-----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, WE7Ogf7PXvtko7TlHCrYutOQoCOQfeT61NkBo/BpsH/aUSgQHUfNNm3TvRzthYlV G+8pDuF8VeatX0tkq+ZYug== 0001012870-96-000696.txt : 19961121 0001012870-96-000696.hdr.sgml : 19961121 ACCESSION NUMBER: 0001012870-96-000696 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19961120 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ISONICS CORP CENTRAL INDEX KEY: 0001023966 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 770338561 STATE OF INCORPORATION: CA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-13289 FILM NUMBER: 96669814 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/A 1 AMENDMENT #2 TO FORM SB-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1996 REGISTRATION NO. 333-13289 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- AMENDMENT NO. 2 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- ISONICS CORPORATION (Name of Small Business Issuer in Its Charter) CALIFORNIA 2819 77-0338561 (STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.) -------------- 4010 MOORPARK AVENUE, SUITE 119 SAN JOSE, CALIFORNIA 95117 (408) 260-0155 (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE OF BUSINESS) -------------- JAMES E. ALEXANDER CHIEF EXECUTIVE OFFICER ISONICS CORPORATION 4010 MOORPARK AVENUE, SUITE 119 SAN JOSE, CALIFORNIA 95117 (408) 260-0155 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE) -------------- COPIES TO: C. KEVIN KELSO, ESQ. 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 94306 (212) 977-6600 (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 PER SHARE(1) PRICE(1) FEE - ------------------------------------------------------------------------------------ Units(2), each consisting of......... 977,500 $8.00 $7,820,000 $2,697 (a) 1 share of Common Stock................ 977,500 -- -- -- (b) 1 Redeemable Common Stock Purchase Warrant.............. 977,500 -- -- -- - ------------------------------------------------------------------------------------ Common Stock issuable upon exercise of Redeemable Warrants... 977,500 $11.85 11,583,375 $3,995 - ------------------------------------------------------------------------------------ Representatives' Warrants(3)........... 85,000 $.001 $85 -- - ------------------------------------------------------------------------------------ Common Stock issuable upon exercise of Representatives' Warrants(4)........... 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(4)........... 85,000 $11.85 $1,007,250 $348 - ------------------------------------------------------------------------------------ Total.................. 3,272,500 $21,226,710 $7,322(5) - ------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------
(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 and 127,500 Redeemable Warrants issuable upon exercise of the Representatives' Over-Allotment Option. (3) No registration fee required pursuant to Rule 457 under the Securities Act. (4) Pursuant to Rule 416 of the Securities Act, there are also being registered hereby such additional indeterminate number of Shares of Common Stock as may become issuable pursuant to the anti-dilution provisions of the Redeemable Warrants and the Representatives' Warrants. (5) Previously paid. -------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +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 NOVEMBER 20, 1996 850,000 SHARES OF COMMON STOCK AND 850,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS (AS UNITS, EACH CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE WARRANT) [LOGO OF ISONICS CORPORATION] This Prospectus relates to the offering by Isonics Corporation, a California corporation ("Isonics" or the "Company"), of 850,000 shares (the "Shares") of common stock, no par value (the "Common Stock"), and 850,000 redeemable common stock purchase warrants (the "Warrants") initially as units, each unit consisting of one share of Common Stock and one Warrant. 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, but will trade separately immediately upon the closing of the offering. 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 ending immediately before the notice of redemption. Prior to this offering, there has been no public market for the Securities, Common Stock or Warrants, and there is no assurance that such a market will develop or be maintained following the offering. After completion of this offering, there will be no public market for the Securities as units. 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, and has also applied for listing of the Common Stock and Warrants on the Boston Stock Exchange under the symbols "INC" and "INCW," respectively. THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 5 AND "DILUTION" ON PAGE 16. ---------- 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 Unit (3)............................... $ $ $ - --------------------------------------------------------------------------------------------------- Per Share................................. $ $ $ - --------------------------------------------------------------------------------------------------- Per Warrant............................... $ $ $ - --------------------------------------------------------------------------------------------------- Total (3)(4)............................... $ $ $ - --------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------
(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 intends to sell the Warrant included in the Units at an initial public offering price of $0.10 per Warrant, with the balance of the initial public offering price per Unit constituting the purchase price of the Share included in the Unit. (4) The Company has granted the Underwriters an over-allotment option, exercisable within 45 days after the date of this Prospectus, to purchase up to 127,500 shares of Common Stock and/or 127,500 Warrants, solely to cover over-allotments, if any. The over-allotment option may be exercised to purchase units (each consisting of one share of Common Stock and one Warrant), or shares of Common Stock or Warrants or any combination thereof. To the extent that the option is exercised, the Underwriter will offer the additional Common Stock 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 A Stable isotope labeled compounds used to determine structure of molecules B Ion implant tool utilizing stable isotopes C A carbon-13 diagnostic breath test sample being provided by a small child D Xenon and carbon stable isotope products packaged and ready for shipment E Depleted zinc in the form of sintered oxide pellets 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, THE BOSTON STOCK EXCHANGE 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 pursuant to sales orders, 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. The amount of future direct sales of DZ to certain end user customers may be limited by, among other things, certain rights or agreements of GE, and future direct sales could also be affected by GE's future intentions regarding sales or purchases of DZ independently of the Company, see "Risk Factors--Number of DZ Customers." New applications for stable isotopes are continually being developed by the Company and by third parties. The Company believes that many new applications have the potential to create new markets. One opportunity is to supply stable isotope labeled compounds for the diagnostic breath test ("DBT") market. DBTs provide early diagnosis of conditions that could otherwise lead to expensive procedures such as endoscopies and biopsies. DBTs under development by third parties which utilize stable isotopes in their application include tests to diagnose peptic ulcers, fat malabsorption and liver function. A urea DBT relating to peptic ulcers has recently been approved by the U.S. Food and Drug Administration (the "FDA"), and the Company believes that other companies have applied to the FDA or comparable agencies in foreign countries for approval of these tests, which must be obtained before any products can be sold. Certain DBTs are currently marketed in certain European countries. The Company 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 October 1996, the Company changed its name to Isonics Corporation. The Company's principal executive offices are located at 4010 Moorpark Avenue, Suite 119, San Jose, California, 95117. Its telephone number is (408) 260-0155. 3 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. After completion of this offering, there will be no public market for the Securities as units. See "Description of Capital Stock." Common Stock to be outstanding after this offering.......... 2,761,111 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 Boston Stock Exchange Symbols. Common Stock--INC; Warrants--INCW
SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED THREE MONTHS APRIL 30, ENDED 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).................................. 2,218 2,360 2,360 2,361
JULY 31, 1996 ---------------------- ACTUAL AS ADJUSTED(3) ------ -------------- BALANCE SHEET DATA: Cash and cash equivalents............................... $ 147 $3,654 Working capital (deficiency)............................ (134) 3,373 Total assets............................................ 2,138 5,645 Long-term debt, less current portion.................... 177 177 Total shareholders' equity.............................. 213 4,945
- ------- (1) Based on shares outstanding as of October 1, 1996. Includes 96,315 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, 414,134 shares of Common Stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $1.74 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 414,134 shares of Common Stock, the sale by the Company in this offering of 850,000 Shares and 850,000 Warrants to purchase Common Stock at 150% of the initial public offering price per Share, 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 an assumed weighted average exercise price of $9.38, the exercise of options, after July 31, 1996, to purchase 97,671 shares of Common Stock at an exercise price of $2.07 per share, and after deducting the estimated underwriting discounts and commissions and offering expenses and the application of the net proceeds therefrom. See "Capitalization" and "Use of Proceeds." 4 RISK FACTORS An investment in the Securities offered hereby involves a high degree of risk. In addition to the other information in this Prospectus, the following factors should be considered carefully in evaluating an investment in the Securities offered hereby. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in the Prospectus. Relationship With Certain Suppliers and Raw Materials. The Company depends upon a single processor, located in Russia, for one process involved in the manufacturing of its products, and upon a single supplier or a limited number of suppliers and processors for certain other manufacturing processes. Although the Company does have written agreements with certain of its suppliers and processors, the Company does not have any written agreements with other suppliers and processors. Although the Company seeks to reduce its dependence on its sole and limited suppliers, disruption or termination of any of the sources could occur, and such disruptions could have at least a temporary material adverse effect on the Company's business, financial condition and results of operations. Moreover, a prolonged inability to obtain alternative sources for processing could materially adversely affect the Company's relations with its customers. See "Risk Factors--Expansion of the Company's Product Offerings" and "Business--Manufacturing and Supply." Operations in Russia. The processing of the Company's products is dependent upon an isotope enrichment plant, located in Russia, which is owned by the Ministry of Atomic Energy of the Russian Federation, which is part of the cabinet of the government of the Russian Federation. The Company recently signed an agreement under which the plant and AO Techsnabexport, Co., Ltd. ("Techsnabexport") which is a commercial department of the Ministry, have agreed to supply the Company with zinc, cadmium, silicon, and carbon isotopes over the next three years. Under the agreement, the Company negotiates with the plant management annually regarding the price and certain other terms of the products to be supplied in the upcoming year, and the next such negotiation is expected to occur in November 1996. If such an agreement is entered into, the agreement is expected to provide, among other things, that the plant will exclusively supply the Company and that any disputes arising under the agreement will be resolved by arbitration conducted in Europe under international commercial arbitration rules. Even if such an agreement is negotiated, the enforceability of such an agreement might be subject to a greater degree of uncertainty than if the agreement was with a U.S. company and disputes were resolved in the United States. The plant is generally subject to the same government laws, policies, controls and regulations as apply to private enterprises in Russia. To date, these laws, policies, controls and regulations have not had any material adverse effect on the Company's business or relations with the plant, although there can be no assurance that this will be the case in the future. Operations in Russia entail certain risks. In recent years, the former republics of the Soviet Union have experienced political, social and economic change as constituent republics sought independence from the former central government in Moscow, and certain of the republics including Russia have attempted to transition from a centrally controlled economy toward market-based economies. These changes have involved, in certain cases, armed conflict in certain republics. There can be no assurance that political or economic instability in these republics will not continue or worsen. The supply of stable isotopes could be directly affected by political, economic and military conditions in Russia. Accordingly, the operations of the Company could be materially adversely affected if hostilities in Russia should occur, if trade between Russia and the United States were interrupted or curtailed, if political conditions in Russia disrupt transportation or processing concerning the Company's goods, if laws or governmental policies concerning foreign ownership or business operations in Russia change substantially, or if tariffs are introduced or freight rates change significantly. There can also be no assurance that the Company's relationship with the processing plant in Russia or with the Ministry of Atomic Energy will be successfully maintained, even apart from these political, economic or military factors. In addition, there have been certain privatization programs in certain countries of the former Soviet Union, although the Company is not aware of any current proposals to privatize the plant or other government-controlled isotope production facilities in Russia. If at some future date the plant was privatized, the Company cannot predict whether any such privatization would result in a favorable or an 5 unfavorable impact on the Company. Disruption or termination of the Company's supply sources could have a material adverse effect on the Company's business, financial condition and results of operations. The Company does not maintain political risk insurance. Additionally, Russian courts lack experience in commercial dispute resolution, and many of the procedural remedies for enforcement found in western jurisdictions are not available in Russia. Difficulties may be encountered in enforcing judgments of foreign courts or of arbitrators, in the case of the Company's agreements with suppliers or processors, or in otherwise protecting the Company's rights with its Russian suppliers and transporters. There can be no assurance that this difficulty in enforcing the rights will not have a material adverse effect on the Company. See "Business--Manufacturing and Supply." Customer Concentration. Historically, substantially all of the Company's net revenues in any particular period have been attributable to a limited number of customers. Net revenues from GE accounted for 66%, 59% and 88% of net revenues for the three months ended July 31, 1996, and the years ended April 30, 1995 and 1996, respectively. One other customer accounted for 20% of net revenues for the three months ended July 31, 1996. A second customer accounted for 10% of net revenues for the three months ended July 31, 