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a Vice President designated by the Board of Directors, shall perform all the duties of the President and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these Bylaws, the President or the Chairman of the Board. 5.9 SECRETARY --------- The Secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of Directors, committees of directors and shareholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The Secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors required to be given by law or by these Bylaws. The Secretary shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these Bylaws. 13 5.10 CHIEF FINANCIAL OFFICER ----------------------- The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The Chief Financial Officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the Board of Directors. The Chief Financial Officer shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the President and directors, whenever they request it, an account of all of his or her transactions as Chief Financial Officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or these Bylaws. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, -------------------------------------------------- AND OTHER AGENTS ---------------- 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS ----------------------------------------- The corporation shall, to the maximum extent and in the manner permitted by the Code, indemnify each of its directors and officers against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was a director or officer of the corporation. For purposes of this Article VI, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS ------------------------- The corporation shall have the power, to the extent and in the manner permitted by the Code, to indemnify each of its employees and agents (other than directors or officers) against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an employee or agent of the corporation. For purposes of this Article VI, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 14 6.3 PAYMENT OF EXPENSES IN ADVANCE ------------------------------ Expenses and attorneys' fees incurred in defending any civil or criminal action or proceeding for which indemnification is required pursuant to Section 6.1, or if otherwise authorized by the Board of Directors, shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI. 6.4 INDEMNITY NOT EXCLUSIVE ----------------------- The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any Bylaw, agreement, vote of shareholders or directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. The rights to indemnity hereunder shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of the person. 6.5 INSURANCE INDEMNIFICATION ------------------------- The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation against any liability asserted against or incurred by such person in such capacity or arising out of that person's status as such, whether or not the corporation would have the power to indemnify that person against such liability under the provisions of this Article VI. 6.6 CONFLICTS --------- No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (1) That it would be inconsistent with a provision of the Articles of Incorporation, these Bylaws, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. 6.7 RIGHT TO BRING SUIT ------------------- If a claim under this Article is not paid in full by the corporation within 90 days after a written claim has been received by the corporation (either because the claim is denied or because no determination is made), the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall also be entitled to be paid the expenses of prosecuting such claim. The corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the Code for the corporation to 15 indemnify the claimant for the claim. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is permissible in the circumstances because he or she has met the applicable standard of conduct, if any, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its shareholders) that the claimant has not met the applicable standard of conduct, shall be a defense to such action or create a presumption for the purposes of such action that the claimant has not met the applicable standard of conduct. 6.8 INDEMNITY AGREEMENTS -------------------- The Board of Directors is authorized to enter into a contract with any director, officer, employee or agent of the corporation, or any person who is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, or any person who was a director, officer, employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation, providing for indemnification rights equivalent to or, if the Board of Directors so determines and to the extent permitted by applicable law, greater than, those provided for in this Article VI. 6.9 AMENDMENT, REPEAL OR MODIFICATION --------------------------------- Any amendment, repeal or modification of any provision of this Article VI shall not adversely affect any right or protection of a director or agent of the corporation existing at the time of such amendment, repeal or modification. ARTICLE VII RECORDS AND REPORTS ------------------- 7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER -------------------------------------------- The corporation shall keep either at its principal executive office or at the office of its transfer agent or registrar (if either be appointed), as determined by resolution of the Board of Directors, a record of its shareholders listing the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation or who hold at least one percent (1%) of such voting shares and have filed a Schedule 14B with the United States Securities and Exchange Commission relating to the election of directors, shall have an absolute right to do either or both of the following (i) inspect and copy the record of shareholders' names, addresses, and shareholdings during usual business hours upon five (5) days' prior written demand upon the corporation, or (ii) obtain from the transfer agent for the corporation, upon written demand and upon the tender of such transfer agent's usual charges for such list (the amount of which charges shall be stated to the shareholder by the transfer agent upon request), a list of the shareholders' names and addresses who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand. The list shall be made available on or before the later of five (5) business days after the demand is received or the date specified therein as the date as of which the list is to be compiled. 16 The record of shareholders shall also be open to inspection and copying by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to the holder's interests as a shareholder or holder of a voting trust certificate. Any inspection and copying under this Section 7.1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. 7.2 MAINTENANCE AND INSPECTION OF BYLAWS ------------------------------------ The corporation shall keep at its principal executive office or, if its principal executive office is not in the State of California, at its principal business office in California, the original or a copy of these Bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in such state, then it shall, upon the written request of any shareholder, furnish to such shareholder a copy of these Bylaws as amended to date. 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS ----------------------------------------------------- The accounting books and records and the minutes of proceedings of the shareholders and the Board of Directors, and committees of the Board of Directors shall be kept at such place or places as are designated by the Board of Directors or, in absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form, and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand on the corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as the holder of a voting trust certificate. Such inspection by a shareholder or holder of a voting trust certificate may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts. Such rights of inspection shall extend to the records of each subsidiary corporation of the corporation. 7.4 INSPECTION BY DIRECTORS ----------------------- Every director shall have the absolute right at any reasonable time to inspect and copy all books, records, and documents of every kind and to inspect the physical properties of the corporation and each of its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts. 7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER ------------------------------------- The Board of Directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the corporation. Such report shall be sent to the shareholders at least fifteen (15) (or, if sent by third-class mail, thirty-five (35)) days prior to the annual meeting of shareholders to be held 17 during the next fiscal year and in the manner specified in Section 2.5 of these Bylaws for giving notice to shareholders of the corporation. The annual report shall contain a balance sheet as of the end of the fiscal year and an income statement and statement of changes in financial position for the fiscal year, accompanied by any report thereon of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation. The foregoing requirement of an annual report shall be waived so long as the shares of the corporation are held by fewer than one hundred (100) holders of record. 7.6 FINANCIAL STATEMENTS -------------------- If no annual report for the fiscal year has been sent to shareholders, then the corporation shall, upon the written request of any shareholder made more than one hundred twenty (120) days after the close of such fiscal year, deliver or mail to the person making the request, within thirty (30) days thereafter, a copy of a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year. A shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of the corporation may make a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the current fiscal year ended more than thirty (30) days prior to the date of the request and a balance sheet of the corporation as of the end of that period. The statements shall be delivered or mailed to the person making the request within thirty (30) days thereafter. A copy of the statements shall be kept on file in the principal office of the corporation for twelve (12) months and it shall be exhibited at all reasonable times to any shareholder demanding an examination of the statements or a copy shall be mailed to the shareholder. If the corporation has not sent to the shareholders its annual report for the last fiscal year, the statements referred to in the first paragraph of this Section 7.6 shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report thereon, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. 7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS ---------------------------------------------- The Chairman of the Board, the President, any Vice President, the Chief Financial Officer, the Secretary or Assistant Secretary of this corporation, or any other person authorized by the Board of Directors or the President or a Vice President, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. 18 ARTICLE VIII GENERAL MATTERS --------------- 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING ----------------------------------------------------- For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action (other than with respect to notice or voting at a shareholders meeting or action by shareholders by written consent without a meeting), the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days prior to any such action. Only shareholders of record at the close of business on the record date are entitled to receive the dividend, distribution or allotment of rights, or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Articles of Incorporation or the Code. If the Board of Directors does not so fix a record date, then the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto or the sixtieth (60th) day prior to the date of that action, whichever is later. 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS ----------------------------------------- From time to time, the Board of Directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED -------------------------------------------------- The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.4 CERTIFICATES FOR SHARES ----------------------- A certificate or certificates for shares of the corporation shall be issued to each shareholder when any of such shares are fully paid. The Board of Directors may authorize the issuance of certificates for shares partly paid provided that these certificates shall state the total amount of the consideration to be paid for them and the amount actually paid. All certificates shall be signed in the name of the corporation by the Chairman of the Board or the Vice Chairman of the Board or the President or a Vice President and by the Chief Financial Officer or an Assistant Treasurer or the Secretary or an Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be by facsimile. 19 In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent or registrar at the date of issue. 8.5 LOST CERTIFICATES ----------------- Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation or its transfer agent or registrar and cancelled at the same time. The Board of Directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed (as evidenced by a written affidavit or affirmation of such fact), authorize the issuance of replacement certificates on such terms and conditions as the Board may require; the Board may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 8.6 CONSTRUCTION; DEFINITIONS ------------------------- Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Code shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. ARTICLE IX AMENDMENTS ---------- 9.1 AMENDMENT BY SHAREHOLDERS ------------------------- New Bylaws may be adopted or these Bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the Articles of Incorporation of the corporation set forth the number of authorized Directors of the corporation, then the authorized number of Directors may be changed only by an amendment of the Articles of Incorporation. 9.2 AMENDMENT BY DIRECTORS ---------------------- Subject to the rights of the shareholders as provided in Section 9.1 of these Bylaws, Bylaws, other than a Bylaw or an amendment of a Bylaw changing the authorized number of directors (except to fix the authorized number of directors pursuant to a Bylaw providing for a variable number of directors), may be adopted, amended or repealed by the Board of Directors. 9.3 RECORD OF AMENDMENTS -------------------- Whenever an amendment or new Bylaw is adopted, it shall be copied in the book of minutes with the original Bylaws. If any Bylaw is repealed, the fact of repeal, with the date of the meeting at which the repeal was enacted or written consent was filed, shall be stated in said book. 20 ARTICLE X INTERPRETATION -------------- Reference in these Bylaws to any provision of the California Corporations Code shall be deemed to include all amendments thereof. 21 SECRETARY'S CERTIFICATE OF ADOPTION OF BYLAWS OF A & R MATERIALS, INC. I, the undersigned, do hereby certify: 1. That I am the duly elected and acting Secretary of A & R Materials, Inc., a California corporation. 2. That the foregoing Bylaws constitute the Bylaws of said corporation as amended, restated and adopted by the Directors of said corporation by unanimous written consent as of October 3, 1994. IN WITNESS WHEREOF, I have hereunto subscribed my name this ______ day of ___________________, 1994. -------------------------------- Lee Pekary Secretary 22 EX-10.01 5 REGISTRANT'S 1996 STOCK OPTION PLAN EXHIBIT 10.01 A & R MATERIALS, INC. 1996 STOCK OPTION PLAN 1. Purpose of Plan. --------------- The purpose of the 1996 Stock Option Plan (the "Plan") is to attract, retain and reward persons providing services to A & R Materials, Inc., a California corporation, and any successor corporation thereto (collectively referred to as the "Company"), and any present or future parent and/or subsidiary corporations of such corporation (all of whom along with the Company being individually referred to as a "Participating Company" and collectively referred to as the "Participating Company Group"), and to motivate such persons to contribute to the growth and profits of the Participating Company Group in the future. For purposes of the Plan, a parent corporation and a subsidiary corporation shall be as defined in sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Administration. -------------- (a) Administration by Board and/or Committee. The Plan shall be ---------------------------------------- administered by the Board of Directors of the Company (the "Board") and/or by a duly appointed committee of the Board having such powers as shall be specified by the Board. Any subsequent references herein to the Board shall also mean the committee if such committee has been appointed and, unless the powers of the committee have been specifically limited, the committee shall have all of the powers of the Board granted herein, including, without limitation, the power to terminate or amend the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. All questions of interpretation of the Plan or of any options granted under the Plan (an "Option") shall be determined by the Board, and such determinations shall be final and binding- upon all persons having an interest in the Plan and/or any Option. (b) Options Authorized. Options-may be either incentive stock options ------------------ as defined in section 422 of the Code ("Incentive Stock Options") or nonqualified stock options. (c) Authority of Officers. Any officer of a Participating Company --------------------- shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. (d) Disinterested Administration. After the Company first registers ---------------------------- its common stock under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), then with respect to the participation in the Plan of any employees who are also officers or directors of the Company subject to Section 16 of the Exchange Act, the Plan shall be administered by the Board in compliance with the "disinterested administration" requirement of Rule 16b-3, as promulgated under the Exchange Act and amended from time to 1 time or any successor rule or regulation ("Rule 16b-3"). 3. Eligibility. ----------- (a) Eligible Persons. Options may be granted only to employees ---------------- (including officers) and directors of the Participating Company Group or to individuals who are rendering services as consultants to the Participating Company Group. For purposes of the foregoing sentence, "employees" shall include prospective employees to whom Options are granted in connection with written offers of employment and "consultants" shall include prospective consultants to whom Options are granted in connection with written offers of engagement with the Participating Company Group. The Board shall, in its sole discretion, determine which eligible persons shall be granted Options (an "Optionee"). Eligible persons may be granted more than one (1) Option. (b) Directors Serving on Committee. If a committee of the Board has ------------------------------ been established to administer the Plan in compliance with the "disinterested administration" requirement of Rule 16b-3, no member of such committee, while a member, shall be eligible to be granted an Option. (c) Restrictions on Option Grants. Any person who is not an employee ---------------------- on the effective date of the -rant of an Option to such person may be granted only a nonqualified stock option. An Incentive Stock Option granted to a prospective employee upon the condition that such person become an employee shall be deemed granted effective on the date such person commences service with a Participating Companv, with an exercise price determined as of such date in accordance with paragraph 6(a). 4. Shares Subject to Option. Options shall be for the purchase of shares ------------------------ of the authorized but unissued or reacquired common stock of the Company (the "Stock"), subject to adjustment as provided in paragraph 10 below. The maximum number of shares of Stock which may be issued under the Plan shall be Five Million (5,000,000) shares. If any outstanding Option for any reason expires or is terminated or canceled and/or shares of Stock subject to repurchase are repurchased by the Company, the shares allocable to the unexercised portion of such Option, or such repurchased shares may again be subject to an Option grant. 5. Time for Granting Options. All Options shall be -ranted, if at all, ------------------------- within ten (10) years from January 2, 1996. 6. Terms. Conditions and Form of Options. Subject to the provisions of -------------------------------------- the Plan, the Board shall determine for each Option (which need not be identical,) the number of shares of Stock for which the Option shall be granted, the exercise price of the Option, the timing, and terms of exercisability and vesting of the Option, the time of expiration of the Option, the effect of the Optionee's termination of employment or service, whether the Option is to be treated as an Incentive Stock Option or as a nonqualified stock option, the method for satisfaction of any tax withholding obligation arising in connection with an Option, including by withholding or 2 delivery of shares of stock, and all other terms and conditions of the Option not consistent with the Plan. Options granted pursuant to the Plan shall be evidenced by written agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish, which agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions. (a) Option Exercise Price. The exercise price for each Option shall --------------------- be established in the sole discretion of the Board; provided, however, that (i) the exercise price per share for an Incentive Stock Option shall not be less than the fair market value, as determined by the Board, of a share of Stock on the effective date of grant of the Option, (ii) the exercise price per share for a nonqualified stock option shall not be less than eight-five percent (85%) of the fair market value, as determined by the Board, of a share of Stock on the effective date of grant of the Option and (iii) no Incentive Stock Option granted to an Optionee who at the time the Option is granted owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company within the meaning of section 422(b)(6) of the Code (a "Ten Percent Owner Optionee") shall have an exercise price per share less than one hundred ten percent (1 10 '7o) of the fair market value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a nonqualified stock option) may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is ,ranted pursuant to an assumption or substitution for another option in a manner qualifying with the provisions of section 424(a) of the Code. (b) Exercise Period of Options. The Board shall have the power to --------------------------- set, including by amendment of an Option, the time or times within each Option shall be exercisable or the event or events upon the occurrence of which all or a portion of each Option shall be exercisable and the term of each Option; provided, however, that (i) no Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (ii) no Incentive Stock Option granted to a Ten Percent Owner Optionee shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option, and (iii) no Option granted to a prospective employee or prospective consultant may become exercisable prior to the date on which such person commences service with a Participating Company. (c) Payment of Exercise Price. -------------------------- (i) Forms of Consideration Authorized. Payment of the ---------------------------------- exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (1) in cash, by check, or cash equivalent, (2) by tender to the Company of shares of the Company's stock owned by the Optionee having a value, as determined by the Board (but without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company), not less than the exercise price, (3) by the assignment of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (a "Cashless Exercise"), or (4) by any combination thereof. The Board may at any time or from time to time, by adoption of 3 or by amendment to the standard form or forms of stock option agreement described in paragraph 7 below, or by other means, grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price and/or which other-wise restrict one (1) or more forms of consideration. (ii) Tender of Company Stock. Notwithstanding the foregoing, an ----------------------- Option may not be exercised by tender to the Company of shares of the Company's stock to the extent such tender of stock would constitute a violation of the provisions of any law, regulation and/or agreement restricting the redemption of the Company's stock. Unless otherwise provided for by the Board, an Option may not be exercised by tender to the Company of shares of the Company's stock unless such shares of the Company's stock either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (iii) Cashless Exercise. The Company reserves, at any and all ----------------- times, the right, in the Company's sole and absolute discretion, to establish, decline to approve and/or terminate any program and/or procedures for the exercise of Options by means of a Cashless Exercise. 7. Standard Forms of Stock Option Agreement. ---------------------------------------- (a) Incentive Stock Options. Unless otherwise provided for by the ----------------------- Board at the time an Option is granted, an Option designated as an "Incentive Stock Option" shall comply with and be subject to the terms and conditions set forth in the form of incentive stock option agreement attached hereto as Exhibit A and as amended from time to time. - --------- (b) Nonqualified Stock Options. Unless otherwise provided for by the -------------------------- Board at the time an Option is granted, an Option designated as a "Nonqualified Stock Option" shall comply with and be subject to the terms and conditions set forth in the form of nonqualified stock option agreement attached hereto as Exhibit B and as amended from time to time. - --------- (c) Standard Term for Options. Unless otherwise provided for by the ------------------------- Board in the grant of an Option, any Option granted hereunder shall be exercisable for a term of ten (10) years from the effective date of grant of the Option. 8. Authority to Vary Terms. The Board shall have the authority to vary, ----------------------- from time to time, the terms of either of the standard forms of stock option agreement described in paragraph 7 above, either in connection with the grant or amendment of an individual Option or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of such revised or amended standard form or forms of stock option agreement shall be in accordance with the terms of the Plan. Such authority shall include, but not by way of limitation, the authority to grant Options which are not immediately exercisable. 