1996. A third customer accounted for 11% of net revenues for the years ended April 30, 1995 and 1996. A fourth customer accounted for 26% of net revenues for the year ended April 30, 1995. The Company expects that if it continues to increase sales of depleted zinc products to end users and if it develops and sells products in the medical and research and electronic materials industries, concentration of net revenues from a limited number of customers will be reduced. None of the Company's customers have entered into long-term agreements to purchase the Company's products. In particular, the Company's sales of DZ to GE have been pursuant to sales orders placed from time to time by GE, and the Company does not have any written purchase or sales agreements with GE relating to sales of DZ or other products. If completed sales orders are not replaced on a timely basis by new orders from customers, the Company's net revenues could be materially and adversely affected. The Company's net revenues also could be adversely affected by a number of factors including the loss of a significant customer, reductions in orders from any significant customer compared to historical buying levels or otherwise, or the cancellation of a significant order from a customer. Any of these factors, many of which are outside the Company's control, could have a material adverse effect on the Company's business, financial condition and results of operations. Limited Operating History; History of Operating Losses. The Company was incorporated in March 1993 and has had only a limited operating history upon which evaluation of its prospects can be made. The Company had net losses of $171,000 and $143,000, respectively, for the years ended April 30, 1994 and 1995, 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, and an extraordinary charge relating to payment of the Placement Notes upon completion of this offering. The Company's limited operating history makes the prediction of future operating results difficult. 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." 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 6 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, and as a result the Company expects to have a significant net loss for the quarter in which the offering occurs. See "Capitalization--Recent Financing Transactions." Number of DZ Customers. Patents have been granted to GE with respect to a method for inhibiting deposition of radioactive cobalt in a water-cooled nuclear reactor through the use of DZ. The nuclear power facilities that have purchased DZ to date directly from the Company have received correspondence from GE indicating that such customers may practice the method of utilizing DZ in such facilities and may purchase DZ from entities other than GE, such as the Company. In addition, certain nuclear power facilities are located in countries where GE does not have similar patents. Similarly, certain third party entities other than nuclear power plants, such as certain entities that construct nuclear power facilities or equipment, have licenses from GE which the Company believes may allow them to purchase DZ from the Company. Other facilities or third party entities may not be granted such licenses, and the Company's ability to sell DZ to such customers may be limited by applicable patent law and/or such customers' agreements with GE. GE may in the future grant licenses to additional end users entitling them to purchase DZ from third parties such as the Company, and GE may continue to purchase DZ directly from the Company, although there can be no assurance that this will be the case. GE could, among other actions, seek alternative sources of DZ to compete with the Company and seek to sell or purchase DZ independently of the Company. Nevertheless, it is possible that the Company's sales of DZ may be limited to only those entities described above that can purchase DZ from the Company without infringing on GE's intellectual property rights. Future Additional Capital Requirements. The Company's capital requirements will depend on numerous factors, including the level of future capital expenditures, the level of resources devoted to research and development and marketing of its products, market acceptance and demand for its products, and other factors. The Company believes the net proceeds of this offering, together with cash on hand and cash expected to be generated from operations, will provide adequate funding for the Company's anticipated operations for at least the next twelve months. Nevertheless, the Company may be required to raise additional funds through public or private debt or equity financings, collaborative relationships, bank facilities or other arrangements. There can be no assurance that the Company will not require additional funding sooner than expected or that such additional funding, if needed, will be available on terms attractive to the Company, if at all. Any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. See "--Expansion of the Company's Product Offerings," "Use of Proceeds," and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 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 7 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, 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 8 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 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. 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 9 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 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 10 products that the Company may develop in the future are subject to stringent regulation by the FDA and its foreign counterparts, and within the United States by certain state agencies. Regulations by the FDA and its counterparts impose significant restrictions on the development, testing, manufacture, marketing, distribution and export of such products, including in most cases the need for prior approval from such government agencies to manufacture, test and distribute such products. Regulatory approvals for commercial distribution of medical and diagnostic products generally require substantial preclinical and human clinical testing to demonstrate their safety and effectiveness. There can be no assurance that clinical data from such studies will demonstrate the safety or efficacy of any product that the Company may in the future develop or of products utilizing components that the Company may desire to supply, nor could there be any assurance that the FDA or its foreign counterparts will approve the commercial distribution of any such products in a timely manner, if at all. Likewise, to the extent that other foreign or domestic government approvals or permits are required for the manufacture, export, import, distribution and marketing of the Company's products and operations, there can be no assurance that the Company will be able to obtain or maintain such approvals or permits or meet applicable requirements or standards, or that such approvals or permits will not contain restrictions or limitations that materially affect the sale and distribution of the Company's products. The Company's failure to obtain such approvals in a timely manner, or its failure to comply with applicable foreign or domestic laws, regulations or policies, including those applicable to its operations and products, or changes in such laws, regulations or policies, may have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Government Regulation." Control by Existing Shareholders. Upon completion of this offering, the directors, executive officers and principal shareholders of the Company and their affiliates will, in the aggregate, assuming the exercise in full of all options and warrants then outstanding, beneficially own approximately 45.7% of the Company's outstanding Common Stock (approximately 43.3% 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." The Company's bylaws provide that so long as the Company is a "listed company" as defined by applicable California law, there will not be cumulative voting in connection with the election of directors. Upon the closing of this offering, however, the Company will not be a listed company as so defined, and therefore cumulative voting will apply in connection with the election of directors. See "Description of Capital Stock--Common Stock." Effect of Certain Charter Provisions. The Company's Board of Directors has the authority to issue up to 10,000,000 shares of Preferred Stock and to determine the rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the shareholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock could adversely affect the voting power of holders of Common Stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. Additionally, issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. The Company has no current plans to issue shares of Preferred Stock. 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 and the Boston Stock Exchange, 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 on the Boston Stock Exchange (assuming the Company 11 continued to be listed on such exchange) and 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. Under the blue sky laws of most states, public sales of Common Stock and Warrants after this offering by persons other than the Company in "nonissuer transactions" must either be qualified under applicable blue sky laws, or exempt from such qualification requirements. Applicable exemptions for secondary trading of the Common Stock and Warrants may differ from state to state depending on the particular statutes and regulations of that state. In many states, secondary trading will be permitted only so long as information about the Company is published in a recognized manual such as manuals published by Moody's Investor Service or Standard & Poor's Corporation. The Company has applied for listing in a recognized manual and will attempt to be so listed as soon after the closing of this offering as reasonably practicable, but secondary trading in many states will be restricted for some period of time after the date of this Prospectus. 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 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 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 1,911,111 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 587,134 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 $5.30 per share. To the extent options or warrants to purchase Common Stock are exercised, there may be further dilution. See "Dilution." 12 RECENT DEVELOPMENTS Based on preliminary sales, operating and other data through October 31, 1996, the Company believes that total revenues for the three months ended October 31, 1996 were approximately $800,000. In addition to sales to GE of approximately 30% to 35% of net revenues, the Company continued direct sales of DZ to end users, and for the three months ended October 31, 1996, approximately 20% to 25% of net revenues were from sales made directly to end users. Sales of cadmium and stable isotope labeled compounds represented approximately 40% to 50% of net revenues during the period. Net revenues decreased from approximately $1.6 million for the three months ended July 31, 1996. The decrease was due to the timing of DZ orders and the size of such orders. The decrease in DZ net revenues was offset in part by increases in sales of cadmium and stable isotope labeled compounds. Based upon such data, the Company believes that it will incur a net loss for the period of approximately $300,000 to $400,000. 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 ($5,403,000 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 APPROXIMATE PERCENTAGE OF NET APPLICATION OF NET PROCEEDS DOLLAR AMOUNT PROCEEDS --------------------------- ------------- ----------------- Repayment of outstanding debt(1)............... $1,372,000 29% Facilities and capital expenditures(2)......... $ 930,000 21% Research and development(3).................... $1,000,000 21% Working capital and general corporate purposes(4).................................... $1,375,000 29%
- -------- (1) The Company intends to apply these proceeds to repay approximately $1,372,000 payable under the notes issued in the Placement. See "Capitalization--Recent Financing Transactions" and "Certain Transactions." (2) The Company intends to conduct a feasibility study concerning construction of an isotope manufacturing facility, estimated at approximately $300,000, purchase equipment, estimated at approximately $550,000, and upgrade management information systems, estimated at approximately $80,000. See "Business--Manufacturing and Supply." (3) The Company intends to use an estimated approximately $850,000 of the net proceeds to further develop and select technology associated with the diagnostic breath test market, an estimated approximately $100,000 of the net proceeds to develop and test isotopically pure silicon and an estimated approximately $50,000 of the net proceeds to continue research and development of existing products. (4) The Company intends to use a portion of the proceeds for general corporate purposes which may, among other purposes, include inventory purchases, accounts receivable financing and administrative salaries. The foregoing represent estimates only, and the actual amounts expended by the Company for these purposes and the timing of such expenditures will depend on numerous factors. The Company may use a portion of the net proceeds to acquire businesses or products complementary to the Company's business, although the Company currently has no specific plans or commitments in this regard. Pending use of the net proceeds for the above purposes, the Company intends to invest such funds in short-term, interest-bearing, investment-grade obligations and federally insured certificates of deposit. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its capital stock. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, operations, capital requirements, the general financial condition of the Company, general business conditions and contractual restrictions on payment of dividends, if any. The Company currently anticipates that it will retain all future earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. 13 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 and $0.10 per Warrant, the issuance of Representatives' Warrants to purchase 170,000 shares of Common Stock at a weighted average exercise price of $9.38 per share, the exercise of options, after July 31, 1996, to purchase 315,377 shares of Common Stock at a weighted average exercise price of $1.69 per share and the issuance of 96,315 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 $1,155 $ 177 ==== ====== ====== Shareholders' equity: Class A 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 actual and pro forma, no shares issued or outstanding 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, 2,761,111 as adjusted................................. 78 78 5,412 Warrants.................................. -- 394 394 Common stock subscriptions receivable..... -- -- (330) Retained earnings (accumulated deficit)..... 10 10 (531) ---- ------ ------ Total stockholders' equity................ 213 607 4,945 ---- ------ ------ Total capitalization.................... $390 $1,762 $5,122 ==== ====== ======