9. Fair Market Value Limitation. To the extent that the aggregate fair ---------------------------- market value 4 (determined at the time the Option is granted) of Stock with respect to which Incentive Stock Options are exercisable by an Optionee for the first time during any calendar year (under all stock options plans of the Company, including the Plan) exceeds One Hundred Thousand Dollars ($100,000), such options shall be treated as nonqualified stock options. This paragraph shall be applied by taking Incentive Stock Options into account in the order in which they were granted. 10. Effect of Change in Stock Subject to Plan. Appropriate adjustments ----------------------------------------- shall be made in the number and class of shares of Stock subject to the Plan and to any outstanding Options and in the exercise price of any outstanding Options in the event of a stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification, or like change in the capital structure of the Company. If a majority of the shares which are of the same class as the shares that are subject to outstanding Options are exchanged for, converted into, or otherwise become shares of another corporation (the "New Shares"), the Company may unilaterally amend the outstanding Options to provide that such Options are exercisable for New Shares. In the event of any such amendments, the number of shares and the exercise prices of the outstanding Options shall be adjusted in a fair and equitable manner. 11. Transfer of Control. A "Transfer of Control" shall be deemed to have ------------------- occurred if any of the following occurs with respect to the Company: (a) the direct or indirect sale or exchange by the stockholders of the Company of all or substantially all of the stock of the Company where the stockholders of the Company before such sale or exchange do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Company after such sale or exchange; (b) a merger or consolidation in which the Company is not the surviving corporation; (c) a merger or consolidation in which the Company is the surviving corporation where the stockholders of the Company before such merger or consolidation do not retain, directly or indirectly, at least a majority o f the beneficial interest in the voting stock of the Company after such merger or consolidation, (d) the sale, exchange., or transfer of all or substantially all of the assets of the Company (other than a sale, exchange, or transfer to one (1) or more subsidiary corporations (as defined in paragraph 1 above) of the Company); or (e) a liquidation or dissolution of the Company. In the event of a Transfer of Control, the Board, in its sole discretion, may arrange with the surviving, continuing, successor, or purchasing corporation, or parent corporation thereof, as the case may be (the "Acquiring Corporation"), for the Acquiring Corporation to either assume the Company's rights and obligations under outstanding stock option agreements or substitute options for the Acquiring Corporation's stock for such outstanding Options. Any Options which are neither assumed or substituted for by the Acquiring Corporation nor exercised 5 as of the date of the Transfer of Control shall terminate effective as of the date of the Transfer of Control. 12. Provision of Information. Each Optionee shall be given access to ------------------------ information concerning the Company equivalent to that information generally made available to the Company's common stockholders. 13. Options Non-Transferable. During the lifetime of the Optionee, the ------------------------ Option shall be exercisable only by the Optionee. No Option shall be assigned or transferred by the Optionee, except by will or by the laws of descent and distribution. 14. Indemnification. In addition to such other rights of --------------- indemnification as they may have as members of the Board or as officers or employees of the Participating Company Group, members of the Board and any officers or employees of the Participating Company Group to whom authority to act for the Board is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same. 15. Termination of Amendment of Plan or Options. The Board, including any ------------------------------------------- duly appointed committee of the Board, may terminate or amend the Plan or any Option at any time; provided, however, that without the approval of the Company's stockholders, there shall be (a) no increase in the total number of shares of Stock covered by the Plan (except by operation of the provisions of paragraph 10 above), (b) no change in the class of persons eligible to receive Incentive Stock Options and (c) no expansion in the class of persons eligible to receive nonqualified stock options. In addition to the foregoing, the approval of the Company's stockholders shall be sought for any amendment to the Plan for which the Board deems stockholder approval necessary in order to comply with Rule 16b-3. In any event, no amendment may adversely affect any then outstanding Option, or any unexercised portion thereof, without the consent of the Optionee, unless such amendment is required to enable an Option designated as an Incentive Stock Option to qualify as an Incentive Stock Option. 6 EX-10.02 6 EMPLOYMENT AGREEMENT EXHIBIT 10.02 EMPLOYMENT AGREEMENT This Agreement, dated as of _____ is between Isonics Corporation, a California corporation ("Employer"), and _________ ("Employee"). BACKGROUND Employer has spent significant time, effort, and money to develop certain Proprietary Information (as defined below), which Employer considers vital to its business and goodwill. The Proprietary Information necessarily will be communicated to or acquired by Employee in the course of Employee's employment with Employer, and the parties desire to provide for the protection of Employer's Proprietary Information, and goodwill. Further, the parties anticipate that certain Invention/Ideas (as defined below) will be conceived, developed, or reduced to practice by Employee during the course of Employee's employment by Employer, and the parties desire to provide for the disclosure, assignment, and protection of these Invention/Ideas as provided in this Agreement. In addition, the parties desire to provide certain restrictions against solicitating customers or suppliers of Employer and inducing other employees to leave Employer, all as set forth below. The parties also desire to set forth in writing the terms and conditions of Employee's employment by Employer. The parties acknowledge that Employer considers the services of Employee to be unique, extraordinary and/or of intellectual character. TERMS OF AGREEMENT NOW, THEREFORE, in consideration of the employment or continued employment of Employee by Employer, the parties agree as follows: 1. Term of Agreement. ----------------- This Agreement shall continue in full force and effect for the duration of Employee's employment by Employer (the "Period of Employment") and shall continue thereafter until terminated through a written instrument signed by both parties. 2. Compensation and Benefits. ------------------------- (a) Compensation. In consideration of the services to be rendered by ------------ Employee commencing with the date of this Agreement and continuing until the termination of Employee's employment, Employer shall pay Employee ________ per year, payable semi-monthly, pursuant to the procedures regularly established, and as they may be amended from time to time, by Employer in its sole discretion. Employer shall review annually Employee's compensation in accordance with Employer's established administrative practice for adjusting salaries for similarly situated employees. (b) Benefits. Employee shall be entitled to vacation leave in -------- accordance with Employer's standard policies, as they may be amended from time to time. As Employee becomes eligible therefor. Employee shall have the right to participate in and receive benefits from all present and future benefit plans specified in Employer's policies (as they may be amended from time to time) and generally made available to similarly situated employees of Employer. The amount and extent of benefits to which Employee is entitled shall be governed by the specific benefit plan, as amended. Nothing contained in this Agreement shall prevent Employer from changing or eliminating any benefit(s) during the Period of Employment as Employer, in its sole discretion, may deem necessary or desirable. All compensation and comparable payments to be paid to Employee shall be less withholdings required by law. (c) No Incentive Compensation. Unless otherwise agreed by the parties ------------------------- in a separate written agreement signed by the President of Employer, Employee shall not be entitled to any additional or incentive compensation. (d) Expenses. Employer shall reimburse Employee for reasonable -------- out-of-town travel and other business expenses reasonably incurred by Employee in the performance of Employee's duties, in accordance with Employer's policies, as they may be amended from time to time in Employer's sole discretion. 3. Termination of Employment. ------------------------- (a) At-Will Employment. At any time, either party may terminate the ------------------ Period of Employment for any reason, with or without cause. Without limiting the generality of the foregoing, Employer may dismiss Employee without cause at any time notwithstanding anything to the contrary contained in or arising from any statements, policies or practices of Employer relating to the employment, discipline, or termination of its employees. (b) Termination Obligations. ----------------------- (i) Employee agrees that all property, including, without limitation, all equipment, tangible Proprietary Information (as defined below), documents, books, records, reports, notes, contracts, lists, computer disks (and other computer-generated files and data), and copies thereof, created on any medium and furnished to, obtained by, or prepared by Employee in the course of or incident to Employee's employment, belong to Employer and shall be returned promptly to Employer upon termination of the Period of Employment. (ii) Employee's representations, warranties, and obligations contained in this Agreement shall survive the termination of the Period of Employment, and Employee's representations and warranties shall also survive the expiration of this Agreement. (iii) Following any termination of the Period of Employment, Employee shall fully cooperate with Employer in all matters relating to Employee's continuing obligations under this Agreement. 2 4. Proprietary Information. ----------------------- (a) Defined. "Proprietary Information" is all information, ideas and ------- concepts in whatever form, tangible or intangible, pertaining in any manner to the business of Employer, or any Affiliate (as hereinafter defined), or the respective employees, clients, customers, suppliers, consultants or business associates of Employer or any Affiliate, which information, idea(s) or concept(s) have been, or shall have been, produced by any employee of Employer in the course of his or her employment or otherwise produced or acquired by or on behalf of Employer. All Proprietary Information not generally known outside of Employer's organization, and all Proprietary Information so known only through improper means, shall be deemed "Confidential Information." Without limiting the foregoing definition, Proprietary Information and Confidential Information shall include, but not be limited to: (i) formulas, teaching and development techniques, processes, trade secrets, computer programs, electronic codes, inventions, improvements, and research projects; (ii) information about costs, profits, markets, sales, and lists of vendors, suppliers, customers or clients; (iii) business, marketing, and strategic plans; and (iv) employee personnel files and compensation information. Employee should consult any Employer procedures instituted to identify and protect certain types of Confidential Information, which are considered by Employer to be safeguards in addition to the protection provided by this Agreement. Nothing contained in those procedures or in this Agreement is intended to limit the effect of the other. For purposes of this Agreement, "Affiliate" shall mean any person or entity that directly or indirectly controls, is controlled by, or is under common control with Employer. (b) General Restrictions on Use. During the Period of Employment, Employee --------------------------- shall use Proprietary Information, and shall disclose Confidential Information, only for the benefit of Employer and as is necessary to carry out Employee's responsibilities under this Agreement. Following termination, Employee shall neither, directly or indirectly, use any Proprietary Information nor disclose any Confidential Information, except as expressly and specifically authorized in writing by Employer. The publication of any Proprietary Information through literature or speeches must be approved in advance in writing by Employer. (c) Location and Reproduction. Employee shall maintain at Employee's work ------------------------- station and/or any other place under Employee's control only such Confidential Information as Employee has a current "need to know." Employee shall return to the appropriate person or location or otherwise properly dispose of Confidential Information once that need to know no longer exists. Employee shall not make copies of or otherwise reproduce Confidential Information unless there is a legitimate business need for reproduction. (d) Prior Actions and Knowledge. Employee represents and warrants that --------------------------- from the time of Employee's first contact with Employer, Employee has held in strict confidence all Confidential Information and has not disclosed any Confidential Information, directly or indirectly, to anyone outside of Employer, or used, copied, published, or summarized any Confidential Information, except to the extent otherwise permitted in this Agreement. 3 (e) Third-Party Information. Employee acknowledges that Employer has ----------------------- received and in the future will receive from third parties their confidential information subject to a duty on Employer's part to maintain the confidentiality of such information and to use it only for certain limited purposes. Employee agrees that Employee owes Employer and such third parties, during the Period of Employment and thereafter, a duty to hold all such confidential information in the strictest confidence and not to disclose or use it, except as necessary to perform Employee's obligations hereunder and as is consistent with Employer's agreement with such third parties. (f) Conflicting Obligations. Employee represents and warrants that ----------------------- Employee's execution of this Agreement, Employee's employment with Employer, and the performance of Employee's proposed duties under this Agreement shall not violate any obligations Employee may have to any former employer (or other person or entity), including any obligations with respect to proprietary or confidential information of any other person or entity. 5. Competitive Activity. -------------------- (a) Acknowledgment. Employee acknowledges that the pursuit of the -------------- activities forbidden by Section 5(b) below would necessarily involve the use or disclosure of Confidential Information in breach of Section 4, but that proof of such a breach would be extremely difficult. (b) Prohibited Activity. To forestall the above-described disclosure, use, ------------------- and breach, Employee agrees that for a period of one (1) year after termination of the Period of Employment, Employee shall not, directly or indirectly, (i) divert or attempt to divert from Employer (or any Affiliate) any business of any kind in which it is engaged, including, without limitation, the solicitation of or interference with any of its customers or suppliers; (i) employ, solicit for employment, or recommend for employment any person employed by Employer (or any Affiliate); or (iii) engage in any business activity that is or may be competitive with Employer (or any Affiliate) in any state where Employer conducts its business, unless Employee can prove that any action taken is contravention of this subsection was done without the use in any way of Confidential Information. 6. Inventions and Ideas. -------------------- (a) Defined: Statutory Notice. The term "Invention/Idea" includes any and -------------------------- all ideas, processes, trademarks, service marks, inventions, technology, computer hardware or software, original works of authorship, designs, formulas, discoveries, patents, copyrights and products, as well as any and all improvements, know-how, rights and claims related to the foregoing, that are conceived, developed, or reduced to practice by Employee (alone or with others), during the Period of Employment, except to the extent that California Labor Code Section 2870 lawfully prohibits the assignment of rights in such intellectual property. Employee acknowledges that Employee understands that this definition includes only those rights that my be lawfully assigned pursuant to California Labor Code Section 2870, which provides: 4 "(a) Any provision in any employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer; or (2) Result from any work performed by the employee for the employer. (b) To the extent a provision in any employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable." Nothing in this Agreement is intended to expand the scope of protection provided Employee by Sections 2870 through 2872 of the California Labor Code. (b) Disclosure. Employee agrees to maintain adequate and current written ---------- records on the development of all Invention/Ideas and to disclose promptly to Employer all Invention/Ideas and relevant records, which records will remain the sole property of Employer. Employee further agrees that all information and records pertaining to any idea, process, trademark, service mark, invention, technology, computer hardware or software, original work of authorship, design, formula, discovery, patent, copyright or product, as well as any improvement or know-how related to the foregoing ("Intellectual Property"), that Employee does not believe to be an Invention/Idea, but that is conceived, developed, or reduced to practice by Employee (alone or with others) during the Period of Employment (or during the post-employment period set forth in Section 4(e) below), shall be disclosed promptly to Employer (such disclosure to be received in confidence). Employer shall examine such information to determine if in fact the Intellectual Property is an Invention/Idea subject to this Agreement. (c) Assignment. Employee agrees to assign to Employer the Employee's ---------- entire right, title, and interest (throughout the United States and in all foreign countries), free and clear of all liens and encumbrances, in and to each Invention/Idea, which shall be the sole property of Employer, whether or not patentable. In the event any Invention/Idea is deemed by Employer to be patentable or otherwise registrable, Employee shall assist Employer (at its expense) in obtaining letters patent or other applicable registrations thereon and shall execute all documents and do all other things necessary or proper thereto (including testifying at Employer's expense) in order to vest Employer, or any entity or person specified by Employer, with full and perfect title thereto or interest therein. Employee shall also take any action necessary or advisable in connection with any continuations, renewals, or reissues thereof or in any related proceedings or litigation. 5 Should Employer be unable to secure Employee's signature on any document necessary to apply for, prosecute, obtain, or enforce any patent, copyright, or other right or protection relating to any Invention/Idea, whether due to Employee's mental or physical incapacity, refusal to sign or any other cause, Employee irrevocably designates and appoints Employer and each of its duly authorized officers and agents as Employee's agent and attorney in fact, to act for and in Employee's behalf and stead and to execute and file any such document, and to do all other lawfully permitted acts to further the prosecution, issuance, and enforcement of patents, copyrights, or other rights or protections with the same force and effect as if executed, delivered, and/or done by Employee. EMPLOYER SHALL HAVE NO OBLIGATION TO PAY EMPLOYEE ANY ADDITIONAL CONSIDERATION WITH RESPECT TO THE ASSIGNMENT OF ANY OF THE ABOVE- DESCRIBED INVENTIONS/IDEAS. (d) No Conflict. To the best of Employee's knowledge, there is no existing ----------- contract in conflict with this Agreement and there is no contract to assign any Intellectual Property that is now in existence between Employee and any other person or entity. (e) Post-Termination Period. Because of the difficulty of establishing ----------------------- when any Intellectual Property is first conceived or developed by Employee, or whether it results from access to Confidential Information or Employer's equipment, supplies, facilities, or data, Employee agrees that any Intellectual Property shall be presumed to be an Invention/Idea, if reduced to practice by Employee or with the aid of Employee within one (1) year after termination of the Period of Employment. Employee can rebut the above presumption if Employee proves that the Intellectual Property (i) was developed entirely on Employee's own time without using Employer's equipment, supplies, facilities, or trade secret information; (ii) was not conceived or reduced to practice during the Period of Employment, or, if conceived or reduced to practice during this period, did not, at the time of conception or reduction to practice, relate to Employer's business or actual or demonstrably anticipated research or development; and (iii) did not result from any work performed by Employee by Employer. (f) Representation of Coverage and Grant of License. Except for those ----------------------------------------------- Inventions/Ideas (if any) specifically reserved by Employee in an attachment to this Agreement, Employee represents that there are no Inventions/Ideas owned wholly or in part by Employee, or controlled directly or indirectly by Employee, which Employee considers to be reserved and excluded from the scope of this Agreement. Employee grants to the Company a royalty-free, non-exclusive, irrevocable license on any and all non-reserved Invention/Ideas of Employee. (g) Preservation of Confidence. In order to preserve Employee's -------------------------- proprietary rights in any unpatented or unpublished reserved Inventions/Ideas, Employer shall keep in confidence all information provided by Employee pertaining to any reserved Invention/Idea unless the information: (i) is already known to or in the possession of Employer; (ii) is or becomes publicly known through no wrongful act of Employer; (iii) is rightfully received by Employer from a third party without beach of any obligation to 6 Employee; (iv) is approved for release by written authorization of Employee; (v) is distributed or made available to others by Employee without restriction as to use or disclosure; or (vi) is developed independently by Employer through persons not involved with information received by Employer from Employee. (h) License from Use. Notwithstanding the reservation of an Invention/Idea ---------------- under Section 6(f) above, if Employee (i) uses a reserved Invention/Idea while employed by Employer, or (ii) permits the use of a reserved Invention/Idea by another employee of Employer and does not have a prior written agreement with Employer pertaining to such use, then Employee thereby grants to Employer a royalty-free, non-exclusive, irrevocable license to that Invention/Idea (provided that the reserved Invention/Idea is owned wholly or in part by Employee, or is within the direct or indirect control of Employee at the time of employment). (i) Right of First Refusal. With respect to any reserved Inventions/Ideas ---------------------- specified under Section 6(f) above, Employee grants to Employer a right of first refusal to purchase or license such Inventions/Ideas (unless otherwise licensed to Employer by any other terms of this Agreement) on terms at least as favorable as those offered by Employee to any other purchaser or licensee while Employee is employed by Employer. 7. Grounds for Termination. Any material breach by Employee of this Agreement ----------------------- shall be grounds for terminating Employee's employment with Employer. Notwithstanding the foregoing, nothing in this Agreement is intended to alter the at-will employment status of Employee. 8. Notices. Any notice under this Agreement must be in writing and shall be ------- effective upon delivery by hand, upon facsimile transmission to the number provided below (if one is provided), or three (3) business days after deposit in the United States mails, postage prepaid, certified or registered, and addressed to Employer or to Employee at the corresponding address below. Employee shall be obligated to notify Employer in writing of any change in Employee's address. Notice of change of address shall be effective only when done in accordance with this Section. Employer's Notice Address: Isonics Corporation 4010 Moorpark, Suite 119 San Jose, CA 95117 Attn: James E. Alexander, President Employee's Notice Address: _______________________________ _______________________________ _______________________________ 7 9. Action by Employer. All actions required or permitted to be taken under ------------------ this Agreement by Employer, including, without limitation, exercise of discretion, consents, waivers, and amendments to this agreement, shall be made and authorized only by the President or by his or her representative specifically authorized to fulfill these obligations under this Agreement. 10. Integration. This Agreement is intended to be the final, complete, and ----------- exclusive statement of the terms of Employee's employment by Employer. This Agreement may not be contradicted by evidence of any prior or contemporaneous statements or agreements. To the extent that the practices, policies, or procedures of Employer, now or in the future, apply to Employee and are inconsistent with the terms of this Agreement, the provisions of this Agreement shall control. 11. Amendments; Waivers. This Agreement may not be modified, amended, or ------------------- terminated except by an instrument in writing, signed by each of the parties. No failure to exercise and no delay in exercising any right, remedy, or power under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, or power under this Agreement preclude any other or further exercise thereof, or the exercise of any other right, remedy, or power provided herein or by law or in equity. 12. Assignment; Successors and Assigns. Employee agrees that Employee will not ---------------------------------- assign, sell, transfer, delegate, or otherwise dispose of, whether voluntarily or involuntarily, or by operation of law, any rights or obligations under this Agreement. Any such purported assignment, transfer, or delegation shall be null and void. Nothing in this Agreement shall prevent the consolidation of Employer with, or its merger into, any other entity, or the sale by Employer of all or substantially all of its assets, or the otherwise lawful assignment by Employer of any rights or obligations under this Agreement. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of the parties and their respective heirs, legal representatives, successors, and permitted assigns, and shall not benefit any person or entity other than those specifically enumerated in this Agreement. 13. Severability. If any provision of this Agreement, or its application to ------------ any person, place, or circumstance, is held by an arbitrator or a court of competent jurisdiction to be invalid, unenforceable, or void, such provision shall be enforced to the greatest extent permitted by law, and the remainder of this Agreement and such provision as applied to other persons, places, and circumstances shall remain in full force and effect. 14. Attorneys' Fees. In any legal action, arbitration, or other proceeding --------------- brought to enforce of interpret the terms of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and costs. 15. Injunctive Relief. If Employee breaches or threatens to breach any ----------------- provision of this Agreement, the parties acknowledge that the damage or imminent damage to Employer's business or its goodwill would be irreparable and extremely difficult to 8 estimate, making any remedy at law or in damages inadequate. Accordingly, Employer shall be entitled to injunctive relief against Employee in the event of any breach or threatened breach of such provisions by Employee, in addition to any other relief (including damages) available to Employer under this Agreement or under law. 16. Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the law of the State of California, notwithstanding any California or other conflict-of-laws provisions to the contrary. 17. Interpretation. This Agreement shall be construed as a whole, according to -------------- its fair meaning, and not in favor of or against any party. By way of example and not in limitation, this Agreement shall not be construed in favor of the party receiving a benefit nor against the party responsible for any particular language in this Agreement. 18. Employee Acknowledgment. Employee acknowledges that Employee has had the ----------------------- opportunity to consult legal counsel in regard to this Agreement, that Employee has read and understands this Agreement, that Employee is fully aware of its legal effect, and that Employee has entered into it freely and voluntarily and based on Employee's own judgment and not on any representations or promises other than those contained in this Agreement. Without limiting the generality of the foregoing, Employee acknowledges that Employee has agreed that any and all Inventions/Ideas that Employee might create during the course of Employee's employment with Employer automatically will be assigned to Employer. Employee further acknowledges that Employee has been advised by Employer that the assignment provisions of this Agreement will not apply to an invention which qualifies fully under the provisions of Section 2870 of the California Labor Code and that Employee is aware of the provisions of Section 2870. The parties have duly executed this Agreement as of the date first written above. EMPLOYEE: - --------------------------------- EMPLOYER: - --------------------------------- Isonics Corporation By: ----------------------------- James E. Alexander, President 9 EX-10.03 7 REGISTRANT'S 1996 EXECUTIVES' EQUITY INCENTIVE PLAN EXHIBIT 10.03 ISONICS CORPORATION 1996 EXECUTIVES' EQUITY INCENTIVE PLAN As Adopted _______, 1996 1. PURPOSE. The purpose of this Plan is to provide incentives to ------- attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, its Parent and Subsidiaries, by offering them an opportunity to participate in the Company's future performance through awards of Options, Restricted Stock and Stock Bonuses. Capitalized terms not defined in the text are defined in Section 23. 2. SHARES SUBJECT TO THE PLAN. -------------------------- 2.1 Number of Shares Available. Subject to Sections 2.2 and -------------------------- 18, the total number of Shares reserved and available for grant and issuance pursuant to this Plan will be 225,000 Shares. Subject to Sections 2.2 and 18, Shares that: (a) are subject to issuance upon exercise of an Option but cease to be subject to such Option for any reason other than exercise of such Option; (b) are subject to an Award granted hereunder but are forfeited or are repurchased by the Company at the original issue price; or (c) are subject to an Award that otherwise terminates without Shares being issued will again be available for grant and issuance in connection with future Awards under this Plan. At all times the Company shall reserve and keep available a sufficient number of Shares as shall be required to satisfy the requirements of all outstanding Options granted under this Plan and all other outstanding but unvested Awards granted under this Plan. 2.2 Adjustment of Shares. In the event that the number of -------------------- outstanding Shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under this Plan, (b) the Exercise Prices of and number of Shares subject to outstanding Options, and (c) the number of Shares subject to other outstanding Awards will be proportionately adjusted, subject to any required action by the Board or the shareholders of the Company and compliance with applicable securities laws; provided, however, that -------- ------- fractions of a Share will not be issued but will either be replaced by a cash payment equal to the Fair Market Value of such fraction of a Share or will be rounded up to the nearest whole Share, as determined by the Committee. 3. ELIGIBILITY. ISO (as defined in Section 5 below) may be granted ----------- only to employees (including officers and directors who are also employees) of the Company or of a Parent or Subsidiary of the Company. All other Awards may be granted to employees, officers, directors, consultants, independent contractors and advisors of the Company or any Parent or Subsidiary of the Company; provided such consultants, contractors and advisors render bona fide -------- services not in connection with the offer and sale of securities in a capital- raising transaction. Notwithstanding the foregoing, Awards under this Plan shall be granted only to persons who (i) have a preexisting personal or business relationship with the Company or any of its officers, directors or controlling persons, or (ii) by reason of their business or financial experience or the business or financial experience of their professional advisors who are unaffiliated with and who are not compensated by the Company or any affiliate or selling agent of the Company, directly or indirectly, could be reasonably assumed to have the capacity to protect their own interests in connection with the transaction. No person will be eligible to receive more than 50,000 Shares in any calendar year under this Plan pursuant to the grant of Awards hereunder, other than new employees of the Company or of a Parent or Subsidiary of the Company (including new employees who are also officers and directors of the Company or any Parent or Subsidiary of the Company) who are eligible to receive up to a maximum of 200,000 Shares in the calendar year in which they commence their employment. A person may be granted more than one Award under this Plan. Isonics Corporation 1996 Executives' Equity Incentive Plan 4. ADMINISTRATION. -------------- 4.1 Committee Authority. This Plan will be administered by ------------------- the Committee or by the Board acting as the Committee. Subject to the general purposes, terms and conditions of this Plan, and to the direction of the Board, the Committee will have full power to implement and carry out this Plan. Without limitation, the Committee will have the authority to: (a) construe and interpret this Plan, any Award Agreement and any other agreement or document executed pursuant to this Plan; (b) prescribe, amend and rescind rules and regulations relating to this Plan; (c) select persons to receive Awards; (d) determine the form and terms of Awards; (e) determine the number of Shares or other consideration subject to Awards; (f) determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or any other incentive or compensation plan of the Company or any Parent or Subsidiary of the Company; (g) grant waivers of Plan or Award conditions; (h) determine the vesting, exercisability and payment of Awards; (i) correct any defect, supply any omission or reconcile any inconsistency in this Plan, any Award or any Award Agreement; (j) determine whether an Award has been earned; and (k) make all other determinations necessary or advisable for the administration of this Plan. 4.2 Committee Discretion. Any determination made by the -------------------- Committee with respect to any Award will be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of this Plan or Award, at any later time, and such determination will be final and binding on the Company and on all persons having an interest in any Award under this Plan. The Committee may delegate to one or more officers of the Company the authority to grant an Award under this Plan to Participants who are not Insiders of the Company. 4.3 Committee Members. If two or more members of the Board ----------------- are Outside Directors, the Committee will be comprised of at least two (2) members of the Board, all of whom are Outside Directors and who satisfy the requirements under the Exchange Act for administering this Plan. 5. OPTIONS. The Committee may grant Options to eligible persons and ------- will determine whether such Options will be Incentive Stock Options within the meaning of the Code ("ISO") or Nonqualified Stock Options ("NQSOS"), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised, and all other terms and conditions of the Option, subject to the following: 5.1 Form of Option Grant. Each Option granted under this Plan -------------------- will be evidenced by an Award Agreement which will expressly identify the Option as an ISO or an NQSO ("STOCK OPTION AGREEMENT"), and will be in such form and contain such provisions (which need not be the same for each Participant) as the Committee may from time to time approve, and which will comply with and be subject to the terms and conditions of this Plan. -2- Isonics Corporation 1996 Executives' Equity Incentive Plan 5.2 Date of Grant. The date of grant of an Option will be the ------------- date on which the Committee makes the determination to grant such Option, unless otherwise specified by the Committee. The Stock Option Agreement and a copy of this Plan will be delivered to the Participant within a reasonable time after the granting of the Option. 5.3 Exercise Period. Options may be exercisable within the --------------- times or upon the events determined by the Committee as set forth in the Stock Option Agreement governing such Option; provided, however, that no Option will -------- ------- be exercisable after the expiration of ten (10) years from the date the Option is granted; and provided further that no ISO granted to a person who directly or -------- ------- by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary of the Company ("TEN PERCENT SHAREHOLDER") will be exercisable after the expiration of five (5) years from the date the ISO is granted. The Committee also may provide for Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines. 5.4 Exercise Price. The Exercise Price of an Option will be -------------- determined by the Committee when the Option is granted and may be not less than 85% of the Fair Market Value of the Shares on the date of grant; provided that: (i) the Exercise Price of an ISO will be not less than 100% of the Fair Market Value of the Shares on the date of grant; and (ii) the Exercise Price of any ISO granted to a Ten Percent Shareholder will not be less than 110% of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased may be made in accordance with Section 8 of this Plan. 5.5 Method of Exercise. Options may be exercised only by ------------------ delivery to the Company of a written stock option exercise agreement (the "EXERCISE AGREEMENT") in a form approved by the Committee (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares purchased under such Exercise Agreement, if any, and such representations and agreements regarding Participant's investment intent and access to information and other matters, if any, as may be required or desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price for the number of Shares being purchased. 5.6 Termination. Notwithstanding the exercise periods set ----------- forth in the Stock Option Agreement, exercise of an Option will always be subject to the following: (a) If the Participant is Terminated for any reason except death or Disability, then the Participant may exercise such Participant's Options only to the extent that such Options would have been exercisable upon the Termination Date no later than three (3) months after the Termination Date (or such shorter or longer time period not exceeding five (5) years as may be determined by the Committee, with any exercise beyond three (3) months after the Termination Date deemed to be an NQSO), but in any event, no later than the expiration date of the Options. (b) If the Participant is Terminated because of Participant's death or Disability (or the Participant dies within three (3) months after a Termination other than because of Participant's death or disability), then Participant's Options may be exercised only to the extent that such Options would have been exercisable by Participant on the Termination Date and must be exercised by Participant (or Participant's legal representative or authorized assignee) no later than twelve (12) months after the Termination Date (or such shorter or longer time period not exceeding five (5) years as may be determined by the Committee, with any such exercise beyond (a) three (3) months after the Termination Date when the Termination is for any reason other than the Participant's death or Disability, or (b) twelve (12) months after the Termination Date when the Termination is for Participant's death or Disability, deemed to be an NQSO), but in any event no later than the expiration date of the Options. (c) If a Participant is Terminated for Cause, unless otherwise determined by the Committee, neither the Participant, the Participant's estate nor such other person who may then hold the -3- Isonics Corporation 1996 Executives' Equity Incentive Plan Option shall be entitled to exercise any Option with respect to any Shares whatsoever, after termination of service, whether or not after termination of service the Participant may receive payment from the Company or Subsidiary for vacation pay, for services rendered prior to termination, for services rendered for the day on which termination occurs, for salary in lieu of notice, or for any other benefits. In making such determination, the Board shall give the Participant an opportunity to present to the Board evidence on his behalf. For the purpose of this paragraph, termination of service shall be deemed to occur on the date when the Company dispatches notice or advice to the Participant that his service is terminated. 5.7 Limitations on Exercise. The Committee may specify a ----------------------- reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent Participant from exercising the Option for the full number of Shares for which it is then exercisable. 5.8 Limitations on ISO. The aggregate Fair Market Value ------------------ (determined as of the date of grant) of Shares with respect to which ISO are exercisable for the first time by a Participant during any calendar year (under this Plan or under any other incentive stock option plan of the Company, Parent or Subsidiary of the Company) shall not exceed $100,000. If the Fair Market Value of Shares on the date of grant with respect to which ISO are exercisable for the first time by a Participant during any calendar year would exceed $100,000, then the Options for the first $100,000 worth of Shares to become exercisable in such calendar year will be ISO and the Options for the amount in excess of $100,000 that become exercisable in that calendar year will be NQSOs. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date of this Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISO, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment. 5.9 Modification, Extension or Renewal. The Committee may ---------------------------------- modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of a Participant, impair any of such Participant's rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants affected by a written notice to them; provided, however, that the Exercise Price may not be reduced -------- ------- below the minimum Exercise Price that would be permitted under Section 5.4 of this Plan for Options granted on the date the action is taken to reduce the Exercise Price. 5.10 No Disqualification. Notwithstanding any other provision ------------------- in this Plan, no term of this Plan relating to ISO will be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code. 6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the ---------------- Company to sell to an eligible person Shares that are subject to restrictions. The Committee will determine to whom an offer will be made, the number of Shares the person may purchase, the price to be paid (the "PURCHASE PRICE"), the restrictions to which the Shares will be subject, and all other terms and conditions of the Restricted Stock Award, subject to the following: 6.1 Form of Restricted Stock Award. All purchases under a ------------------------------ Restricted Stock Award made pursuant to this Plan will be evidenced by an Award Agreement ("RESTRICTED STOCK PURCHASE AGREEMENT") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. The offer of Restricted Stock will be accepted by the Participant's execution and delivery of the Restricted Stock Purchase Agreement and full payment for the Shares to the Company within thirty (30) days from the date the Restricted Stock Purchase Agreement is delivered to the person. If such person does not execute and deliver the Restricted Stock Purchase Agreement along with full payment for the Shares to the Company within thirty (30) days, then the offer will terminate, unless otherwise determined by the Committee. -4- Isonics Corporation 1996 Executives' Equity Incentive Plan 6.2 Purchase Price. The Purchase Price of Shares sold -------------- pursuant to a Restricted Stock Award will be determined by the Committee and will be at least 85% of the Fair Market Value of the Shares on the date the Restricted Stock Award is granted, except in the case of a sale to a Ten Percent Shareholder, in which case the Purchase Price will be 100% of the Fair Market Value. Payment of the Purchase Price may be made in accordance with Section 8 of this Plan. 6.3 Restrictions. Restricted Stock Awards will be subject to ------------ such restrictions (if any) as the Committee may impose. The Committee may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions, in whole or part, based on length of service, performance or such other factors or criteria as the Committee may determine. 7. STOCK BONUSES. ------------- 7.1 Awards of Stock Bonuses. A Stock Bonus is an award of ----------------------- Shares (which may consist of Restricted Stock) for services rendered to the Company or any Parent or Subsidiary of the Company. A Stock Bonus may be awarded for past services already rendered to the Company, or any Parent or Subsidiary of the Company pursuant to an Award Agreement (the "STOCK BONUS AGREEMENT") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. A Stock Bonus may be awarded upon satisfaction of such performance goals as are set out in advance in the Participant's individual Award Agreement (the "PERFORMANCE STOCK BONUS AGREEMENT") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. Stock Bonuses may vary from Participant to Participant and between groups of Participants, and may be based upon the achievement of the Company, Parent or Subsidiary and/or individual performance factors or upon such other criteria as the Committee may determine. 7.2 Terms of Stock Bonuses. The Committee will determine the ---------------------- number of Shares to be awarded to the Participant and whether such Shares will be Restricted Stock. If the Stock Bonus is being earned upon the satisfaction of performance goals pursuant to a Performance Stock Bonus Agreement, then the Committee will determine: (a) the nature, length and starting date of any period during which performance is to be measured (the "PERFORMANCE PERIOD") for each Stock Bonus; (b) the performance goals and criteria to be used to measure the performance, if any; (c) the number of Shares that may be awarded to the Participant; and (d) the extent to which such Stock Bonuses have been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Bonuses that are subject to different Performance Periods and different performance goals and other criteria. The number of Shares may be fixed or may vary in accordance with such performance goals and criteria as may be determined by the Committee. The Committee may adjust the performance goals applicable to the Stock Bonuses to take into account changes in law and accounting or tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships. 7.3 Form of Payment. The earned portion of a Stock Bonus may --------------- be paid currently or on a deferred basis with such interest or dividend equivalent, if any, as the Committee may determine. Payment may be made in the form of cash, whole Shares, including Restricted Stock, or a combination thereof, either in a lump sum payment or in installments, all as the Committee will determine. 7.4 Termination During Performance Period. If a Participant ------------------------------------- is Terminated during a Performance Period for any reason, then such Participant will be entitled to payment (whether in Shares, cash or otherwise) with respect to the Stock Bonus only to the extent earned as of the date of Termination in accordance with the Performance Stock Bonus Agreement, unless the Committee will determine otherwise. 8. PAYMENT FOR SHARE PURCHASES. --------------------------- 8.1 Payment. Payment for Shares purchased pursuant to this ------- Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and where permitted by law: -5- Isonics Corporation 1996 Executives' Equity Incentive Plan (a) by cancellation of indebtedness of the Company to the Participant; (b) by surrender of shares that either: (1) have been owned by Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares); or (2) were obtained by Participant in the public market; (c) by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; provided, however, that Participants who are not -------- ------- employees or directors of the Company will not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares; (d) by waiver of compensation due or accrued to the Participant for services rendered; (e) with respect only to purchases upon exercise of an Option, and provided that a public market for the Company's stock exists: (1) through a "same day sale" commitment from the Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD DEALER") whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (2) through a "margin" commitment from the Participant and a NASD Dealer whereby the Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (f) by any combination of the foregoing. 8.2 Loan Guarantees. The Committee may help the Participant --------------- pay for Shares purchased under this Plan by authorizing a guarantee by the Company of a third-party loan to the Participant. 9. WITHHOLDING TAXES. ----------------- 9.1 Withholding Generally. Whenever Shares are to be issued --------------------- in satisfaction of Awards granted under this Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under this Plan, payments in satisfaction of Awards are to be made in cash, such payment will be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements. 9.2 Stock Withholding. When, under applicable tax laws, a ----------------- Participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may in its sole discretion allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined (the "TAX DATE"). All elections by a Participant to have Shares withheld for this purpose will be made in accordance with the requirements established by the Committee and be in writing in a form acceptable to the Committee -6- Isonics Corporation 1996 Executives' Equity Incentive Plan 10. PRIVILEGES OF STOCK OWNERSHIP. ----------------------------- 10.1 Voting and Dividends. No Participant will have any of the -------------------- rights of a shareholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant will be a shareholder and have all the rights of a shareholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided, that if such -------- Shares are Restricted Stock, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company will be subject to the same restrictions as the Restricted Stock; provided, further, that the Participant will have no right to -------- ------- retain such stock dividends or stock distributions with respect to Shares that are repurchased at the Participant's original Purchase Price pursuant to Section 12. 10.2 Financial Statements. The Company will provide financial -------------------- statements to each Participant prior to such Participant's purchase of Shares under this Plan, and to each Participant annually during the period such Participant has Awards outstanding; provided, however, the Company will not be -------- ------- required to provide such financial statements to Participants whose services in connection with the Company assure them access to equivalent information. 11. TRANSFERABILITY. Awards granted under this Plan, and any interest --------------- therein, will not be transferable or assignable by Participant, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution. During the lifetime of the Participant an Award will be exercisable only by the Participant, and any elections with respect to an Award may be made only by the Participant. 12. RESTRICTIONS ON SHARES. At the discretion of the Committee, the ---------------------- Company may reserve to itself and/or its assignee(s) in the Award Agreement a right to repurchase a portion of or all Unvested Shares held by a Participant following such Participant's Termination at any time within ninety (90) days after the later of Participant's Termination Date and the date Participant purchases Shares under this Plan, for cash and/or cancellation of purchase money indebtedness, at the Participant's Exercise Price or Purchase Price, as the case may be. 13. CERTIFICATES. All certificates for Shares or other securities ------------ delivered under this Plan will be subject to such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted. 14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a ------------------------ Participant's Shares, the Committee may require the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of Participant's obligation to the Company under the promissory note; provided, however, that the Committee may -------- ------- require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company will have full recourse against the Participant under the promissory note notwithstanding any pledge of the Participant's Shares or other collateral. In connection with any pledge of the Shares, Participant will be required to execute and deliver a written pledge agreement in such form as the Committee will from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a pro rata basis as the promissory note is paid. 15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or ----------------------------- from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in -7- Isonics Corporation 1996 Executives' Equity Incentive Plan exchange for the surrender and cancellation of any or all outstanding Awards. The Committee may at any time buy from a Participant an Award previously granted with payment in cash, Shares (including Restricted Stock) or other consideration, based on such terms and conditions as the Committee and the Participant may agree. 16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not ---------------------------------------------- be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to: (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and/or (b) completion of any registration or other qualification of such Shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so. 17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award ----------------------- granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent or Subsidiary of the Company or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Participant's employment or other relationship at any time, with or without cause. 18. CORPORATE TRANSACTIONS. ---------------------- 18.1 Assumption or Replacement of Awards by Successor. In the ------------------------------------------------ event of (a) a dissolution or liquidation of the Company, (b) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the shareholders of the Company or their relative stock holdings and the Awards granted under this Plan are assumed, converted or replaced by the successor corporation, which assumption will be binding on all Participants), (c) a merger in which the Company is the surviving corporation but after which the shareholders of the Company immediately prior to such merger (other than any shareholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company, or (d) the sale of substantially all of the assets of the Company, the vesting of all options granted pursuant to this Plan will accelerate and the options will become exercisable in full prior to the consummation of such event at such times and on such conditions as the Committee determines, and if such options are not exercised prior to the consummation of the corporate transaction, they shall terminate in accordance with the provisions of this Plan. 18.2 Other Treatment of Awards. Subject to any greater rights ------------------------- granted to Participants under the foregoing provisions of this Section 18, in the event of the occurrence of any transaction described in Section 18.1, any outstanding Awards will be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation, sale of assets or other "corporate transaction." 18.3 Assumption of Awards by the Company. The Company, from ----------------------------------- time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either; (a) granting an Award under this Plan in substitution of such other company's award; or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of this Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award will remain unchanged (except that the exercise price and the number and nature of Shares ------ issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price. -8- Isonics Corporation 1996 Executives' Equity Incentive Plan 19. ADOPTION AND SHAREHOLDER APPROVAL. This Plan will become --------------------------------- effective on the date on which the registration statement filed by the Company with the SEC under the Securities Act registering the initial public offering of the Company's Common Stock is declared effective by the SEC (the "EFFECTIVE DATE"); provided, however, that if the Effective Date does not occur on or -------- ------- before December 31, 1997, this Plan will terminate having never become effective. This Plan shall be approved by the shareholders of the Company (excluding Shares issued pursuant to this Plan), consistent with applicable laws, within twelve (12) months before or after the date this Plan is adopted by the Board. Upon the Effective Date, the Board may grant Awards pursuant to this Plan; provided, however, that: (a) no Option may be exercised prior to initial -------- ------- shareholder approval of this Plan; (b) no Option granted pursuant to an increase in the number of Shares subject to this Plan approved by the Board will be exercised prior to the time such increase has been approved by the shareholders of the Company; and (c) in the event that shareholder approval of such increase is not obtained within the time period provided herein, all Awards granted hereunder will be canceled, any Shares issued pursuant to any Award will be canceled, and any purchase of Shares hereunder will be rescinded. So long as the Company is subject to Section 16(b) of the Exchange Act, the Company will comply with the requirements of Rule 16b-3 (or its successor), as amended, with respect to shareholder approval. 20. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided -------------------------- herein, this Plan will terminate ten (10) years from the date this Plan is adopted by the Board or, if earlier, the date of shareholder approval. This Plan and all agreements thereunder shall be governed by and construed in accordance with the laws of the State of California. 21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time -------------------------------- terminate or amend this Plan in any respect, including without limitation amendment of any form of Award Agreement or instrument to be executed pursuant to this Plan; provided, however, that the Board will not, without the approval -------- ------- of the shareholders of the Company, amend this Plan in any manner that requires such shareholder approval pursuant to the Code or the regulations promulgated thereunder as such provisions apply to ISO plans or (if the Company is subject to the Exchange Act or Section 16(b) of the Exchange Act) pursuant to the Exchange Act or Rule 16b-3 (or its successor), as amended, thereunder, respectively. 22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by -------------------------- the Board, the submission of this Plan to the shareholders of the Company for approval, nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options and bonuses otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 23. DEFINITIONS. As used in this Plan, the following terms will have ----------- the following meanings: "AWARD" means any award under this Plan, including any Option, Restricted Stock or Stock Bonus. "AWARD AGREEMENT" means, with respect to each Award, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award. "BOARD" means the Board of Directors of the Company. "CAUSE" means Termination because of (i) any willful material violation by the Participant of any law or regulation applicable to the business of the Company or a Parent or Subsidiary of the Company, the Participant's conviction for, or guilty plea to, a felony or a crime involving moral turpitude, any willful perpetration by the Participant of a common law fraud or any unlawful use by the Participant of drugs or other controlled substances, (ii) the Participant's commission of an act of personal dishonesty which involves personal profit in connection with the Company or any other entity having a business relationship with the Company, (iii) any material breach by the Participant of any provision of any agreement or understanding between the Company and the Participant regarding the terms of the Participant's service as an employee, director, consultant, independent contractor or adviser to the Company or a Parent or Subsidiary of the Company, including without limitation, the willful and continued failure or refusal of the Participant to perform the material duties required of such Participant as an employee, director, consultant, independent -9- Isonics Corporation 1996 Executives' Equity Incentive Plan contractor or adviser of the Company or a Parent or Subsidiary of the Company, other than as a result of being Disabled, or a breach of any applicable invention assignment and confidentiality agreement or similar agreement between the Company and the Participant, (iv) Participant's disregard of the policies of the Company so as to cause loss, damage or injury to the property, reputation or employees of the Company or a Parent or Subsidiary of the Company, or (v) any other misconduct by the Participant which is materially injurious to the financial condition or business reputation of, or is otherwise materially injurious to, the Company or a Parent or Subsidiary of the Company. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMITTEE" means the committee appointed by the Board to administer this Plan, or if no such committee is appointed, the Board. "COMPANY" means Isonics Corporation or any successor corporation. "DISABILITY" means a disability, whether temporary or permanent, partial or total, within the meaning of Section 22(e)(3) of the Code, as determined by the Committee. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "EXERCISE PRICE" means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option. "FAIR MARKET VALUE" means, as of any date, the value of a share of the Company's Common Stock determined as follows: (a) if such Common Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the date of determination as reported in The Wall Street Journal; ----------------------- (b) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal; ----------------------- (c) if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination as reported in The Wall -------- Street Journal; -------------- (d) in the case of an Award made on the Effective Date, the price per share at which shares of the Company's Common Stock are initially offered for sale to the public by the Company's underwriters in the initial public offering of the Company's Common Stock pursuant to a registration statement filed with the SEC under the Securities Act; or (e) if none of the foregoing is applicable, by the Committee in good faith. "INSIDER" means an officer or director of the Company or any other person whose transactions in the Company's Common Stock are subject to Section 16 of the Exchange Act. "OUTSIDE DIRECTOR" means any director who is not; (a) a current employee of the Company or any Parent or Subsidiary of the Company; (b) a former employee of the Company or any Parent or Subsidiary of the Company who is receiving compensation for prior services (other than benefits under a tax- qualified pension -10- Isonics Corporation 1996 Executives' Equity Incentive Plan plan); (c) a current or former officer of the Company or any Parent or Subsidiary of the Company; or (d) currently receiving compensation for personal services in any capacity, other than as a director, from the Company or any Parent or Subsidiary of the Company; provided, however, that at such time as the -------- ------- term "Outside Director", as used in Section 162(m) of the Code is defined in regulations promulgated under Section 162(m) of the Code, "Outside Director" will have the meaning set forth in such regulations, as amended from time to time and as interpreted by the Internal Revenue Service. "OPTION" means an award of an option to purchase Shares pursuant to Section 5. "PARENT" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "PARTICIPANT" means a person who receives an Award under this Plan. "PLAN" means this Isonics Corporation 1996 Equity Incentive Plan, as amended from time to time. "RESTRICTED STOCK AWARD" means an award of Shares pursuant to Section 6. "SEC" means the Securities and Exchange Commission. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SHARES" means shares of the Company's Common Stock reserved for issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any successor security. "STOCK BONUS" means an award of Shares, or cash in lieu of Shares, pursuant to Section 7. "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "TERMINATION" or "TERMINATED" means, for purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provide services as an employee, officer, director, consultant, independent contractor, or advisor to the Company or a Parent or Subsidiary of the Company. An employee will not be deemed to have ceased to provide services in the case of (i) sick leave, (ii) military leave, or (iii) any other leave of absence approved by the Committee, provided, that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute or unless provided otherwise pursuant to formal policy adopted from time to time by the Company and issued and promulgated to employees in writing. In the case of any employee on an approved leave of absence, the Committee may make such provisions respecting suspension of vesting of the Award while on leave from the employ of the Company or a Subsidiary as it may deem appropriate, except that in no event may an Option be exercised after the expiration of the term set forth in the Option agreement. The Committee will have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the "TERMINATION DATE"). "UNVESTED SHARES" means "Unvested Shares" as defined in the Award Agreement. "VESTED SHARES" means "Vested Shares" as defined in the Award Agreement. -11- EX-10.04 8 REGISTRANT'S 1996 EQUITY INCENTIVE PLAN EXHIBIT 10.04 ISONICS CORPORATION 1996 EQUITY INCENTIVE PLAN As Adopted _____________, 1996 1. PURPOSE. The purpose of this Plan is to provide incentives to ------- attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, its Parent and Subsidiaries, by offering them an opportunity to participate in the Company's future performance through awards of Options, Restricted Stock and Stock Bonuses. Capitalized terms not defined in the text are defined in Section 23. 2. SHARES SUBJECT TO THE PLAN. -------------------------- 2.1 Number of Shares Available. Subject to Sections 2.2 and -------------------------- 18, the total number of Shares reserved and available for grant and issuance pursuant to this Plan will be 50,000 Shares. Subject to Sections 2.2 and 18, Shares that: (a) are subject to issuance upon exercise of an Option but cease to be subject to such Option for any reason other than exercise of such Option; (b) are subject to an Award granted hereunder but are forfeited or are repurchased by the Company at the original issue price; or (c) are subject to an Award that otherwise terminates without Shares being issued will again be available for grant and issuance in connection with future Awards under this Plan. At all times the Company shall reserve and keep available a sufficient number of Shares as shall be required to satisfy the requirements of all outstanding Options granted under this Plan and all other outstanding but unvested Awards granted under this Plan. 2.2 Adjustment of Shares. In the event that the number of -------------------- outstanding Shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under this Plan, (b) the Exercise Prices of and number of Shares subject to outstanding Options, and (c) the number of Shares subject to other outstanding Awards will be proportionately adjusted, subject to any required action by the Board or the shareholders of the Company and compliance with applicable securities laws; provided, however, that -------- ------- fractions of a Share will not be issued but will either be replaced by a cash payment equal to the Fair Market Value of such fraction of a Share or will be rounded up to the nearest whole Share, as determined by the Committee. 3. ELIGIBILITY. ISO (as defined in Section 5 below) may be granted ----------- only to employees (including officers and directors who are also employees) of the Company or of a Parent or Subsidiary of the Company. All other Awards may be granted to employees, officers, directors, consultants, independent contractors and advisors of the Company or any Parent or Subsidiary of the Company; provided such consultants, contractors and advisors render bona fide -------- services not in connection with the offer and sale of securities in a capital- raising transaction. No person will be eligible to receive more than 50,000 Shares in any calendar year under this Plan pursuant to the grant of Awards hereunder, other than new employees of the Company or of a Parent or Subsidiary of the Company (including new employees who are also officers and directors of the Company or any Parent or Subsidiary of the Company) who are eligible to receive up to a maximum of 30,000 Shares in the calendar year in which they commence their employment. A person may be granted more than one Award under this Plan. Isonics Corporation 1996 Equity Incentive Plan 4. ADMINISTRATION. -------------- 4.1 Committee Authority. This Plan will be administered by ------------------- the Committee or by the Board acting as the Committee. Subject to the general purposes, terms and conditions of this Plan, and to the direction of the Board, the Committee will have full power to implement and carry out this Plan. Without limitation, the Committee will have the authority to: (a) construe and interpret this Plan, any Award Agreement and any other agreement or document executed pursuant to this Plan; (b) prescribe, amend and rescind rules and regulations relating to this Plan; (c) select persons to receive Awards; (d) determine the form and terms of Awards; (e) determine the number of Shares or other consideration subject to Awards; (f) determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or any other incentive or compensation plan of the Company or any Parent or Subsidiary of the Company; (g) grant waivers of Plan or Award conditions; (h) determine the vesting, exercisability and payment of Awards; (i) correct any defect, supply any omission or reconcile any inconsistency in this Plan, any Award or any Award Agreement; (j) determine whether an Award has been earned; and (k) make all other determinations necessary or advisable for the administration of this Plan. 4.2 Committee Discretion. Any determination made by the -------------------- Committee with respect to any Award will be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of this Plan or Award, at any later time, and such determination will be final and binding on the Company and on all persons having an interest in any Award under this Plan. The Committee may delegate to one or more officers of the Company the authority to grant an Award under this Plan to Participants who are not Insiders of the Company. 4.3 Committee Members. If two or more members of the Board ----------------- are Outside Directors, the Committee will be comprised of at least two (2) members of the Board, all of whom are Outside Directors and who satisfy the requirements under the Exchange Act for administering this Plan. 5. OPTIONS. The Committee may grant Options to eligible persons and ------- will determine whether such Options will be Incentive Stock Options within the meaning of the Code ("ISO") or Nonqualified Stock Options ("NQSOS"), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised, and all other terms and conditions of the Option, subject to the following: 5.1 Form of Option Grant. Each Option granted under this Plan -------------------- will be evidenced by an Award Agreement which will expressly identify the Option as an ISO or an NQSO ("STOCK OPTION AGREEMENT"), and will be in such form and contain such provisions (which need not be the same for each Participant) as the Committee may from time to time approve, and which will comply with and be subject to the terms and conditions of this Plan. -2- Isonics Corporation 1996 Equity Incentive Plan 5.2 Date of Grant. The date of grant of an Option will be the ------------- date on which the Committee makes the determination to grant such Option, unless otherwise specified by the Committee. The Stock Option Agreement and a copy of this Plan will be delivered to the Participant within a reasonable time after the granting of the Option. 5.3 Exercise Period. Options may be exercisable within the --------------- times or upon the events determined by the Committee as set forth in the Stock Option Agreement governing such Option; provided, however, that no Option will -------- ------- be exercisable after the expiration of ten (10) years from the date the Option is granted; and provided further that no ISO granted to a person who directly or -------- ------- by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary of the Company ("TEN PERCENT SHAREHOLDER") will be exercisable after the expiration of five (5) years from the date the ISO is granted. The Committee also may provide for Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines. 5.4 Exercise Price. The Exercise Price of an Option will be -------------- determined by the Committee when the Option is granted and may be not less than 85% of the Fair Market Value of the Shares on the date of grant; provided that: (i) the Exercise Price of an ISO will be not less than 100% of the Fair Market Value of the Shares on the date of grant; and (ii) the Exercise Price of any Option granted to a Ten Percent Shareholder will not be less than 110% of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased may be made in accordance with Section 8 of this Plan. 5.5 Method of Exercise. Options may be exercised only by ------------------ delivery to the Company of a written stock option exercise agreement (the "EXERCISE AGREEMENT") in a form approved by the Committee (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares purchased under such Exercise Agreement, if any, and such representations and agreements regarding Participant's investment intent and access to information and other matters, if any, as may be required or desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price for the number of Shares being purchased. 5.6 Termination. Notwithstanding the exercise periods set ----------- forth in the Stock Option Agreement, exercise of an Option will always be subject to the following: (a) If the Participant is Terminated for any reason except death or Disability, then the Participant may exercise such Participant's Options only to the extent that such Options would have been exercisable upon the Termination Date no later than three (3) months after the Termination Date (or such shorter or longer time period not exceeding five (5) years as may be determined by the Committee, with any exercise beyond three (3) months after the Termination Date deemed to be an NQSO), but in any event, no later than the expiration date of the Options. (b) If the Participant is Terminated because of Participant's death or Disability (or the Participant dies within three (3) months after a Termination other than because of Participant's death or Disability), then Participant's Options may be exercised only to the extent that such Options would have been exercisable by Participant on the Termination Date and must be exercised by Participant (or Participant's legal representative or authorized assignee) no later than twelve (12) months after the Termination Date (or such shorter or longer time period not exceeding five (5) years as may be determined by the Committee, with any such exercise beyond (a) three (3) months after the Termination Date when the Termination is for any reason other than the Participant's death or disability, within the meaning of Section 22(e)(3) of the Code, or (b) twelve (12) months after the Termination Date when the Termination is for Participant's death or disability, within the meaning of Section 22(e)(3) of the Code, deemed to be an NQSO), but in any event no later than the expiration date of the Options. -3- Isonics Corporation 1996 Equity Incentive Plan (c) If the Participant is terminated for Cause, then Participant's options shall expire on such Participant's Termination Date, or at such later time or on such conditions as determined by the Committee. 5.7 Limitations on Exercise. The Committee may specify a ----------------------- reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent Participant from exercising the Option for the full number of Shares for which it is then exercisable. 5.8 Limitations on ISO. The aggregate Fair Market Value ------------------ (determined as of the date of grant) of Shares with respect to which ISO are exercisable for the first time by a Participant during any calendar year (under this Plan or under any other incentive stock option plan of the Company, Parent or Subsidiary of the Company) shall not exceed $100,000. If the Fair Market Value of Shares on the date of grant with respect to which ISO are exercisable for the first time by a Participant during any calendar year would exceed $100,000, then the Options for the first $100,000 worth of Shares to become exercisable in such calendar year will be ISO and the Options for the amount in excess of $100,000 that become exercisable in that calendar year will be NQSOs. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date of this Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISO, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment. 5.9 Modification, Extension or Renewal. The Committee may ---------------------------------- modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of a Participant, impair any of such Participant's rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants affected by a written notice to them; provided, however, that the Exercise Price may not be reduced -------- ------- below the minimum Exercise Price that would be permitted under Section 5.4 of this Plan for Options granted on the date the action is taken to reduce the Exercise Price. 5.10 No Disqualification. Notwithstanding any other provision ------------------- in this Plan, no term of this Plan relating to ISO will be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code. 6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the ---------------- Company to sell to an eligible person Shares that are subject to restrictions. The Committee will determine to whom an offer will be made, the number of Shares the person may purchase, the price to be paid (the "PURCHASE PRICE"), the restrictions to which the Shares will be subject, and all other terms and conditions of the Restricted Stock Award, subject to the following: 6.1 Form of Restricted Stock Award. All purchases under a ------------------------------ Restricted Stock Award made pursuant to this Plan will be evidenced by an Award Agreement ("RESTRICTED STOCK PURCHASE AGREEMENT") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. The offer of Restricted Stock will be accepted by the Participant's execution and delivery of the Restricted Stock Purchase Agreement and full payment for the Shares to the Company within thirty (30) days from the date the Restricted Stock Purchase Agreement is delivered to the person. If such person does not execute and deliver the Restricted Stock Purchase Agreement along with full payment for the Shares to the Company within thirty (30) days, then the offer will terminate, unless otherwise determined by the Committee. 