- -------- (1) The Placement is reflected in the Pro Forma amounts as a borrowing and a sale of securities. See "--Recent Financing Transactions." The $1,372,000 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 $394,000. Expenses and discounts related to the issuance of the Placement Notes were $147,000. 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 $541,000, 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) 414,134 shares of Common Stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $1.74 per share, (iv) 170,000 warrants to purchase shares of Common Stock issuable to the Representatives upon exercise of the Representatives' Warrants 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. 14 RECENT FINANCING TRANSACTIONS In an August and September 1996 private placement (the "Placement"), the Company issued approximately $1,372,000 principal amount of 12% nonconvertible promissory notes (the "Placement Notes") and warrants (the "Placement Warrants") to acquire 286,414 shares (the "Placement Shares") of Common Stock to a small number of sophisticated investors (the "Placement Investors"). Net proceeds were approximately $1,225,000. 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 12% per annum is due and payable monthly from September 1996 through May 1997 and (ii) principal and accrued but unpaid interest at 15% per annum 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 143,207 Placement Shares are exercisable in whole at any time or in part at $.4217 per share, and Placement Warrants to purchase 143,207 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 377,458 additional Placement Shares (such warrants referred to as "Default Warrants") at $.01 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." An aggregate discount of $541,000 will be amortized to interest expense over the contractual life of the Placement Notes. This discount is comprised of $394,000 representing the fair value of the warrants issued in connection with the Placement, $137,000 representing discounts on the Placement Notes and $10,000 representing expenses of the Placement. 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 (as an extraordinary item) and will be reflected in the Company's statement of operations for that period. The charge is likely to have a material effect on the Company's reported earnings for that quarter, and as a result the Company expects to have a significant net loss for the quarter in which the offering occurs. Certain of the Company's directors, employees, and other related persons participated in the Placement. See "Certain Transactions." 15 DILUTION The net tangible book value of the Company as of July 31, 1996 was $17,000 or $.01 per share of Common Stock. The July 31, 1996 book value was adjusted for the following items: (i) the 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 $2.07 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 $4,694,000 or $1.70 per share. This represents an immediate increase in net tangible book value of $1.69 per share to existing shareholders and an immediate dilution of $5.30 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............ $ .01 Increase in net tangible book value per share attributable to new investors................................................ $1.69 Pro forma net tangible book value per share after the offering.. 1.70 ----- Net tangible book value dilution per share to new investors..... $5.30 =====
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.. 1,911,111 69.2% $ 735,000 11.0% $0.38 New investors.......... 850,000 30.8% $5,950,000 89.0% $7.00 --------- ----- ---------- ----- Totals............. 2,761,111 100.0% $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 414,134 shares of Common Stock issuable at a weighted average exercise price of $1.74 per share, (iii) additional warrants to purchase 850,000 shares of Common Stock at an exercise price of 150% of the IPO Price Per Share, (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 and (v) options to purchase 40,000 shares of Common Stock at an exercise price equal to 110% 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." 16 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............................... 2,218 2,360 2,360 2,361 ===== ====== ====== ======
APRIL 30, JULY 31, ------------ -------- 1995 1996 1996 ----- ----- -------- (IN THOUSANDS) BALANCE SHEET DATA: 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
17 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 GE accounted for 66%, 59% and 88% of net revenues for the three months ended July 31, 1996, and the years ended April 30, 1995 and 1996, respectively. One other customer accounted for 20% of net revenues for the three months ended July 31, 1996. A second customer accounted for 10% of net revenues for the three months ended July 31, 1996. A third customer accounted for 11% of net revenues for the years ended April 30, 1995 and 1996. A fourth customer accounted for 26% of net revenues for the year ended April 30, 1995. 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. Isoserve was the only other supplier of DZ in the world at the 18 acquisition date. By virtue of its acquisition of the Isoserve assets and assumption of liabilities, the Company effectively became the sole source for DZ worldwide. Management believes this acquisition has had a significant positive impact on the Company's net revenues in fiscal 1996 as compared to 1995, and the Company cannot determine what the results of operations from sales of DZ would have been in fiscal 1996 had the Company not acquired Isoserve. Net sales of DZ were approximately $4.9 million in fiscal 1996 as compared to $430,000 in fiscal 1995. By virtue of its position as the sole worldwide supplier of DZ in 1996, the Company was able to increase unit shipments and per unit selling price while keeping production costs stable, thus increasing its gross margin on sales of DZ. 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) 3.2 4.3 2.0 ----- ----- ----- ----- Net income (loss)............................... (19.4)% 5.0% 7.0% 2.7% ===== ===== ===== =====
Net Revenues. Net revenues increased from $738,000 in fiscal 1995 to $5.6 million in fiscal 1996. The increase was due primarily to demand for energy products. Unit shipments of energy products increased by a factor of approximately seven and average unit prices increased slightly as a result of additional processing performed by the Company. The increase in shipments and average unit prices was in part attributable to the acquisition of Isoserve. To a lesser extent, net sales in fiscal 1996 increased from the introduction of a new product, cadmium, which is used for laser holography applications. Cadmium sales represented less than 15% of net revenues in fiscal 1996. 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 primarily to demand for energy products and cadmium. Net revenues from energy product sales increased approximately $213,000 as a result of increased unit shipments and average unit prices. Average unit prices of energy products were positively affected by the Company's direct sales to end users. Net revenues from cadmium increased approximately $107,000 on increased unit shipments, but average unit prices decreased significantly as a result of competition in the market. 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. 19 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. 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 working capital limitations which prevented additional research and development expenditures. 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 3.2% 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. 20 Extraordinary Item. As a result of the Placement Notes issued in the Placement, the Company is amortizing to interest expense an aggregate discount of $541,000 over the contractual life of the Placement Notes. In the quarter in which this offering is completed, the amount of the discount which has not already been amortized will be recorded as a charge to operations for debt restructuring and is expected to be shown as an extraordinary item and will be reflected in the Company's statement of operations for that period. The charge is likely to have a material adverse effect on the Company's reported earnings for that quarter, and as a result the Company expects to have a significant net loss for the quarter in which the offering occurs. As of October 31, 1996, approximately $490,000 of the discount remained to be amortized. See "Capitalization--Recent Financing Transactions." LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has primarily financed its operations through a combination of cash flow from operations, borrowed funds, lease financing and private sales of equity securities. The Company generated cash flow from operating activities of $180,000 in fiscal 1996, principally as a result of net income, adjusted for 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 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. The Company is required to make royalty payments to Isoserve for each gram of depleted zinc metal sold until March 2000. Minimum annual royalty payments of $100,000 are required regardless of sales volume until the Company has paid $500,000 in the aggregate. The maximum royalty payments under the agreement are $1,000,000. As of July 31, 1996, the Company has paid cumulative royalties of $241,000 to Isoserve, of which $45,000 was paid in the three months ended July 31, 1996. 