6.2 Purchase Price. The Purchase Price of Shares sold -------------- pursuant to a Restricted Stock Award will be determined by the Committee and will be at least 85% of the Fair Market Value of the Shares on the date the Restricted Stock Award is granted, except in the case of a sale to a Ten Percent Shareholder, in which case the Purchase Price will be 100% of the Fair Market Value. Payment of the Purchase Price may be made in accordance with Section 8 of this Plan. -4- Isonics Corporation 1996 Equity Incentive Plan 6.3 Restrictions. Restricted Stock Awards will be subject to ------------ such restrictions (if any) as the Committee may impose. The Committee may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions, in whole or part, based on length of service, performance or such other factors or criteria as the Committee may determine. 7. STOCK BONUSES. ------------- 7.1 Awards of Stock Bonuses. A Stock Bonus is an award of ----------------------- Shares (which may consist of Restricted Stock) for services rendered to the Company or any Parent or Subsidiary of the Company. A Stock Bonus may be awarded for past services already rendered to the Company, or any Parent or Subsidiary of the Company pursuant to an Award Agreement (the "STOCK BONUS AGREEMENT") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. A Stock Bonus may be awarded upon satisfaction of such performance goals as are set out in advance in the Participant's individual Award Agreement (the "PERFORMANCE STOCK BONUS AGREEMENT") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. Stock Bonuses may vary from Participant to Participant and between groups of Participants, and may be based upon the achievement of the Company, Parent or Subsidiary and/or individual performance factors or upon such other criteria as the Committee may determine. 7.2 Terms of Stock Bonuses. The Committee will determine the ---------------------- number of Shares to be awarded to the Participant and whether such Shares will be Restricted Stock. If the Stock Bonus is being earned upon the satisfaction of performance goals pursuant to a Performance Stock Bonus Agreement, then the Committee will determine: (a) the nature, length and starting date of any period during which performance is to be measured (the "PERFORMANCE PERIOD") for each Stock Bonus; (b) the performance goals and criteria to be used to measure the performance, if any; (c) the number of Shares that may be awarded to the Participant; and (d) the extent to which such Stock Bonuses have been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Bonuses that are subject to different Performance Periods and different performance goals and other criteria. The number of Shares may be fixed or may vary in accordance with such performance goals and criteria as may be determined by the Committee. The Committee may adjust the performance goals applicable to the Stock Bonuses to take into account changes in law and accounting or tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships. 7.3 Form of Payment. The earned portion of a Stock Bonus may --------------- be paid currently or on a deferred basis with such interest or dividend equivalent, if any, as the Committee may determine. Payment may be made in the form of cash, whole Shares, including Restricted Stock, or a combination thereof, either in a lump sum payment or in installments, all as the Committee will determine. 7.4 Termination During Performance Period. If a Participant ------------------------------------- is Terminated during a Performance Period for any reason, then such Participant will be entitled to payment (whether in Shares, cash or otherwise) with respect to the Stock Bonus only to the extent earned as of the date of Termination in accordance with the Performance Stock Bonus Agreement, unless the Committee determines otherwise. 8. PAYMENT FOR SHARE PURCHASES. --------------------------- 8.1 Payment. Payment for Shares purchased pursuant to this ------- Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and where permitted by law: (a) by cancellation of indebtedness of the Company to the Participant; (b) by surrender of shares that either: (1) have been owned by Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144 (and, if such shares -5- Isonics Corporation 1996 Equity Incentive Plan were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares); or (2) were obtained by Participant in the public market; (c) by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; provided, however, that Participants who are not -------- ------- employees or directors of the Company will not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares; (d) by waiver of compensation due or accrued to the Participant for services rendered; (e) with respect only to purchases upon exercise of an Option, and provided that a public market for the Company's stock exists: (1) through a "same day sale" commitment from the Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD DEALER") whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (2) through a "margin" commitment from the Participant and a NASD Dealer whereby the Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (f) by any combination of the foregoing. 8.2 Loan Guarantees. The Committee may help the Participant --------------- pay for Shares purchased under this Plan by authorizing a guarantee by the Company of a third-party loan to the Participant. 9. WITHHOLDING TAXES. ----------------- 9.1 Withholding Generally. Whenever Shares are to be issued --------------------- in satisfaction of Awards granted under this Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under this Plan, payments in satisfaction of Awards are to be made in cash, such payment will be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements. 9.2 Stock Withholding. When, under applicable tax laws, a ----------------- Participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may in its sole discretion allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares withheld for this purpose will be made in accordance with the requirements established by the Committee and be in writing in a form acceptable to the Committee 10. PRIVILEGES OF STOCK OWNERSHIP. ----------------------------- 10.1 Voting and Dividends. No Participant will have any of the -------------------- rights of a shareholder with respect to any Shares until the Shares are issued to the -6- Isonics Corporation 1996 Equity Incentive Plan Participant. After Shares are issued to the Participant, the Participant will be a shareholder and have all the rights of a shareholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided, that if such -------- Shares are Restricted Stock, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company will be subject to the same restrictions as the Restricted Stock; provided, further, that the Participant will have no right to -------- ------- retain such stock dividends or stock distributions with respect to Shares that are repurchased at the Participant's original Purchase Price pursuant to Section 12. 10.2 Financial Statements. The Company will provide financial -------------------- statements to each Participant prior to such Participant's purchase of Shares under this Plan, and to each Participant annually during the period such Participant has Awards outstanding; provided, however, the Company will not be -------- ------- required to provide such financial statements to Participants whose services in connection with the Company assure them access to equivalent information. 11. TRANSFERABILITY. Awards granted under this Plan, and any interest --------------- therein, will not be transferable or assignable by Participant, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution or as consistent with the specific Plan and Award Agreement provisions relating thereto. During the lifetime of the Participant an Award will be exercisable only by the Participant, and any elections with respect to an Award may be made only by the Participant. 12. RESTRICTIONS ON SHARES. At the discretion of the Committee, the ---------------------- Company may reserve to itself and/or its assignee(s) in the Award Agreement a right to repurchase Unvested Shares held by a Participant following such Participant's Termination at any time within ninety (90) days after Participant's Termination Date for cash and/or cancellation of purchase money indebtedness, at the Participant's Exercise Price or Purchase Price, as the case may be, provided, that to the extent the Participant is not an officer, director -------- or consultant of the Company, such right of repurchase lapses at the rate of at least twenty percent (20%) per year over five (5) years from: (A) the date of grant of the Option or (B) in the case of Restricted Stock, the date the Participant purchases the Shares. 13. CERTIFICATES. All certificates for Shares or other securities ------------ delivered under this Plan will be subject to such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted. 14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a ------------------------ Participant's Shares, the Committee may require the Participant to deposit all certificates representing Shares, (other than Shares with respect to which consideration has been fully paid by the Participant (in forms other than by promissory notes) and received by the Company), together with stock powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of Participant's obligation to the Company under the promissory note; provided, however, that the Committee may -------- ------- require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company will have full recourse against the Participant under the promissory note notwithstanding any pledge of the Participant's Shares or other collateral. In connection with any pledge of the Shares, Participant will be required to execute and deliver a written pledge agreement in such form as the Committee will from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a pro rata basis as the promissory note is paid. 15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or ----------------------------- from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Committee may at any time buy -7- Isonics Corporation 1996 Equity Incentive Plan from a Participant an Award previously granted with payment in cash, Shares (including Restricted Stock) or other consideration, based on such terms and conditions as the Committee and the Participant may agree. 16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not ---------------------------------------------- be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to: (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and/or (b) completion of any registration or other qualification of such Shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so. 17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award ----------------------- granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent or Subsidiary of the Company or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Participant's employment or other relationship at any time, with or without cause. 18. CORPORATE TRANSACTIONS. ---------------------- 18.1 Assumption or Replacement of Awards by Successor. In the ------------------------------------------------ event of (a) a dissolution or liquidation of the Company, (b) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the shareholders of the Company or their relative stock holdings and the Awards granted under this Plan are assumed, converted or replaced by the successor corporation, which assumption will be binding on all Participants), (c) a merger in which the Company is the surviving corporation but after which the shareholders of the Company immediately prior to such merger (other than any shareholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company, or (d) the sale of substantially all of the assets of the Company, any or all outstanding Awards may be assumed, converted or replaced by the successor corporation (if any), which assumption, conversion or replacement will be binding on all Participants. In the alternative, the successor corporation may substitute equivalent Awards or provide substantially similar consideration to Participants as was provided to shareholders (after taking into account the existing provisions of the Awards). The successor corporation may also issue, in place of outstanding Shares of the Company held by the Participant, substantially similar shares or other property subject to repurchase restrictions no less favorable to the Participant. In the event such successor corporation (if any) refuses to assume or substitute Awards, as provided above, pursuant to a transaction described in this Subsection 18.1, such Awards will expire on such transaction at such time and on such conditions as the Board will determine. 18.2 Other Treatment of Awards. Subject to any greater rights ------------------------- granted to Participants under the foregoing provisions of this Section 18, in the event of the occurrence of any transaction described in Section 18.1, any outstanding Awards will be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation, sale of assets or other "corporate transaction." 18.3 Assumption of Awards by the Company. The Company, from time ----------------------------------- to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either; (a) granting an Award under this Plan in substitution of such other company's award; or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of this Plan to such grant. In the event the Company assumes an award -8- Isonics Corporation 1996 Equity Incentive Plan granted by another company, the terms and conditions of such award will remain unchanged (except that the exercise price and the number and nature of Shares ------ issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price. 19. ADOPTION AND SHAREHOLDER APPROVAL. This Plan will become --------------------------------- effective on the date on which the registration statement filed by the Company with the SEC under the Securities Act registering the initial public offering of the Company's Common Stock is declared effective by the SEC (the "EFFECTIVE DATE"); provided, however, that if the Effective Date does not occur on or -------- ------- before December 31, 1997, this Plan will terminate having never become effective. This Plan shall be approved by the shareholders of the Company (excluding Shares issued pursuant to this Plan), consistent with applicable laws, within twelve (12) months before or after the date this Plan is adopted by the Board. Upon the Effective Date, the Board may grant Awards pursuant to this Plan; provided, however, that: (a) no Option may be exercised prior to initial -------- ------- shareholder approval of this Plan; (b) no Option granted pursuant to an increase in the number of Shares subject to this Plan approved by the Board will be exercised prior to the time such increase has been approved by the shareholders of the Company; and (c) in the event that shareholder approval of such increase is not obtained within the time period provided herein, all Awards granted hereunder will be canceled, any Shares issued pursuant to any Award will be canceled, and any purchase of Shares hereunder will be rescinded. So long as the Company is subject to Section 16(b) of the Exchange Act, the Company will comply with the requirements of Rule 16b-3 (or its successor), as amended, with respect to shareholder approval. 20. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided -------------------------- herein, this Plan will terminate ten (10) years from the date this Plan is adopted by the Board or, if earlier, the date of shareholder approval. This Plan and all agreements thereunder shall be governed by and construed in accordance with the laws of the State of California. 21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time -------------------------------- terminate or amend this Plan in any respect, including without limitation amendment of any form of Award Agreement or instrument to be executed pursuant to this Plan; provided, however, that the Board will not, without the approval -------- ------- of the shareholders of the Company, amend this Plan in any manner that requires such shareholder approval pursuant to the Code or the regulations promulgated thereunder as such provisions apply to ISO plans or (if the Company is subject to the Exchange Act or Section 16(b) of the Exchange Act) pursuant to the Exchange Act or Rule 16b-3 (or its successor), as amended, thereunder, respectively. 22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by -------------------------- the Board, the submission of this Plan to the shareholders of the Company for approval, nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options and bonuses otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 23. DEFINITIONS. As used in this Plan, the following terms will have ----------- the following meanings: "AWARD" means any award under this Plan, including any Option, Restricted Stock or Stock Bonus. "AWARD AGREEMENT" means, with respect to each Award, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award. "BOARD" means the Board of Directors of the Company. "CAUSE" means Termination because of (i) any willful material violation by the Participant of any law or regulation applicable to the business of the Company or a Parent or Subsidiary of the Company, the Participant's conviction for, or guilty plea to, a felony or a crime involving moral turpitude, any willful perpetration by the Participant of a common law fraud or any unlawful use by the Participant of drugs or other controlled -9- Isonics Corporation 1996 Equity Incentive Plan substances, (ii) the Participant's commission of an act of personal dishonesty which involves personal profit in connection with the Company or any other entity having a business relationship with the Company, (iii) any material breach by the Participant of any provision of any agreement or understanding between the Company and the Participant regarding the terms of the Participant's service as an employee, director, consultant, independent contractor or adviser to the Company or a Parent or Subsidiary of the Company, including without limitation, the willful and continued failure or refusal of the Participant to perform the material duties required of such Participant as an employee, director, consultant, independent contractor or adviser of the Company or a Parent or Subsidiary of the Company, other than as a result of being Disabled, or a breach of any applicable invention assignment and confidentiality agreement or similar agreement between the Company and the Participant, (iv) Participant's disregard of the policies of the Company so as to cause loss, damage or injury to the property, reputation or employees of the Company or a Parent or Subsidiary of the Company, or (v) any other misconduct by the Participant which is materially injurious to the financial condition or business reputation of, or is otherwise materially injurious to, the Company or a Parent or Subsidiary of the Company. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMITTEE" means the committee appointed by the Board to administer this Plan, or if no such committee is appointed, the Board. "COMPANY" means Isonics Corporation or any successor corporation. "DISABILITY" means a disability, whether temporary or permanent, partial or total, as determined by the Committee. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "EXERCISE PRICE" means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option. "FAIR MARKET VALUE" means, as of any date, the value of a share of the Company's Common Stock determined as follows: (a) if such Common Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the date of determination as reported in The Wall Street Journal; ----------------------- (b) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal; ----------------------- (c) if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination as reported in The Wall -------- Street Journal; -------------- (d) in the case of an Award made on the Effective Date, the price per share at which shares of the Company's Common Stock are initially offered for sale to the public by the Company's underwriters in the initial public offering of the Company's Common Stock pursuant to a registration statement filed with the SEC under the Securities Act; or (d) if none of the foregoing is applicable, by the Committee in good faith. "INSIDER" means an officer or director of the Company or any other person whose transactions in the Company's Common Stock are subject to Section 16 of the Exchange Act. -10- Isonics Corporation 1996 Equity Incentive Plan "OUTSIDE DIRECTOR" means any director who is not; (a) a current employee of the Company or any Parent or Subsidiary of the Company; (b) a former employee of the Company or any Parent or Subsidiary of the Company who is receiving compensation for prior services (other than benefits under a tax- qualified pension plan); (c) a current or former officer of the Company or any Parent or Subsidiary of the Company; or (d) currently receiving compensation for personal services in any capacity, other than as a director, from the Company or any Parent or Subsidiary of the Company; provided, however, that at such time as ----------------- the term "Outside Director", as used in Section 162(m) of the Code is defined in regulations promulgated under Section 162(m) of the Code, "Outside Director" will have the meaning set forth in such regulations, as amended from time to time and as interpreted by the Internal Revenue Service. "OPTION" means an award of an option to purchase Shares pursuant to Section 5. "PARENT" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "PARTICIPANT" means a person who receives an Award under this Plan. "PLAN" means this Isonics Corporation 1996 Equity Incentive Plan, as amended from time to time. "RESTRICTED STOCK AWARD" means an award of Shares pursuant to Section 6. "SEC" means the Securities and Exchange Commission. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SHARES" means shares of the Company's Common Stock reserved for issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any successor security. "STOCK BONUS" means an award of Shares, or cash in lieu of Shares, pursuant to Section 7. "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "TERMINATION" or "TERMINATED" means, for purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provide services as an employee, officer, director, consultant, independent contractor, or advisor to the Company or a Parent or Subsidiary of the Company. An employee will not be deemed to have ceased to provide services in the case of (i) sick leave, (ii) military leave, or (iii) any other leave of absence approved by the Committee, provided, that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute or unless provided otherwise pursuant to formal policy adopted from time to time by the Company and issued and promulgated to employees in writing. In the case of any employee on an approved leave of absence, the Committee may make such provisions respecting suspension of vesting of the Award while on leave from the employ of the Company or a Subsidiary as it may deem appropriate, except that in no event may an Option be exercised after the expiration of the term set forth in the Option agreement. The Committee will have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the "TERMINATION DATE"). -11- Isonics Corporation 1996 Equity Incentive Plan "UNVESTED SHARES" means "Unvested Shares" as defined in the Award Agreement. "VESTED SHARES" means "Vested Shares" as defined in the Award Agreement. -12- EX-10.05 9 MEMORANDUM OF AGREEMENT EXHIBIT 10.05 M E M O R A N D U M O F A G R E E M E N T 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 1st 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. _______________ A. Shubin _______________ A. Shishkin _______________ J. Alexander General Director General Director President _______________ Date _______________ Date _______________ Date
EX-10.06 10 OPTION AGREEMENT BETWEEN REGISTRANT & YALE CONFIDENTIAL TREATMENT REQUESTED EXHIBIT 10.06 OPTION AGREEMENT ---------------- This Agreement is effective on the date last subscribed below, and is by and between A&R Materials, Inc., with offices at San Jose, California (hereinafter referred to as "A&R") and YALE UNIVERSITY with offices at New Haven, Connecticut (hereinafter referred to as "Yale"). WHEREAS, Professor T.P. Ma in the Yale University Department of Electrical Engineering is conducting research on and has discovered increased conductivity and electron mobility in istopically enriched semiconductor materials (the "Invention"); and WHEREAS, a patent application for the Invention was filed on 16 November 1990 with the serial number 615,425; and WHEREAS, A&R wishes to examine the business opportunities presented by this Invention; and WHEREAS, A&R or an affiliate may wish to obtain a world-wide exclusive license to the Invention and to all patents issuing from it and from other applications claiming priority on the basis of its filing date (the "Patent Rights"); NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties agree as follows: Section I Option ---------------- 1.1 Yale hereby grants to A&R, for the term of this agreement, an exclusive option to an exclusive, world-wide license to make, have made, use, sell and practice the Invention pursuant to the Patent Rights, such license to be on such reasonable terms and conditions, including reasonable royalties, as the parties may agree. If A&R decides to exercise this option, it shall so notify Yale in writing within the term of this agreement. Thereafter, Yale and A&R shall within ninety (90) days negotiate in good faith a license agreement. Provided that the terms of said Licensing Agreement shall be no less favorable to A&R than those contained in the following two tables: i) LICENSEE shall pay to YALE Earned Royalties on Net Sales according to the following schedule:
Net Sales Royalty Rate - ------------------------------------------------------------------------------ [CONFIDENTIAL]
ii) In addition, LICENSEE shall pay to YALE Sublicense Income according to the following schedule:
Sublicensee Sublicense Income - ------------------------------------------------------------------------------ [CONFIDENTIAL]
where "Investor" is a company that funded A&R to acquire /28/Si to provide to YALE and a "Non-investor" is a company which did not fund A&R to acquire /28/Si to provide to YALE as contemplated in 4.1 below. Section II Term --------------- 2.1 This Agreement shall expire eighteen (18) months after its signing by both parties. This option will be extendible for an additional six (6) months if agreed in writing by both parties. Section III Evaluation ---------------------- 3.1 During the term of this Agreement, A&R will evaluate the feasibility of the commercial development of the Invention. Section IV Payment ------------------ 4.1 As consideration of the option hereby, A&R shall provide Yale istopically and chemically pure rod and wafer specimens of single crystal silicon suitable for measurement of thermal conductivity and electron mobility. The parties agree that the isotopic enrichment should exceed 99% /28/Si and have less than 1 part per million total chemical impurities. A&R will make all reasonable efforts to reduce these chemical impurities to levels approaching industry standard purity. A&R shall provide Yale with a full accounting of the costs it has incurred in securing said isotopically and chemically pure silicon crystals, and shall be reimbursed for one-half (1/2) of said amount but only by deduction from royalty payments due Yale from A&R under the Licensing Agreement contemplated herein. To cover this reimbursement, royalty payments due Yale shall be reduced by no more than one-half (1/2) in any given Royalty Year until the full amount is paid. Section V Miscellaneous ----------------------- 5.1 Notices. All notices shall be mailed via certified mail, return receipt ------- requested, or shall be given by fax, telegraph, telex or cable, confirmed by letter mailed as provided above, addressed as follows, or to such other address as may be designated from time to time by notice given in the manner provided in this Section: 2 If to Yale: If to A&R: Yale University James E. Alexander Director President & CEO Office of Cooperative Research A&R Materials, Inc. 246 Church Street, Suite 401 4606 Meridian Ave., Suite K New Haven, CT 06510 San Jose, CA 95124 FAX: 203-432-7245 FAX: 408-266-6970 Notices shall be deemed given as of the date sent. 5.2 Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of Connecticut. 5.3 Binding Effect. This Agreement shall be binding upon and inure to the -------------- benefit of the parties hereto and their respective legal representatives, successors and permitted assigns. 5.4 Headings. Paragraph headings are inserted herein for convenience of -------- reference only and do not form a part of this Agreement, and no construction or inference shall be derived therefrom. 5.5 Entire Agreement. This Agreement and the instruments, documents and other ---------------- agreements referred to herein or signed concurrently set forth the entire agreement and understanding of the parties regarding the subject matter. 5.6 Counterparts. This Agreement may be executed simultaneously in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 5.7 Amendment; Waiver; etc. This Agreement may be amended, modified, ---------------------- superseded or canceled, and any of the terms hereof may be waived, only by a written instrument executed by each party hereto or, in the case of waiver, by the party or parties waiving compliance. The delay or failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the rights at a later time to enforce the same. No waiver by any party of any condition or of the breach of any term contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such condition or of the breach of such term or any other term of this Agreement. 5.8 No Third Party Beneficiaries. No person not a party to this Agreement, ---------------------------- including any employee of any party to this Agreement, shall have or acquire any rights by reason of this Agreement, nor shall any party hereto have any obligations or liabilities to such other Person by reason of this Agreement. Nothing contained in this Agreement shall be deemed to constitute the parties partners with each other or any Person. 3 5.9 Assignment and Successors. This Agreement may not be assigned by either ------------------------- party hereto, except that A&R may assign this Agreement and the rights and interests of A&R hereunder, in whole or in part, to any of its Affiliates, any purchaser of all or substantially all of its assets or to any successor corporation resulting from any merger or consolidation of A&R with or into such corporation. 5.10 Severability and Survival. If any provision of this Agreement is or ------------------------- becomes invalid or is ruled invalid by any court of competent jurisdiction or is deemed unenforceable, it is the intention of the parties that the remainder of the Agreement shall not be affected. 5.11 Representations. Yale represents that it has the right to enter into this --------------- Agreement, and that there are no other agreements which conflict with this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first written above. YALE UNIVERSITY A&R MATERIALS, INC. By: ___________________________ By: ____________________________ Typed Name: ___________________ Typed Name: ____________________ Its: _________________________ Its: ___________________________ Date: _________________________ Date: __________________________ 4 EX-10.07 11 OFFICE LEASE AGREEMENT EXHIBIT 10.07 EARLY POSSESSION AGREEMENT Reference is made to that lease commencing February 1, 1996 between the LESSOR: PAULSEN OFFICE PARK and the LESSEE: A & R MATERIALS, INC. at 4010 Moorpark Avenue, Suite 119, San Jose, California LESSEE is allowed to occupy premises on January 12, 1996. Rent is to begin on February 1, 1996. LESSOR and LESSEE agree that all the terms and conditions to the above referenced lease are to be in full force and effect as of the date of LESSEE's possession of the premises. LESSEE accepts premises in their present condition. LESSOR agrees to complete all LESSEE improvements as set forth in this lease. LESSEE understands that his early occupancy may cause some delay in the con- struction of the LESSEE improvements and that such delay will not be a release of liability of any rent due. It is further understood that prior to any improvement of the leased premises by the LESSEE which may result in the delay in construction of LESSEE improvements or the obtaining of building permit without written consent of LESSOR is hereby prohibited. Any such violation may cause the termination of this lease. In the event LESSEE takes possession of the premises prior to completion of any construction, LESSEE agrees to hold LESSOR harmless from any and all claims for damages to goods, equipment or inconvenience. ACCEPTED: LESSOR: LESSEE: PAULSEN OFFICE A & R MATERIALS, INC. - -------------------------------- ------------------------------------ BY: Peter Paulsen BY: James E. Alexander BY: Linda Stockhus, Attorney in Fact DATE: _______________________ TITLE: ____________________________ OFFICE LEASE AGREEMENT THIS LEASE is made between PAULSEN PROPERTIES, called "Landlord" and A & R MATERIALS, INC., A CALIFORNIA CORPORATION, called "Tenant." IT IS AGREED BETWEEN LANDLORD AND TENANT AS FOLLOWS: - 1. PREMISES: Landlord hereby leases and Tenant hereby hires, upon the terms and conditions herein set forth, the office space known as Suite 119 on the First floor of the PAULSEN OFFICE PARK Building, herein after referred to as the "Building," located at 4010 Moorpark Avenue, California 95117 as outlined on the floor plan attached hereto as Exhibit "A" and hereby made a part hereof, such office space referred to as the "Premises." 2. TERMS: The term of this Lease shall be for a period of Two (2) Years commencing on the 1st day of February, 1996 and terminating on the 31st day of January, 1998. 3. RENT: Tenant will pay to Landlord, at the office of the Building, as rent for the premises. Payable Two Thousand Three Hundred Six Dollars and 00/100 ($2,306.00) concurrent herewith as and for rent for the first month of the lease term, and Two Thousand Three Hundred Six Dollars @ 00/100 ($2,306.00) per month on the first day of each and every month thereafter during the full term thereof Tenant agrees that he will promptly pay said rent at the times above stated; that he will pay all other charges, if any, for the premises during the term of this Lease. The parties agree that in the event Tenant fails to make any rental payment within ten days of the due date, it will be impracticable and extremely difficult to fix the actual damages to Landlord. Therefore, the parties agree that Tenant will pay Landlord the sum of $50.00 if the rent payment is not received within ten (10) days of the due date, and an additional sum of $50.00 if the rent is not received within twenty (20) days of the due date. The assessment of the damages herein above set forth shall be in addition to remedies available to Landlord as set forth on paragraph # 25 hereof. 4. DEPOSIT: As additional consideration for the execution of this Lease agreement by Landlord, Tenant has paid to Landlord the sum of Two Thousand Three Hundred Six Dollars and 00/100 ($2,306.00) concurrent herewith, receipt whereof is hereby acknowledged. Landlord may apply any portion or all of said deposit to unperformed obligations of Tenant under this Lease, and in said event Tenant shall replace the portion so applied within ten (10) days of notice from Landlord. At the end of the Lease term, any portion of the deposit remaining shall be returned to Tenant. 5. TAXES: Landlord shall pay all taxes and assessments levied upon the real property and Landlords improvements only, of which the Premises represents 3.6 %(3.6%) of the total area, as they exist at the commencement ----------- date of this Lease, However, in the event that such taxes shall be increased above the 1994-1995 fiscal year figures, Tenant shall pay Landlord his propor- --------- tionate share of said increase during the term of the Lease within twenty (20) days of receipt of a bill therefore from Landlord setting forth the computations of Tenants obligation in accordance with this paragraph. Tenant shall pay the pro rata amount of such increase for the number of months of the Lease term within the fiscal tax year when less than twelve (12) months. Tenant shall pay all taxes and assessments levied against any personal property, trade fixtures, or other improvements on the Premises belonging to Tenant. Tenant shall also pay any sales, use or rental tax which may be assessed by any governmental body during the time of this Lease. 6. UTILITIES: Landlord will use reasonable efforts to provide the Premises with hot and cold water, heat air conditioning, ventilation, gas, light and janitor service during such hours and of such character and amounts a Landlord, in its sole judgment, may deem reasonable, without liability for failures or interruptions resulting from any cause or from good faith acts or decisions of Landlord. -2- 7. USE: Tenant will use the Premises only for office purposes, unless the Landlord shall give Tenant previous written consent for a different use. In connection with his use of and activities in and about the Premises and the Building, Tenant at his expense will comply and will cause his employees, agents and invitees to comply, with all applicable rules and regulations of governmental agencies, and Tenant will conduct himself and cause his employees, agents and invitees to conduct themselves, with full regard for the rights, convenience, and welfare of all other tenants in the Building. 8. SIGNS: Tenant will not permit any signs, advertisements or notices to be displayed, inscribed upon or affixed on any part of the outside or inside of the premises, or in the building of which they are a part, except on the directory board to be provided by Landlord and on the entrance doors of the Premises, and then only of such size, color and style as Landlord may approve. 9. CONDITION OF PREMISES AT COMMENCEMENT: Tenant acknowledges that his acceptance of possession of the Premises constitutes a conclusive admission that he has inspected the Premises and has found it in good condition and repair in all respects in accordance with the obligation of Landlord under this Lease. 10. UNDERTAKINGS BY TENANT-INDEMNIFICATION OF LANDLORD: Tenant will hold Landlord and all other tenants of the Building, and their employees, agents and invitees, harmless from any loss, damage, or liability caused by Tenant or his employees, agents or invitees. Tenant will not claim damages, other than a prorated abatement of the rent, if delivery of possession of the Premises will be delayed beyond commencement of the term of this Lease, regardless of the cause. 11. NOTICE OF DISREPAIR: Upon observing that any part of the Premises or of the Building, including the fixtures and facilities, is or appears to be defective, damaged or in disrepair, regardless of the nature or cause, Tenant will notify Landlord immediately. 12. ACTS AFFECTING INSURANCE: Tenant will not conduct any activities or keep any materials, substances, or articles in or about the Premises which will impair or invalidate, or increase the premium cost of, insurance policies carried by Landlord. 13. MAINTENANCE: During the term Tenant will maintain the Premises in good condition and repair in compliance with Landlord's written instructions, except such repair and maintenance which are the obligations of Landlord as provided hereafter in Paragraph 19 of this Lease and except for damage not caused by any negligence of Tenant or of any employee, agent, or invitee of Tenant. Tenant will maintain all of his furniture, furnishings, and equipment located in the Premises in good, neat, and attractive condition and in good repair. 14. ALTERATIONS: Tenant will not make any alterations or additions to or install partitions or built-in fixtures or facilities in the Premises without Landlord's previous written consent. Any alterations, partitions, or built-in fixtures or facilities made to or installed in the Premises by Tenant with Landlord's consent will be, done in accordance with and subject to the written directions and conditions issued by Landlord, and shall become a part of the Building and the property of Landlord. Landlord may repair, alter, improve or remodel any portion of the Premises or the Building, but without obligation so to do, without liability to Tenant for any damage or convenience to or temporary impairment of enjoyment of the Premises by Tenant. 15. LIENS: Tenant will not cause or permit any lien to be imposed upon the Premises or the Building and will pay all taxes and license fees imposed by reason of any improvements made by Tenant to the Premises or imposed upon any personal property located in the Premises. Tenant agrees to give Landlord not less than (5) days notice prior to commencement of any alteration or repair permitted under the terms of the Lease so that Landlord may post Notice of Non- Responsibility. 16. REIMBURSEMENT: Tenant will reimburse Landlord for all expenditures made by Landlord for the account or benefit of Tenant. 17. CONDEMNATION: Should any part of the Premises or the Building be taken from Landlord as a result of condemnation proceedings, threatened or filed, Tenant does and will relinquish to Landlord any interest in the proceeds or the award. Should all or a substantial part of the Premises be taken or relinquished by a public utility or a governmental agency by condemnation or otherwise, Landlord or Tenant may terminate this Lease on not less than thirty (30) days' written notice to Tenant. 18. RIGHT OF ENTRY: Tenant will permit any officer, agent, or employee of Landlord to enter the Premises, with a passkey or otherwise at any reasonable time for inspection, janitor service, or other reasonable purposes and Tenant releases Landlord from any responsibility for any resulting theft or damage, excepting only willful misconduct or negligence of landlord. 19. UNDERTAKINGS BY LANDLORD-RULES AND SERVICE: Landlord will endeavor, but without liability for failure, to establish, maintain, and enforce rules and regulations in connection with the use and occupancy of the Building which will be conducive to the welfare and comfort of all tenants of the Building, and shall furnish the Premises during reasonable and usual business hours the following services at Landlord's sole expense. (a) Heat - Heat and air conditioning during the customary periods of the year, Monday through Friday, when and to the same extent Landlord furnishes heat and air conditioning for other portions of the Building of which the Premises are a part should Tenant require heat or cooling. (b) Electricity - Electric current consisting of 110/208 service for lighting and ordinary business appliances; (c) Janitorial Services - Usual janitorial and maintenance service including the sweeping and waxing of floors. Landlord shall also maintain and keep lighted the common stairs, entries, and toilet rooms in the Building; (d) Repairs - Tenant will, at his sole cost and expense, supply chair mats for all desk chairs, keep and maintain the said leased premises, and every part thereof, including the interior of the premises, glazing, and plumbing and electrical fixtures, in good and sanitary order, condition and repair. Lessor will, at his sole cost and expense, keep and maintain the structure, roof and exterior walls of the Building (excluding glazing), the heating and air conditioning equipment, the off premises sewer and water lines, and the landscaping, sidewalks and parking areas used in common by other tenants, in good and sanitary order, condition and repair. 20. FLOORLOAD: Tenant will not overload the floors, nor install any heavy business machines or any heavy equipment of any kind, without prior written approval of Landlord, which, if granted, may be conditioned upon moving by skilled licensed handlers and installation and maintenance at Tenant's expense of special reinforcing and settings adequate to absorb and prevent noise and vibration. In no event will Tenant be allowed to place a load exceeding fifty (50) pounds per square inch on any floor of the building without prior written consent. 21. NONLIABILITY OF LANDLORD: Excepting only willful misconduct or negligence of Landlord shall not be liable to Tenant for any damage to Tenant's property, or for any disruption of Tenant's business or professional activities in the Premises, resulting from leaky plumbing, gas, water, steam, electrical, heating, cooling, ventilating or air-conditioning fixtures, facilities or conduits, from disrepair or faulty construction of the building; from acts of officers, agents, or employees of Landlord or of other tenants in the building or their employees, agents or invitees; or from any trespass or public offense committed in or about the Premises of the building except that Landlord agrees to take reasonable steps to correct any such condition after first receiving written notice thereof from Tenant. 22. (A) ASSIGNMENT AND SUBLETTING: Tenant shall not voluntarily assign or encumber its interest in this Lease or in the Premises, or sublease all or any part of the Premises, or allow any other person or entity to occupy or use all or any part of the Premises, without first obtaining Landlord's prior written consent. Any assignment, encumbrance, or sublease without Landlord's prior written consent shall be voidable, at Landlord's election, and shall constitute a default. No consent to any assignment, encumbrance, or sublease shall constitute a further waiver of the provisions of this paragraph. Tenant shall notify Landlord in writing of Tenant's intent to sublease, encumber or assign this Lease and Landlord shall, within thirty (30) days of receipt of such written notice, elect one of the following: (a) Consent to such proposed assignment, encumbrance or sublease; (b) Refuse such consent, which refusal shall be on reasonable grounds; or (a) Elect to terminate this Lease. As a condition for granting its consent to any assignment, encumbrance or sublease, Landlord may require that the sublessee or assignee remit directly to Landlord on a monthly basis, all monies due to Tenant by said assignee or sublessee. If for any proposed assignment or sublease Tenant receives rent or other consideration, either initially or over the term of the assignment or sublease, in excess of the rent called for hereunder, or, in case of the sublease of a portion of the ]Premises, in excess of such rent fairly allocable such portion, after appropriate adjustments to assure that all other payments called for hereunder are taken into account, Tenant shall pay Landlord as additional rent hereunder ninety percent (90%) of the excess of each such payment of rent or other consideration received by Tenant promptly after its receipt. Landlord's waiver or consent to any assignment or subletting shall not relieve Tenant from any obligation under this Lease. Occupancy of all or part of the Premises by parent, subsidiary, or affiliated companies of Tenant shall not be deemed an assignment or subletting. (B) SUBORDINATION: Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, and at the election of Landlord or any first mortgagee with a lien on the Building or any ground Lessor with respect to the building, this Lease shall be subject and subordinate at all times to: (a) all ground leases or underlying leases which may now exist or hereafter be executed affecting the building or the land upon which the Building is situated or both, and (b) the lien of any mortgage or deed of trust which may now exist or hereafter be executed in any amount for which the Building, land, ground leases or underlying leases, or Landlords interest or estate in any of said items is specified as security. Notwithstanding the foregoing, Landlord shall have the right the subordinate or cause to be subordinated any such ground leases or underlying leases or any such lions to this Lease. In the event that any ground lease or underlying lease terminates for any reason or any mortgage or deed of trust is foreclosed or a conveyance in lien of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination, attorn to and becomes the Tenant of the successor in interest to Landlord, at the option of such successor in interest. Tenant covenants and agrees to execute and deliver, upon demand by Landlord and in the form requested by Landlord, any additional documents evidencing the priority or subordination of this Lease with respect to any such ground leases or underlying leases or the lien of any such mortgage or deed of trust. Tenant hereby irrevocably appoints Landlord as attorney-in-fact of Tenant to execute, deliver and record any such documents in the name and on behalf of Tenant. 23. DESTRUCTION OF LEASEHOLD: Should the leasehold, or any part of the building, be damaged or destroyed, Landlord may elect to terminate this Lease or continue it in force and, without affecting Tenant's liability under Paragraph 10, repair or rebuild the leasehold or Building, provided Tenant, upon giving to Landlord written notice within 10 days after the damage or destruction, may terminate this Lease if the leasehold cannot be made tenantable within 120 days. Landlord may occupy as much of the leasehold as may be necessary to accomplish the repair or reconstruction, pending the completion of which an equitable reduction or abatement of the rent will be made by Landlord if this Lease should not be terminated under this paragraph. Landlord shall not be liable to Tenant for any loss or damage to or destruction of the leasehold or from the repairing or rebuilding of the leasehold or Building. 24. RULES AND REGULATIONS: Tenant will comply, and will cause his employees, agents and invitees to comply, with all reasonable rules and regulations adopted by Landlord in connection with the use and occupancy of the Premises and of the Building, and with all supplements and amendments which Landlord may adopt hereafter. Any violation by Tenant, or by his employees, agents, or invitees, of any rule or regulation heretofore or hereafter adopted, amended, or supplemented by Landlord, shall constitute a default under this Lease and shall make available to Landlord the remedies provided herein. 25. DEFAULT: If tenant should become in default under this Lease, Landlord, at its option and without notice, (1) may terminate this Lease, take possession of the Premises at any rent obtainable, recovering from Tenant, in successive actions or a single action, any deficit between the rent received and the rent provided to be paid under this Lease, plus all the expenses, including attorney's fees, incurred in the taking of possession and reletting; or (2) without attempting to relet the premises and with Or without terminating this Lease, may (a) sue, at regular or irregular intervals and in successive suits, to recover the unpaid installments of rent, or (b) bring a single action to recover unpaid rent for the remaining term of this Lease, or (e) sue for general and special damages. If Landlord should take possession of the Premises under the provisions of this paragraph or at the end of the term, Land may remove to any place of storage, or any dumping ground, at Tenant's s risk and expense and. without incur any responsibility to Tenant for loss, damage, or theft, all property in or about the leasehold belonging to or in custody of Tenant. The remedies provided in this paragraph are cumulative and may be exercised simultaneously with, in addition to, or independently of, any other legal remedy. 26. ABANDONMENT: Tenant covenants that he will occupy the premises continuously except for normal vacation periods and agrees that any absence therefrom for more than one week, during any part of which time rental is delinquent shall be conclusively presumed to be an abandonment of the premises at the option of the Landlord. 27. RESTORATION OF PREMISES: Upon termination of this Lease or by expiration of the term or by election of Landlord, Tenant will restore the Premises to Landlord in the same condition as it existed at the commencement of the term except as otherwise permitted or required by this Lease, and except for reasonable use and wear. 28. HOLDING OVER: Should Tenant hold over the Premises after the term of this Lease, he will be a Tenant by sufferance from day to day, with a rental of 120% of the then current daily rental rate unless Landlord shall consent in writing to a different tenancy. 29. INSURANCE: Tenant agrees to and shall secure from a responsible company or companies doing insurance business in the State of California, and maintain during the entire term of this Lease, public liability insurance in the minimum amount of One Million Dollars and 00/100 ($1,000,000.00) and fire and extended coverage insurance upon Tenant's personal property in an amount sufficient to cover all losses. Tenant agrees that Landlord shall be named as an additional insured on the aforementioned policies of insurance. On securing said coverage the Tenant shall deliver to Landlord a copy of the appropriate policies, or certificates of said insurance, which shall provide that same shall not be cancelled without ten (10) days' prior written notice to Landlord. 30. INTEREST ON MONETARY OBLIGATION: All monetary obligations of Tenant to Landlord under this Lease shall carry nine percent (9%) interest per annum from the due date until paid. 31. TIME OF ESSENCE: Time is of the essence of this Lease. 32. CONDITION: Each term of this Lease shall constitute a condition. 33. NOTICES: Notices shall be deemed served upon Tenant when left at the Premises or mailed, postage prepaid, addressed to Tenant at 4010 Moorpark Avenue, Suite 119, San Jose, California 95117. 34. LANDLORD DEFAULT: In the event of any default by the Landlord hereunder Tenant agrees to give notice of such default, by registered mail, to the holder of any first deed of trust covering the demised premises and to said holder a reasonable opportunity to cure such default on Landlords behalf. 35. WAIVER: No waiver, benefit, privilege, or service, voluntarily granted or performed by Landlord to or for Tenant, or any other tenant in the Building shall be construed to vest any contractual right in Tenant by custom, estoppel, or otherwise. No waiver by Landlord of a default by Tenant under this Lease shall constitute a waiver of a subsequent default and after a waiver, expressed or implied, no notice need be given that strict compliance in the future will be required. 