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. These working capital deficiencies were the result of the significant losses from operations in the Company's early stages as it incurred expenses to establish its market position. The Company believes that the net proceeds of this offering will eliminate these working capital deficiencies upon the closing of this offering. At present, the Company has no credit facility with a bank or other financial institution and no in-place source of capital, other than the approximately $1,125,000 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 21 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." 22 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 pursuant to sales orders, 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. 23 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; 24 . 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; . 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. Testing sponsored by the Electric Power Research Institute has shown that the addition of a soluble form of zinc to the nuclear reactor coolant reduces plant radiation fields, and in some cases, substantially mitigates environmentally induced cracking. Zinc acts as a corrosion inhibitor for the stainless steel and other metal components of the nuclear reactor systems. In boiling water reactors ("BWRs"), zinc prevents the development and concentration of corrosion products, the cause of high radiation fields which can result in radiation exposure to plant workers. In pressurized water reactors ("PWRs"), zinc not only prevents radiation field build-up, but has been shown in a PWR test to substantially reduce environmental cracking. Zinc provides the important benefits outlined above, but one isotope of natural zinc becomes radioactive in the nuclear reactor, thus offsetting a substantial portion of the desired benefits. By depleting this zinc isotope, the desired benefits are still obtained while the detrimental side effect is essentially eliminated. This product is known as isotopically depleted zinc ("DZ"). DZ is currently sold to 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 25 assurance that a market will develop for DZ sales to PWRs, that the Company will be able to sell DZ to all such potential customers, or that selling prices of DZ will not decrease. Sales of DZ are presently the Company's largest source of revenues, representing approximately 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. The Company's sales of DZ to GE have been pursuant to sales orders placed from time to time by GE, and the Company does not have any written purchase or sales agreements with GE relating to sales of DZ or other products. In addition to sales to GE, the Company currently is marketing DZ directly to U.S. and foreign utilities and 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. 26 . Product tagging and stewardship applications. The source of materials and explosives may be identified, without changing their chemistry, by tagging with the stable isotopes of carbon, nitrogen, oxygen and hydrogen. Several other approaches are currently being implemented, and other technologies have also been proposed. These other approaches involve the addition of extraneous materials such as dyes, exotic chemical compounds or radioactive compounds. The Company believes that adding such extraneous 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 27 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. 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 28 which concentrate in specific parts of the human body upon injection, inhalation or ingestion. Measuring the distribution of the materials in the patient can assist physicians in diagnosing disease states and developing appropriate treatment therapies, some of which incorporate radioactive materials produced from stable isotopes. Most phases of the development and ongoing production of these materials are controlled by the FDA and similar foreign regulatory agencies. This fact, combined with the complexities of production and distribution, has resulted in a market with only a few manufacturers. Tight quality control requirements and the importance to the health care industry of a ready supply of these drugs leads these manufacturers to pay close attention to their stable isotope suppliers. Quality, supply reliability, ultimate source, breadth of offerings, price and track record are principal factors that a manufacturer considers in evaluating a potential stable isotope supplier. Much of the material used to manufacture such products originates in countries of the former Soviet Union. While the U.S. Department of Energy ("DOE") has facilities that can, and do, manufacture stable isotopes, its costs are usually substantially higher because of the full cost recovery mandated by legislation governing the DOE's operations. The Company is capable of supplying many of the stable isotopes currently sold in this market. Since the original impetus for new applications of stable isotopes in health care frequently comes from the drug manufacturers, the Company has recently begun marketing its products, services and capabilities to the existing and emerging manufacturers. 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 29 these imperfections amounting to nearly 8%. This far exceeds the doping levels and density of imperfections ordinarily found in device-quality crystals. The Company believes that removal of the minor isotopes should result in substantially improved thermal conductivity. The Company believes that if commercial opportunities emerge, isotopically pure silicon-28 (99.5%) deployed as wafers or substrates and as silane for building epitaxial layers should find a niche in the manufacture of high performance silicon semiconductors. Even at the premium price required for isotopically pure silicon, the Company believes that it can compete in high performance, less cost driven market segments. Isonics has obtained an option entitling it, 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 funds research and development to improve technologies for isotope separation and materials processing technologies performed at Moscow State University and has retained consultants to supervise the progress of such research. The Company's arrangements with the university do not obligate the Company to fund any particular level of expenditures, and payments to fund such research at the university have not been in amounts material to the Company. Much of the expenditures to date have been in Russia to capitalize on the high quality of technology and economical labor rates. The Company's activities in Russia could, however, be directly affected by political, economic and military conditions in Russia. See "Risk Factors--Operations in Russia." PATENTS AND PROPRIETARY RIGHTS The Company relies primarily on a combination of trade secrets, confidentiality procedures and contractual provisions to protect its technology. Despite the Company's efforts to protect its rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's technology and products is difficult. In addition, the 30 laws of many countries do not protect the Company's rights in information, materials and intellectual property that it regards as proprietary to which it regards as great an extent as do the laws of the United States. There can be no assurance that the Company's means of protecting its rights in proprietary information, materials and technology will be adequate or that the Company's competitors will not independently develop similar information, technology or intellectual property. The Company currently has no patents and has not filed any patent applications. The Company has rights to several isotopically engineered innovations regarding electronic and optical materials which it believes may be patentable. Ongoing work in the area of isotope separation by 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. 