36. ATTORNEY'S FEES: In any action or proceeding between Landlord and Tenant the prevailing party shall be awarded costs and attorney's fees. 37. PARTIAL INVALIDITY: No partial invalidity of this Lease shall affect the remainder. 38. HEADINGS: Headings shall not limit or affect any paragraph in this Lease. 39. ENTIRE AGREEMENT: This Lease contains the complete agreement between Landlord and Tenant and no supplement, amendment, or other commitment will be binding unless in writing and signed by the Irrigated party, except that Tenant shall be bound, without signature, to all supplements and amendments to the rules and regulations hereafter adopted by Landlord in accordance with Paragraph 24. Executed on ___________________, 1996, at the Paulsen Office Park. LESSEE: LESSOR: A & R MATERIALS, INC. PAULSEN OFFICE PARK BY: _____________________________ BY: ________________________________ James E. Alexander Peter Paulsen BY: Linda Stockhus ATTORNEY IN FACT TITLE: __________________________ DATE: __________________________ DATE: _____________________________ ADDENDUM -------- This lease addendum is attached hereto and becomes a part hereof, that certain lease agreement commencing February 1, 1996, by and between A & R MATERIALS, INC. as Lessee, and PAULSEN OFFICE PARK, as Lessor, for property located at 4010 Moorpark Avenue, Suite 119, San Jose, California: It is agreed between Lessee and Lessor-. 1) RENT SCHEDULE: February, 1996 - January, 1997 $2,306,00 February, 1997 - January, 1998 CPI** **On the anniversary of the commencement date of this lease, the rent shall be increased according to the then current Consumer Price Index (CPI) for the preceding twelve months for the San Francisco, Oakland and San Jose area published by the U.S. Department of Labor. Said increase shall not be less that 4%, or more than 7%. Therefore, If the then current CPI reflects 2%, the increase shall be 4%, and if the CPI reflects 12%, the 'increase shall be 7%. 2) All other terms and conditions to remain the same and in full force and effect. LESSEE LESSOR A & R MATERIALS, INC. PAULSEN OFFICE PARK BY: __________________________ BY: _____________________________ James E. Alexander Peter Paulsen By: Linda Stockhus ATTORNEY IN FACT TITLE: __________________________ DATE: __________________________ DATE: ___________________________ SERVICE: The landlord will furnish services as follows: Heat, electric service, janitorial service, water, and air conditioning at the Landlord's expense. Air conditioning will be supplied during the season when needed in the normal business week. Monday through Friday from 8:00 a.m. to 6:00 p.m. RULES AND REGULATIONS The Tenant agrees to abide by the following rules and regulations: 1. The sidewalks, entrances, passages, courts, elevators, vestibules, stair- ways, corridors, and halls shall not be obstructed or encumbered by any Tenant or used for any purpose other than ingress and egress to and from the demised premises. 2. No awnings of other projections shall be attached to the outside walls of the building without the prior written consent of the landlord. No curtains, blinds shades, or screens shall be attached to or hung in, or used in connection with, any window or door of the demised premises, without the prior written consent of the landlord, such awnings, projections, curtains, blinds, shades, screens, or other fixtures must be of a quality, type design, and color, and attached in the manner approved by the Landlord. 3. No sign, advertisement, notice, or other lettering shall be exhibited, inscribed, painted, or affixed by the Tenant on any part of the outside or inside of the demised premises or building without the prior written consent of the Landlord. In the event of the violation of the foregoing, by any Tenant, Landlord may remove same without any liability, and may charge the expense incurred by such removal to the Tenant or Tenants violating this rule. Interior sign on doors and directory tablet shall be inscribed, painted, or affixed at the expense of the Tenant, and shall be of a size, color, and style acceptable to the Landlord. 4. The utility sinks and other plumbing fixtures shall not be used for any purposes other than those for which they were constructed and no sweepings, rubbish, rags, or other substances shall be thrown therein. All damages resulting from any misuse of the fixtures shall be borne by the Tenant who, or whose servants, employees, agents, visitors, or licensees shall have caused the same. 5. No Tenant shall mark, paint, drill into, or in any way deface any part of the demised premises of the building of which they form a part. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent of the Landlord, and as it may direct. 6. No bicycles, vehicles, or animals of any kind shall be brought into or kept in or about the premises, and no cooking shall be done or permitted by any Tenant on said premises. No Tenant shall cause or permit any unusual or objectional odors to be produced upon or permeate from the demised premises. 7. No Tenant shall make, or permit to be made, any unseemly or disturbing noises or disturb or interfere with occupants of this neighboring buildings or premises or those having business with them, whether by the use of any musical instrument, radio, talking machine, unmusical noise, whistling, singing or in any other way. 8. In the event of the loss of any keys furnished by the Landlord, Tenant shall pay to the Landlord the cost thereof. 9. All removals, or the carrying in or out of any safes, freight, furniture, or bulky matter of any description must take place during the hours which the Landlord or its agent may determined from time to time. The Landlord reserves the right to prescribe the weight and position of all safes, which must be placed upon 2-inch-thick plank strips to distribute the weight. The moving of safes or other fixtures or bulky matter of any kind must be made after previous notice to the Manager of the building. Any damage done to the building or to the tenants or to other persons in bringing in removing safes, furniture, or other bulky or heavy articles shall be paid for by Tenant. 10. No Tenant shall occupy or permit any portion of the premises demised to him to be used for manufacturing or for the possession, storage, manufacturer, or sale of liquor or narcotics, or as a barber or manicure shop, or as an employment bureau. No Tenant shall engage or pay any employees on the demised premises, except those actually working for such Tenant on said premises, nor advertise for laborers giving an address at said premises. 11. Each Tenant, before leaving the said premises at any time, shall see that all windows, sliding doors, and hall doors are securely locked, and that all front and rear doors are locked after 6PM. 12. The premises shall not be used for gambling, lodging, or sleeping or for any immoral or illegal purposes. 13. The requirements of Tenants will be attended to only upon application at the office of the building. Landlord's employees shall not perform any work or do anything outside of the regular duties, unless under special instructions from the office of the Landlord. 14. canvassing, soliciting, and peddling in the building are prohibited, and each Tenant shall cooperate to prevent the same. 15. Tenants or tenants' guests shall park between designated parking lines only, and shall not occupy two parking spaces with one car. Vehicles in violation of the above shall be subject to tow away, contact San Jose Police at 277-4000 or Schaller Towing at 294-3102. 16. Vehicles parked on premises in excess of fifteen (15) days without prior written consent of the Landlord shall be deemed abandoned and subject to tow away. 17. Tenant is furnished with two keys for each outside entry door, but is responsible for providing extra keys to employees. Tenant is also responsible for any lock changes due to employee turnover. EX-10.08 12 LETTER FROM YALE UNIVERSITY TO REGISTRANT EXHIBIT 10.08 YALE UNIVERSITY Office of Cooperative Research 246 Church Street, Suite 401 New Haven, Connecticut 06510 Telephone: 203 432-7240 Fax: 203 432-7245 14 February 1996 James E. Alexander President & CEO A&R Materials, Inc. 4606 Meridian Ave. Suite K San Jose, CA 95124 Re: Invention of TP Ma (OCR 315) - Isotopically Purified Semiconductors Patent No. 5,442,191 Dear Jim: Thank you for your letter of 10 February. I understand from Professor Ma that A&R has had some difficulty obtaining bulk isotopically pure Si but that he can prove the feasibility of his invention with the epitaxial films that you propose to provide. Yale agrees to the change in wording of section 4.1 of the Option Agreement that you propose in the above-mentioned letter and to the extension of the Agreement by 6 months so that A&R can provide the basic materials and that Dr. Ma can complete his testing of them. I look forward to further progress reports on this project. Best regards. Sincerely, Henry S. Lowendorf Associate Director 203-432-7244 EX-10.09 13 FORM OF INDEMNITY AGREEMENT EXHIBIT 10.09 ISONICS CORPORATION INDEMNITY AGREEMENT ------------------- THIS INDEMNITY AGREEMENT (this "Agreement") is entered into as of _________ ___, 1996 between Isonics Corporation, a California corporation (the "Company"), and ________________________("Indemnitee"). WHEREAS, it is essential to the Company to retain and attract as directors, officers and other agents the most capable persons available; and WHEREAS, Indemnitee is a director, officer and/or other agent of the Company, and both the Company and Indemnitee recognize the risk of litigation and other claims being asserted against such person; and WHEREAS, in recognition of Indemnitee's need for substantial protection against personal liability and to enhance Indemnitee's continued and effective service to the Company, the Company desires to provide for the indemnification of, and the advancing of expenses to, Indemnitee to the fullest extent permitted by law, subject to certain very limited exceptions, as set forth in this Agreement. NOW, THEREFORE, in consideration of the above premises and the promises set forth herein, the parties hereto agree as follows: 1. CERTAIN DEFINITIONS. As used in this Agreement, the capitalized ------------------- terms listed below shall have the meanings ascribed to them as follows: 1.1 Board. The Board of Directors of the Company. ----- 1.2 Expenses. Any expense, liability, or loss, including -------- attorneys' fees, judgments, fines, ERISA excise taxes and penalties, amounts paid or to be paid in settlement, any interest, assessments, or other charges imposed thereon, and any federal, state, local, or foreign taxes imposed as a result of the actual or deemed receipt of any payments under this Agreement, paid or incurred in connection with investigating, defending, being a witness in, or participating in (including on appeal), or preparing for any of the foregoing, in any Proceeding relating to any Indemnifiable Event. 1.3 Indemnifiable Event. Any event or occurrence that takes place ------------------- either prior to or after the execution of this Agreement, related to the fact that Indemnitee: (a) is or was a director, officer or other agent of the Company; or (b) while a director, officer or other agent of the Company is or was serving at the request of the Company as a director, officer, employee, trustee, agent, or fiduciary of another foreign or domestic corporation, partnership, joint venture, employee benefit plan, trust, or other enterprise; or (c) was a director, officer or other agent of a foreign or domestic corporation that was a predecessor corporation of the Company or was a director, officer, employee, trustee, agent, or fiduciary of another enterprise at the request of such predecessor corporation; and related to anything done or not done by Indemnitee in any such capacity, whether or not the basis of the Proceeding is alleged action in an official capacity while serving as described in clauses (a) through (c) above. 1.4 Proceeding. Any threatened, pending, or completed action, ---------- suit, or proceeding, or any inquiry, hearing, or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit, or proceeding, whether civil, criminal, administrative, investigative or other. 2. AGREEMENT TO INDEMNIFY. In the event Indemnitee was, is, or becomes ---------------------- a party to, or witness or other participant in, or is threatened to be made a party to, or witness or other participant in, a Proceeding by reason of (or arising in part out of) an Indemnifiable Event, the Company shall indemnify Indemnitee from and against any and all Expenses to the fullest extent permitted by law, as the same exists or may hereafter be amended or interpreted (but in the case of any such amendment or interpretation, only to the extent that such amendment or interpretation permits the Company to provide broader indemnification rights than were permitted prior thereto). The rights to receive indemnification and the advancement of Expenses under this Agreement are not exclusive of any other rights which Indemnitee may be entitled or subsequently entitled under any statute, the Company's Articles of Incorporation or Bylaws, by vote of the shareholders or the Board, or otherwise. To the extent that a change in applicable law (whether by statute or judicial decision) or the Bylaws permits greater indemnification than is currently provided for an Indemnifiable Event, Indemnitee shall be entitled to such greater indemnification under this Agreement. 2.1 Partial Indemnification. If Indemnitee is entitled under any ----------------------- provision of this Agreement to indemnification by the Company for a portion of Expenses, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled. 2.2 Contribution. If the Indemnitee is not entitled to the ------------ indemnification provided in this Agreement for any reason, then in respect of any threatened, pending or completed Proceedings in which the Company is jointly liable with the Indemnitee (or would be if joined in such Proceedings), the Company shall contribute to the amount of Expenses payable by the Indemnitee in such proportion as is appropriate to reflect (i) the relative benefits received by the Company on the one hand and the Indemnitee on the other hand from the transaction from which such Proceeding arose and (ii) the relative fault of the Company on the one hand and of the Indemnitee on the other hand in connection with the Indemnifiable Events which resulted in such Expenses, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of the Indemnitee on the other hand shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such Expenses. The Company agrees that it would not be just and equitable if contribution pursuant to this section -2- were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations. 2.3 Mandatory Indemnification. Notwithstanding any other ------------------------- provision of this Agreement, to the extent that Indemnitee has been successful on the merits (within the meaning of Section 317(d) of the California Corporations Code) in defense of any Proceeding relating in whole or in part to an Indemnifiable Event or in defense of any issue or matter therein, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 3. EXPENSE ADVANCES. ---------------- 3.1 Advance of Expenses to Indemnitee. Expenses incurred by --------------------------------- Indemnitee in any Proceeding for which indemnification may be sought under this Agreement shall be advanced by the Company to Indemnitee within 30 days after receipt by the Company of a statement or statements from Indemnitee requesting such advance and reasonably evidencing the Expenses incurred by Indemnitee (an "Expense Advance"). If it is ultimately determined by a final judicial decision (from which there is no right of appeal) that Indemnitee is not entitled to be indemnified by the Company, Indemnitee hereby agrees to repay any amounts advanced by the Company under this Section 3. Indemnitee agrees to execute any further agreements regarding the repayment of Expenses as the Company may reasonably request prior to receiving any such advance. 3.2 Exceptions. Notwithstanding Section 3.1, the Company shall ---------- not be obligated for any Expense Advance under this Section 3 for any expenses incurred by the Indemnitee to the extent such arise from a lawsuit filed directly by the Company against the Indemnitee if an absolute majority of the members of the Board reasonably determines in good faith, within forty-five (45) days of Indemnitee's request to be advanced expenses, that the facts known to them at the time such determination is made demonstrate clearly and convincingly that the Indemnitee acted in bad faith. The Company may not avail itself of this Section 3.2 as to a given lawsuit if, at any time after the occurrence of the activities or omissions that are the primary focus of the lawsuit, the Company has undergone a change in control. For this purpose a change in control shall mean a given shareholder or group of affiliated shareholders increasing their beneficial ownership interest in the Company by at least 20 percentage points without advance Board approval. 4. NOTIFICATION AND DEFENSE OF PROCEEDING. -------------------------------------- 4.1 Notice of Claim. Indemnitee shall give written notice to the --------------- Company promptly after Indemnitee has actual knowledge of any Proceeding as to which indemnification may be sought under this Agreement. The failure of Indemnitee to give notice, as provided in this Section 4.1, shall not relieve the Company of its obligations to provide indemnification under this Agreement; however, the amounts to which Indemnitee may be indemnified shall be reduced to the extent that the Company has been prejudiced by such failure. 4.2 Defense. With respect to any Proceeding, the Company will be ------- entitled to participate in the Proceeding at its own expense and, except as otherwise provided below, to the extent the Company so desires, the Company may assume the defense thereof with counsel -3- reasonably satisfactory to Indemnitee. However, the Company shall not be entitled to assume the defense of any Proceeding (a) brought by the Company, or (b) as to which Indemnitee has reasonably determined that there may be a conflict of interest between Indemnitee and the Company in the defense of the Proceeding and Indemnitee does in fact assume and conduct the defense. 4.2.1 If the Company assumes the defense, Indemnitee shall furnish such information regarding Indemnitee or the Proceeding in question, as the Company may reasonably request and as may be required in connection with the defense or settlement of such Proceeding and shall fully cooperate with the Company in every other respect. Except as provided in Section 4.3 below, if the Company assumes the defense of the Proceeding, the Company shall take all necessary steps in good faith to defend, settle or otherwise dispose of the Proceeding. 4.2.2 After notice from the Company to Indemnitee of its election to assume the defense of any Proceeding, the Company will not be liable to Indemnitee under this Agreement or otherwise for any Expenses in excess of $10,000 subsequently incurred by Indemnitee in connection with the defense of such Proceeding other than reasonable costs of investigation or as otherwise provided in clauses (a) through (c) below. Indemnitee shall have the right to employ Indemnitee's own counsel in such Proceeding, but all Expenses related thereto in excess of $10,000 incurred after notice from the Company of its assumption of the defense shall be at Indemnitee's expense, unless: (a) the employment of counsel by Indemnitee has been authorized by the Company; (b) Indemnitee has reasonably determined that there may be a conflict of interest between Indemnitee and the Company in the defense of the Proceeding, but Indemnitee does not, in fact, assume and conduct the defense; or (c) the Company has not, in fact, assumed and is not conducting the defense of such Proceeding. 5. ENFORCEMENT. The Company expressly confirms and agrees that it has ----------- entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to continue as a director, officer or other agent of the Company, and acknowledges that Indemnitee is relying upon this Agreement in continuing in such capacity. Indemnitee shall have the right to enforce his indemnification rights under this Agreement by commencing litigation in any court in the State of California having subject matter jurisdiction thereof and in which venue is proper. Likewise, the Company may seek judicial determination of its obligations under this Agreement. The Company and Indemnitee each hereby consent to service of process and to appear in any such proceeding. 5.1 Defenses; Burden of Proof. It shall be a defense to any ------------------------- action brought by Indemnitee or the Company concerning enforceability of this Agreement that it is not permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed. In connection with any such action or any determination as to whether Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Company. 5.2 Presumptions. Neither the failure of the Company (including ------------ its Board or shareholders) to have made a determination prior to the commencement of such action that indemnification is proper under the circumstances because Indemnitee has met the standard of conduct set forth in applicable law, nor an actual determination by the Company (including its Board or shareholders) that Indemnitee has not met such applicable -4- standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct. For purposes of this Agreement, the termination of any claim, action, suit or proceeding, by judgment, order, settlement (whether with or without court approval), conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. 5.3 Equitable Relief. The Company agrees that the Company's ---------------- failure to make indemnification payments or Expense Advances to Indemnitee shall cause irreparable damage to Indemnitee, the exact amount of which is impossible to ascertain, and for this reason agrees that Indemnitee shall be entitled to such injunctive or other equitable relief as shall be necessary to adequately provide for payment or reasonably anticipated payments. 5.4 Indemnification for Expenses Incurred in Enforcing Rights. --------------------------------------------------------- Except as set forth in Sections 3.2 and 6, the Company shall indemnify Indemnitee against any and all Expenses and, if requested by Indemnitee, shall (within thirty days after such request) advance such Expenses to Indemnitee, that are incurred by Indemnitee in connection with any claim or action asserted against or brought by Indemnitee for indemnification of Expenses or payment of Expense Advances by the Company under this Agreement or any other agreement or under applicable law or the Company's Articles of Incorporation or Bylaws now or hereafter in effect relating to indemnification for Indemnifiable Events. Any Expenses so paid shall be considered Expense Advances under Section 3 above. 6. EXCEPTIONS. Subject only to Section 2.3 above and notwithstanding ---------- any other provision of this Agreement, the Company shall not be obligated pursuant to the terms of this Agreement: 6.1 Claims Initiated by Indemnitee. To indemnify or advance ------------------------------ expenses to the Indemnitee in connection with any Proceeding initiated by Indemnitee unless the Company has joined in, or the Board has consented to, the initiation of such Proceeding, or the Proceeding is one to enforce rights under this Agreement; 6.2 Unauthorized Settlements. To indemnify Indemnitee to the ------------------------ extent Indemnitee settles or otherwise disposes of a Proceeding or causes the settlement or disposal of a Proceeding without the Company's express prior written consent (which shall not be unreasonably withheld) unless Indemnitee receives court approval for such settlement or other disposition where the Company had the opportunity to oppose Indemnitee's request for such court approval; 6.3 No Opportunity to Defend. To indemnify or advance expenses to ------------------------ Indemnitee with regard to any judicial award if the Company was not given a reasonable and timely opportunity, at its expense, to participate in the defense of such action unless the Company's participation in such Proceeding was barred by this Agreement or the court in such Proceeding; 6.4 Securities Law Actions. To indemnify the Indemnitee on ---------------------- account of any suit in which judgment is rendered against the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of the Company pursuant to the provisions of -5- Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; 6.5 Proceeding to Enforce Agreement. To indemnify or advance ------------------------------- expenses to the Indemnitee for any expenses incurred by the Indemnitee with respect to any Proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such Proceeding was not made in good faith or was frivolous; or 6.6 Unlawful Indemnification. To indemnify or advance expenses ------------------------ for any acts, omissions, transactions or circumstances for which indemnification is prohibited by applicable state or federal law or until any preconditions imposed upon, or agreed to by, the Company by or with any court or governmental agency are satisfied. 7. INSURANCE; SUBROGATION. The Company shall not be liable under this ---------------------- Agreement to make any payment in connection with any claim made against Indemnitee to the extent Indemnitee has otherwise received payment (under any insurance policy, Bylaw, or otherwise) of the amounts otherwise indemnifiable hereunder. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. 8. GENERAL PROVISIONS. ------------------ 8.1 Amendment of this Agreement. No supplement, modification, or --------------------------- amendment of this Agreement shall be binding unless executed in writing by both parties hereto. No waiver of any of the provisions of this Agreement shall operate as a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. Except as specifically provided herein, no failure to exercise or any delay in exercising any right or remedy hereunder shall constitute a waiver thereof. 8.2 Binding Effect. This Agreement shall be binding upon and -------------- inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, spouses, heirs, and personal and legal representatives. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity pertaining to an Indemnifiable Event even though Indemnitee may have ceased to serve in such capacity at the time of any Proceeding. 8.3 Entire Agreement. This Agreement constitutes the entire ---------------- agreement between the parties hereto with respect to the subject matter hereof. 8.4 Remedies Cumulative. The rights and remedies provided in this ------------------- Agreement and by law shall be cumulative and the exercise of any particular right or remedy shall not preclude the exercise of any other right or remedy in addition to, or as an alternative to, such right or remedy. -6- 8.5 Notices. Any notice required or permitted by this Agreement ------- shall be given in writing and shall be deemed effectively given upon personal delivery or, if mailed, upon deposit with the United States Post Office by certified mail, return receipt requested, postage prepaid or a nationally recognized express courier, to the address for the recipient set forth on the signature page hereto or to such other address as the recipient shall hereafter have noticed the sending party in the manner set forth above. 