31 Many of the areas in which the Company is or intends to compete are rapidly evolving. There can be no assurance that an existing or potential competitor has already developed, or may develop, a patentable product or process which will substantially prevent the Company from competing in its intended markets. The Company competes primarily on the basis of product performance, proprietary position and price. Some of the Company's products may also compete based on product efficacy, safety, patient convenience and reliability. In many cases the first company to introduce a product to the market will obtain at least a temporary competitive advantage over subsequent market entrants. MANUFACTURING AND SUPPLY Consistent with the Company's strategy to minimize capital expenditures, the Company obtains stable isotopes through a multi-year supply agreement and, to a lesser extent, from time to time from a variety of other Russian stable isotope sources and may invest in Company-owned isotope production facilities in the future upon determining the optimum production technology. Currently, the Company obtains substantially all its isotopes from Russia and the Republic of Georgia (which was part of the former Soviet Union). The production of DZ is an international activity involving several distinct steps which require up to nine months for the complete production cycle. First the feed material, high purity diethylzinc, is procured from a chemical plant in the United States and shipped by freighter to St. Petersburg, Russia. There it is transported by truck or train to the gas centrifuge plant where it is depleted of the zinc-64 isotope and converted to depleted 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 Techsnabexport and an isotope enrichment plant located in Russia, which is owned by the Ministry of Atomic Energy of the Russian Federation, which is part of the cabinet of the government of the Russian Federation. The term of the agreement is through 1999. Under the agreement, the plant will produce DZ and other stable isotopes for the Company will allocate its stable isotope production capacity to the Company and will produce other isotopes to respond to marketplace demand on the Company for other stable isotopes. Under the 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. If such an agreement is entered into, the agreement is expected to provide, among other things, that the plant will exclusively supply the Company and that disputes arising thereunder will be resolved by arbitration conducted in Europe under international commercial arbitration rules. Even if such an agreement is negotiated, the enforceability of the agreement might be subject to the greater degree of uncertainty than if the agreement was with a U.S. company and disputes were resolved in the U.S. The supply of stable isotopes could be directly affected by political, economic and military conditions in Russia. Accordingly, the operations of the Company could be materially adversely affected if hostilities involving Russia should occur, if trade between Russia and the United States were interrupted or curtailed, or if the Company should fail to obtain and maintain all necessary governmental approvals. Operations in Russia entail certain other risks, including, among others, supply disruptions as well as introduction of tariffs and fluctuations in freight rates. See "Risk Factors--Operations in Russia." There can be no assurance that the Company's relationship with its processor in Russia will be successfully maintained. Disruption or termination of the Company's supply sources could delay shipments by the Company and could have a material adverse effect on the Company's business, financial condition and results of operations. The Company does not presently maintain political risk insurance but will evaluate the desirability and availability of such insurance in the future. The plant with which the Company has the agreement described above is one of four similar plants which were designed to address the needs of the former Soviet Union and certain other countries' needs for low enriched uranium for commercial nuclear power plant fuel and for highly enriched uranium for military purposes. Following the nuclear accident at Chernobyl, certain of the Russian nuclear power plants have been shut down, 32 reducing demand on these enrichment plants. In addition, in recent years the demand on these plants to produce products for military purposes has declined. In part in response to these trends, the plant has converted a portion of its capacity to processing stable isotopes, and the Company believes that additional capacity could be converted if the plant decided to do so. The Company believes that the plant has the potential capacity to meet all of the Company's foreseeable needs for processing of stable isotopes. The Company believes that one or more of the other similar enrichment plants may convert part of its capacity to the production of stable isotopes should market demand grow substantially. Certain other facilities elsewhere in the world, including the Oak Ridge National Laboratory in Oak Ridge, Tennessee, and certain private and pseudo-governmental organizations in Great Britain, Germany, The Netherlands and South Africa, have the potential to produce stable isotopes and, in certain cases, actually produce isotopes. To increase capacity and to geographically diversify the Company's production of certain isotopes, the Company is considering constructing a facility outside of Russia. The Company believes that owning this facility may improve its profitability and will improve the security of its supply. The Company intends to conduct a feasibility study to evaluate the nature and timing of such a facility, and a portion of the net proceeds of this offering will be used to fund that study. See "Use of Proceeds." The nature and timing of any such construction will depend on several factors, including the results of the study. If such a facility is constructed, it is likely that the facility would be located in North America. The Company depends upon a single processor, located in Russia, for one process involved in the manufacturing of its products, and upon a single supplier or a limited number of suppliers and processors for certain other manufacturing processes. Although the Company does have written agreements with certain of its suppliers and processors, the Company does not have any written agreements with other suppliers and processors. The Company seeks to reduce its dependence on its sole and limited suppliers, but disruption or termination of any of the sources could occur, and such disruptions could have at least a temporary material adverse affect on the Company's business, financial condition and results of operations. Moreover, a prolonged inability to obtain alternative sources for processing could materially adversely affect the Company's relations with its customers. GOVERNMENT REGULATION Regulation by government authorities in the United States and other countries is a significant consideration in the development, production, distribution and marketing of the Company's products and in its continuing research, development, and other activities. In order to clinically test, manufacture, distribute, market and sell products, especially those intended for therapeutic or diagnostic use, mandatory procedures and safety and other standards established by applicable regulatory authorities must be followed. In many cases, specific approval to clinically test and commercially distribute such products must be obtained from numerous governmental authorities. Furthermore, the Company is subject to various laws, regulations and requirements relating to such matters as the import and export of its products, ensuring safe working conditions, laboratory and manufacturing practices, the use and disposal of hazardous or potentially hazardous substances used in connection with the Company's research, development and manufacturing activities. Some of the regulations are summarized below. See "Risk Factors--Government Regulation." FDA Regulation The Company's testing, manufacture, marketing, distribution, export and sale of diagnostic products, such as any DBT it might in the future develop and seek to sell, are subject to extensive and rigorous regulation by United States and other countries in which the Company may choose to test, manufacture or market its proposed diagnostic products. As of the date of this Prospectus, the Company has not determined those countries, other than the United States, where it might seek regulatory approvals to market any such products it may develop. The products the Company intends to develop are subject to rigorous preclinical and clinical testing and other FDA approval requirements, and similar requirements in most other countries. 