8.6 Headings. Descriptive headings contained herein are for -------- convenience of reference only and shall not affect the meaning or interpretation of this Agreement. 8.7 References. Any reference in this Agreement to the indemnity ---------- provisions of the Company's Articles of Incorporation or Bylaws, the California Corporations Code or to any applicable law shall refer to such provisions as they shall be amended from time to time or to any successor provision, except that any change in the Company's Articles of Incorporation or Bylaws shall only apply to the extent that such amendment permits the Company to provide broader indemnification rights to Indemnitee than currently provided. 8.8 Severability. Any provision of this Agreement, which is ------------ unenforceable in any jurisdiction, shall be ineffective in such jurisdiction to the extent of such unenforceability without invalidating the remaining provisions of this Agreement, and any unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 8.9 Applicable Law. The rights and obligations under this -------------- Agreement shall be governed by, and construed in accordance with, the laws of the State of California applicable to contracts between California residents made and to be performed entirely within such State. 8.10 Interpretation of Agreement. It is understood that the --------------------------- parties hereto intend this Agreement to be interpreted and enforced so as to provide indemnification and advancement of expenses to the Indemnitee to the fullest extent now or hereafter permitted by law, except as expressly limited herein. 8.11 Counterparts. This Agreement may be executed in one or more ------------ counterparts, which shall together constitute one agreement. -7- IN WITNESS WHEREOF, this Indemnity Agreement has been entered into effective as of the date first written above. ISONICS CORPORATION By:____________________________________ James E. Alexander President and Chief Executive Officer INDEMNITEE: Signature: ______________________________ Name: ___________________________________ Address: ________________________________ _________________________________________ -8- EX-10.10 14 WARRANT AGREEMENT EXHIBIT 10.10 NEITHER THIS WARRANT NOR THE COMMON STOCK ISSUABLE HEREUNDER HAS BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR WITH ANY STATE SECURITIES COMMISSIONER. NEITHER THIS WARRANT NOR THE COMMON STOCK MAY BE SOLD OR TRANSFERRED UNLESS REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND QUALIFIED UNDER ALL APPLICABLE STATE SECURITIES LAWS, OR UNLESS EXEMPTIONS FROM SUCH REGISTRATION AND QUALIFICATION ARE AVAILABLE. A&R MATERIALS, INC. COMMON STOCK PURCHASE WARRANT No. W1-__ September 27, 1996 Reference is hereby made to that certain $___________ Secured Promissory Note (the "Loan Note") dated the date hereof of A&R Materials, Inc., --------- a California corporation (the "Company"), in favor of _______________, the terms ------- of which are incorporated by this reference. The Loan Note is one of several similar notes sold to DayStar Partners, L.P. ("DayStar") and other purchasers ------- (the "Other Purchasers," who together with DayStar are referred to as the ---------------- "Purchasers") pursuant to that certain Note Purchase Agreement, of even date ---------- herewith, among the Company and the Purchasers (the "Note Purchase Agreement"). ----------------------- As used herein, an "IPO" means an offering of the Company's securities --- registered under the Securities Act of 1933, as amended, from which the Company receives gross proceeds of at least $3,500,000. The Company hereby certifies that, for value received, ___________, or any transferee who has received this Warrant (the "Holder") is entitled on the ------ terms set forth below to purchase from the Company, on or before the Expiration Date (as defined below), at an exercise price of $.0612 (the "Exercise Price"), -------------- ____________ shares (the "Initial Warrant Shares") of common stock of the ---------------------- Company (the "Common Stock"). ------------ The Company and Holder, among other parties, are entering into a Registration Rights Agreement dated as of September 27, 1996 (the "Registration ------------ Rights Agreement"). If an IPO has been completed and the Registration Statement - ---------------- contemplated by Section 2.1 of the Registration Rights Agreement is not effective within one year after the effective date of the IPO, then this warrant shall also be exercisable to acquire an additional number of shares equal to 4.0% of the Initial Warrant Shares for each whole or partial month after the first anniversary of the effective date of the IPO during which such Registration Statement has not been declared effective. 1. Expiration Date. This Warrant shall be exercisable in whole or in --------------- part until 5:00 p.m. (San Francisco time) on September 27, 2001, provided, -------- however, that notwithstanding such expiration date, this Warrant shall not - ------- expire unless and until not less than 30 nor more than 90 days shall have passed since the Company gave the Holder notice of the anticipated expiration hereof. -2- 2. Exercise of Warrant. This Warrant shall be exercisable in whole ------------------- or in part at any time commencing (i) one year after the closing of the IPO, or (ii) if the IPO does not close within six months from the date of this Warrant, then one year after the date of this Warrant. This Warrant shall be exercised by surrendering it to the Company at its principal office, with a duly executed Subscription Form (in substantially the form appearing at the end of this document), together with payment of the Exercise Price. Promptly after exercise, the Company shall issue and deliver to or upon the order of the Holder a certificate or certificates for the number of shares of Common Stock issuable upon such exercise, and the Company will pay all issue taxes in connection therewith. All shares of Common Stock which may be issued upon exercise of this Warrant will, upon issuance by the Company in accordance with the terms of this Warrant, be validly issued, fully paid and non-assessable, and free from all taxes and liens with respect to the issuance thereof. To the extent permitted by law, this Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided herein, even if the Company's stock transfer books are at that time closed, and the Holder shall be treated for all purposes as the holder of record of the Common Stock to be issued upon such exercise as of the close of business on such date. Upon any partial exercise, the Company will issue to or upon the order of the Holder a new Warrant for the number of shares of Common Stock as to which this Warrant has not been exercised. 3. Adjustment of Exercise Price. The Exercise Price and the number ---------------------------- of shares subject to this Warrant shall be subject to adjustment from time to time as described below. 3.1 Adjustment for Stock Splits, Stock Combinations and Common Stock ---------------------------------------------------------------- Dividends. If at any time or from time to time after the date of this Warrant - --------- (the "Issue Date") the number of shares of Common Stock outstanding is increased by a stock dividend payable in shares of Common Stock (or in options to purchase or rights to subscribe for Common Stock, or securities by their terms convertible into or exchangeable for Common Stock, or options to purchase or rights to subscribe for such convertible or exchangeable securities (collectively, "Common Stock Rights")) or by a subdivision or split-up of shares of Common Stock, then, on the date such payment is made or such change is effective, the Exercise Price shall be decreased, and the number of shares of Common Stock which the Holder shall be entitled to purchase hereunder shall be increased, in direct proportion to such increase in outstanding shares; and if the number of shares of Common Stock outstanding at any time after the date hereof is decreased by a combination of the outstanding shares of Common Stock, then, on the effective date of such combination, the Exercise Price shall be increased, and the number of shares of Common Stock which the Holder shall be entitled to purchase hereunder shall be decreased, in direct proportion to such decrease in outstanding shares (it being assumed, in each case, for purposes of calculating such proportional adjustments, that all Common Stock Rights outstanding on the date the adjustments are to be made are exercised into the maximum number of shares of Common Stock into which they may be converted). 3.2 Adjustment for Dividends in Other Stock or Property; ---------------------------------------------------- Reclassifications. In case at any time or from time to time after the holders - ----------------- of the Common Stock receive or, on or after the record date fixed for the determination of eligible stockholders, become entitled to receive, without payment therefor, (i) other or additional stock or other securities or cash or other property by way of dividend, or (ii) other or additional stock or other securities or cash or other -3- property by way of stock split, spin-off, split-up, reclassification, combination of shares or similar corporate rearrangement (in each case other than additional shares of Common Stock of the Company, or any other stock or securities into which such Common Stock had been changed, or any Common Stock Rights, issued as a stock dividend or stock-split), then, and in each such case, the Holder, upon the exercise of this Warrant, will be entitled to receive the amount of stock, securities and/or property (including cash) which the Holder would have received on or before the date of such exercise if on the Issue Date he had been the holder of record of the number of shares of Common Stock of the Company which he would have been able to acquire upon exercise in full of this Warrant and had thereafter, during the period from the Issue Date to and including the date of such exercise, retained such shares and/or all other or additional stock and other securities and cash or other property receivable by him as aforesaid during such period. 3.3 Adjustment for Reorganization, Consolidation, Merger. In case of ---------------------------------------------------- any reorganization of the Company (or any other corporation, the stock or other securities of which are at the time receivable on the exercise of this Warrant), or in case the Company (or such other corporation) consolidates with, merges into or conveys all or substantially all its assets to another corporation after the Issue Date, then the Holder, upon the exercise of this Warrant at any time after the consummation of such reorganization, consolidation, merger or conveyance, will be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise of this Warrant prior to such consummation, the stock, securities or property to which the Holder would have been entitled upon such consummation if the Holder had converted this Warrant immediately prior thereto. The provisions of this Paragraph 3.3 shall similarly apply to successive reorganizations, consolidations, mergers or conveyances. 3.4 Other Restrictions Relating to Acquisitions. The Company shall ------------------------------------------- not permit a third party to acquire substantially all of its stock or assets, or to merge with it, prior to the Company's IPO without the written consent of the Holder of this Warrant, unless in connection therewith the Company pays all amounts then owing under the Loan Note. If the acquisition price for the Company's shares is at least 250% of the exercise price of this Warrant, then the Company may terminate this Warrant if it has not been exercised by the Holder within 30 days following the Closing of such acquisition. 3.5 Minimal Adjustments. No adjustment in the Exercise Price need be ------------------- made if such adjustment would result in a change in the Exercise Price of less than one percent (1%); no adjustment in the number of shares of Common Stock subject to this Warrant need be made if such adjustment would result in a change of less than one percent (1%) in the number of shares subject hereto. Any adjustment less than these amounts which is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of at least this amount. 3.6 Reorganization of Company. If the Company consolidates or merges ------------------------- with or into, or transfers or leases all or substantially all its assets to, any person, upon consummation of such transaction this Warrant shall automatically become exercisable for the kind and amount of securities, cash or other assets which the Holder of a Warrant would have owned immediately after the consolidation, merger, transfer or lease if the Holder had exercised the Warrant immediately before the effective date of the transaction. Concurrently with the consummation of -4- such transaction, the corporation formed by or surviving any such consolidation or merger if other than the Company, or the person to which such sale or conveyance shall have been made, shall enter into a supplemental Warrant Agreement so providing and further providing for adjustments which shall be as nearly equivalent as may be practical to the adjustments provided for in this Section. The successor Company shall mail to Warrant Holders a notice describing the supplemental Warrant Agreement. If the issuer of securities deliverable upon exercise of Warrants under the supplemental Warrant Agreement is an affiliate of the formed, surviving, transferee or lessee corporation, that issuer shall join in the supplemental Warrant Agreement. If this subsection applies, other subsections of this Section 3 shall not apply. 3.7 Certificate as to Adjustments. Upon the occurrence of each ----------------------------- adjustment pursuant to this Paragraph 3 or pursuant to the initial paragraph of this Warrant, the Company, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to the Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon written request at any time of the Holder, furnish or cause to be furnished to the Holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the then effective number of shares of Common Stock subject to the Warrant, and (iii) the then effective amount of securities (other than Common Stock) and other property, if any, which would be received upon exercise of the Warrant. 4. No Dilution or Impairment. The Company will not, by amendment of ------------------------- its Articles of Incorporation or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against dilution or other impairment. Without limiting the generality of the foregoing, the Company will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of Common Stock upon the exercise of this Warrant and will take no action to amend its Articles of Incorporation which would change to the detriment of the holders of Common Stock (whether or not any Common Stock is outstanding at the time) the dividend or voting rights of the Company's Common Stock as constituted on the date hereof. 5. Reservation of Stock Issuable on Exercise of Warrant. The Company ---------------------------------------------------- will at all times reserve and keep available, solely for issuance and delivery upon the exercise of this Warrant, all such shares of Common Stock and other stock, securities and property as from time to time are receivable upon the exercise of this Warrant. If at any time the number of authorized but unissued shares of Common Stock (or other stock, securities or property) shall not be sufficient to effect the exercise of this Warrant, the Company will use its best efforts to take such corporate action as may be necessary, in the opinion of its counsel, to increase its authorized but unissued shares of Common Stock (or other stock, securities or property) to such number of shares as shall be sufficient for such purpose. -5- 6. Fractional Shares. No fractional shares of the Common Stock will ----------------- be issued in connection with any exercise of this Warrant, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Exercise Price then in effect. 7. Notice of Record Date. In case (i) the Company takes a record of --------------------- the holders of its Common Stock (or other stock or securities at the time receivable upon the exercise of the Warrant) for the purpose of entitling them to receive any dividend (other than a cash dividend at the same rate as the rate of the last cash dividend theretofore paid) or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right, or (ii) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation, or any conveyance of all or substantially all of the assets of the Company to another corporation, or (iii) of any voluntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be ---- mailed to the Holder a notice specifying, as the case may be, (a) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (b) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time receivable upon the exercise of the Warrant) will be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be mailed at least fifteen (15) days prior to the date specified therein. 8. Warrant Register. The Company, or its duly appointed agent, shall ---------------- maintain a register for this Warrant and other warrants of similar tenor on which it shall register the issuance and transfer of such warrants. The duly registered holder ("Registered Owner") of each warrant shall be deemed the actual owner of the warrant so registered until the Company, or its agent, is required to record a transfer thereof. 9. Transfer. -------- 9.1 Transfer. Subject to compliance with all applicable federal and -------- state securities laws and the terms of this Warrant, this Warrant may be transferred, in whole or in part, without the consent of the Company. The Company acknowledges that one or more of the Purchasers may wish to transfer their Warrants to a stock brokerage firm which would then exercise the Warrant and sell the underlying stock. If the Company is notified that one or more of the Purchasers wish to proceed in this manner, the Company will cooperate with the parties and use reasonable efforts to assist the brokerage firm in disposing of the underlying securities in accordance with applicable law. 9.2 Registration or Exemption. This Warrant and the Warrant Shares ------------------------- shall not be sold or transferred unless either (i) they first shall have been registered under the Securities Act of 1933, as amended (the "Act"), or (ii) the Company first shall have been furnished with an -6- opinion of legal counsel, reasonably satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Act. 9.3 Legend. Each certificate representing Warrant Shares shall bear ------ a legend substantially in the following form: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be offered, sold or otherwise transferred, pledged or hypothecated unless and until such securities are registered under such Act or an opinion of counsel satisfactory to the Company is obtained to the effect that such registration is not required." The foregoing legend shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Act or otherwise. 10. Payment of Taxes. The Company will pay all documentary stamp taxes ---------------- attributable to the initial issuance of Warrant Shares upon the exercise of Warrants; provided, however, that the Company shall not be required to pay any -------- ------- tax or taxes which may be payable in respect of any transfer involved in the issue of any Warrant Certificates or any certificates for Warrant Shares in a name other than that of the registered holder of a Warrant Certificate surrendered upon the exercise of a Warrant, and the Company shall not be required to issue or deliver such Warrant Certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 11. Replacement of Warrant. Upon receipt of evidence reasonably ---------------------- satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement or bond in such reasonable amount as the Company may determine or (in the case of mutilations) upon surrender and cancellation hereof, the Company, at its expense, will issue a replacement. 12. Notices. All notices, requests, consents and other communications ------- required or permitted hereunder shall be in writing and shall be deemed to have been delivered one business day after deposit with a reputable overnight delivery service, or two business days after deposit in the mail with the United States Postal Service addressed as follows: (a) If to any Holder, addressed to such Holder at its address as shown on the books of the Company, or at such other address as such Holder may specify from time to time by written notice to the Company, with a copy to Paul Escobosa, Esq., Coblentz, Cahen, McCabe & Breyer, LLP, 222 Kearny Street, 7th Floor, San Francisco, CA 94108. (b) If to the Company, at the address set forth below, or at such other address as the Company may specify from time to time by written notice to the Holder, -7- with a copy to Kevin Kelso, Fenwick & West LLP, Two Palo Alto Square, Palo Alto, CA 94306; and such notices and other communications shall for all purposes of this Warrant be treated as being effective or having been given upon delivery, if delivered personally, or, if sent by mail, seventy-two (72) hours after the same has been deposited in a regularly maintained receptacle for the deposit of United States mail, addressed and postage prepaid as aforesaid. 13. Survival of Covenants, Representations and Warranties, etc. All ---------------------------------------------------------- covenants, representations and warranties made in, pursuant to, or in connection with this Warrant shall survive the execution and delivery hereof. 14. Severability. Should any one or more of the provisions of this ------------ Warrant be determined to be illegal or unenforceable, all other provisions of this Warrant shall be given effect separately from the provision or provisions determined to be illegal or unenforceable and shall not be affected thereby. 15. Parties in Interest. All the terms and provisions of this Warrant ------------------- shall be binding upon and inure to the benefit of and be enforceable by the respective transferees, successors, assigns, administrators, executors, heirs, and legal representatives of the Holder and the Company, whether so expressed or not. 16. Changes; Waiver. Neither this Warrant nor any term hereof may be --------------- changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. 17. Headings. The headings in this Warrant are for purposes of -------- convenience of reference only, and shall not be deemed to constitute a part hereof. 18. Governing Law. This Warrant shall be construed in accordance with and ------------- governed by the laws of that State. Any litigation or arbitration between the parties which arises out of this Warrant shall be instituted and prosecuted only in the appropriate California or Federal court or other tribunal, situated in San Jose, California. The Company hereby specifically submits itself and its properties to the exclusive jurisdiction of such courts for purposes of any such action and the enforcement of any judgment or order arising therefrom. The parties hereto each waive any right to a change of venue and any and all objections to the jurisdiction of the California courts. Notwithstanding the foregoing, the Purchasers may take such actions in a foreign jurisdiction with they deem necessary and appropriate to enforce or collect any court judgment in any dispute arising out of the Warrant or to seek and obtain other relief as is necessary to enforce the terms of this Warrant. Each party agrees that service upon such party in any such action or proceeding maybe made as provided above for the giving of notices. 19. Expiration. If the last day on which this Warrant may be exercised, ---------- or on which it may be exercised at a particular Exercise Price, is a Sunday or a legal holiday or a day on which banking institutions doing business in the City of San Francisco are authorized by law to close, -8- this Warrant may be exercised prior to 5:00 p.m. (San Francisco time) on the next succeeding full business day with the same force and effect and at the same Exercise Price as if exercised on such last day specified herein. [balance of page intentionally left blank] -9- IN WITNESS WHEREOF, the Company has caused this Common Stock Purchase Warrant to be duly executed and delivered on the date first set forth above. A&R MATERIALS, INC., a California corporation By: -------------------------------- Its: ----------------------------- Address: 4010 Moorpark Ave., Suite 119 San Jose, CA 95117 Attn: James E. Alexander ACCEPTANCE BY HOLDER: - ------------------------------------------ By: ------------------------------------ By: ------------------------------ Title: ---------------------------- Dated: _____________, 1996 -10- SUBSCRIPTION FORM ----------------- The undersigned hereby irrevocably elects to exercise the within Warrant to the extent of purchasing _______ shares of the Common Stock of A&R MATERIALS, INC. and hereby delivers $______________ in payment of the Exercise Price thereof, in accordance with the Common Stock Purchase Warrant dated ____________________, ______. DATED: _______________, _____ ------------------------------ Name of Warrant Holder By ---------------------------- Authorized Signature -11- EX-11.01 15 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.1 ISONICS CORPORATION STATEMENTS REGARDING CALCULATION OF NET INCOME (LOSS) PER COMMON SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED THREE MONTHS APRIL 30, ENDED JULY 31, ------------- --------------- 1995 1996 1995 1996 ------ ----- ------- ------- Net Income (Loss)................................ $ (143) $ 281 $ 83 $ 43 ====== ===== ======= ======= Weighted Average Common Stock Outstanding........ 1,456 1,499 1,499 1,499 Dilutive Effect of Stock Options and Warrants.... -- -- -- -- Dilutive Effect of Preferred Stock............... -- 99 98 100 Dilutive effect of stock options and warrants granted since August 1, 1995 (approximately twelve months preceding the offering), calculated using the treasury stock method at $7.00 per share................................. 745 745 745 745 ------ ----- ------- ------- Shares Used in Computing Per Share Information... 2,201 2,343 2,342 2,344 ====== ===== ======= ======= Net Income (Loss) Per Share...................... $(0.06) $0.12 $ 0.04 $ 0.02 ====== ===== ======= =======
EX-23.02 16 CONSENT OF GRANT THRONTON LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated May 10, 1996 (except for the first paragraph of Note 8 as to which the date is September 30, 1996), accompanying the financial statements of Isonics Corporation contained in this Registration Statement and Prospectus. We consent to the use of the aforementioned report in this Registration Statement and Prospectus, and to the use of our name as it appears under the caption "Experts." Grant Thornton LLP San Jose, California September 30, 1996 -----END PRIVACY-ENHANCED MESSAGE-----