33 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. 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 34 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. 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. 35 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. 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 36 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. The shipments received at the Company's Columbia, Maryland facility are subject to federal and Maryland regulations pertaining hazardous chemicals and hazardous waste disposal. These shipments are stored in an area of the facility designated for such materials. Currently, the Company is considered a small quantity generator of hazardous waste and will rely on certified haulers to dispose of its minimal amounts of hazardous waste. The Company believes it is in compliance in all material respects with applicable federal and state environmental regulatory requirements. Should the levels of hazardous waste increase as its inventory and handling operations increase in volume, then it would have to comply with Environmental Protection Agency ("EPA") requirements and obtain an EPA ID number, which are costly and require an increased investment of personnel and money. The Company has no experience in this area of compliance and would have to rely on outside consultants or hire additional employees with pertinent experience and training. Potentially, if substantially larger inventories of hazardous chemicals must be maintained at the Maryland facility, the Company might have to move to new facilities in order to meet EPA requirements for the storage of hazardous chemicals. The shipments from Russian manufacturing sources now enter the U.S. duty (without tariff) free; however, there can be no assurance that such duty-free importation will continue. If the shipments are subject to tariff, the Company cannot assure that it will be able to sell the imported products will be commercially viable because of these increased tariff costs. The Nuclear Regulatory Commission ("NRC") has authority to regulate importation and exports of deuterium containing chemicals whose ratio of deuterium atoms to hydrogen atoms exceed 1:5000. At present, the deuterium containing compounds which the Company imports do not require any special licenses or 37 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. 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 leases office and laboratory space on a month-to-month basis at Moscow State University where it performs its research on isotope separation. 38 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 Daniel J. Grady 42 Vice President, Medical, Research & Diagnostics Paul J. Catuna 32 Chief Financial Officer, Director of Administration and Secretary Lindsay A. Gardner(1)(2) 45 Director Larry J. Wells(1)(2) 52 Director
- -------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. Each director holds office until the next annual meeting of shareholders and until his or her successor is elected and qualified or until his or her earlier death, resignation or removal. Each officer serves at the discretion of the Board. Mr. Alexander is a founder of the Company and has served as its President, Chief Executive Officer and a director since its inception. He has worked full-time for the Company since January 1994. From June 1972 to December 1993, he worked in a variety of technology positions at GE in the aircraft engine and nuclear power businesses, where his last position was Manager of Technology Programs. Mr. Alexander received his bachelors degree in Metallurgical Engineering from the University of Cincinnati and performed graduate work in materials science there. He earned a masters degree in Business Administration from Santa Clara University. Mr. Rubizhevsky is a founder of the Company and has been a Senior Vice President and a director of the Company since inception. 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 39 to January 1994, Mr. Catuna worked for Grant Thornton LLP, an international accounting and consulting firm, where he most recently served as an audit manager. Mr. Catuna received his bachelors degree in Business Administration- Accounting from California State University Fresno, and is a certified public accountant. Ms. Gardner has served from 1991 through the present as President of LG Associates, a US-based management consulting firm providing materials management expertise to foreign company affiliates of US companies in developing countries. She began performing consulting services for Isonics in September 1992 and was elected a director in September 1993. During her tenure at LG Associates, she resided in Moscow, Russia from September 1991 to January 1994 when she moved to Beijing, China, where she currently resides. From 1977 to 1991, Ms. Gardner worked for GE in a variety of management and functional positions including international marketing, quality assurance and materials. Ms. Gardner received her bachelors degree in International Economics from The George Washington University Elliott School of International Affairs, and earned a masters in Business Administration from the University of Louisville. Mr. Wells was elected a director of the Company in September 1996. He is the founder of Sundance Venture Partners, L.P. ("Sundance"), a venture capital fund, and is the chairman of the entity that acts as the manager of Sundance. From 1983 to 1987, Mr. Wells served as Vice President of Citicorp Venture Capital and then became Senior Vice President of Inco Venture Capital. From May 1969 to June 1983, Mr. Wells was the founder and President of Creative Strategies International, a market research consulting firm specializing in emerging markets. Mr. Wells is a director of Identix, Inc., Atlanta Technology Group, Cellegy Pharmaceuticals, Gateway Data Sciences and Telegen Corporation as well as several privately held companies. Mr. Wells holds a BA degree in Economics and an MBA degree from Stanford University. Mr. Wells, together with entities with which he is affiliated, owns approximately 6% of the equity securities of National Securities Corporation, one of the Representatives. 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 40 Medical Systems from 1990 to 1996. Dr. Engdahl was employed as radiologic physicist in nuclear medicine at Henry Ford Hospital from 1987 to 1990, and from 1982 to 1987 he was employed at GE Medical Systems as manager of product development for GE's nuclear imaging business. Dr. Engdahl chaired the National Electrical Manufacturers Association, Nuclear Diagnostic Imaging Section from 1992 to 1995, is a member of the IEEE and Society of Nuclear Medicine. Dr. Engdahl received his bachelors and 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 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 $50,000 or 10% of such Named Person's annual compensation. The following table sets forth information with respect to the options granted to each Named Person during fiscal 1996. 41 OPTION/SAR GRANTS IN LAST FISCAL YEAR
NUMBER OF % OF TOTAL SECURITIES OPTIONS/SARS UNDERLYING GRANTED TO EXERCISE OPTION/SARS EMPLOYEES IN PRICE PER EXPIRATION NAME GRANTED(#)(1) FISCAL YEAR SHARE($)(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. In September 1996, Mr. Alexander and Mr. Rubizhevsky each exercised his option to acquire 108,853 shares at $1.52 per share. In payment of the exercise price, the Company accepted a full recourse promissory note from each officer in the principal amount of approximately $165,000. The principal bears interest at the minimum applicable federal rate, which is payable in annual installments over the term of the note. All accrued and unpaid interest and all principal is due five years after the exercise date. The purchased shares have been pledged to secure repayment of the loan. Upon a sale of any shares, a portion of the net proceeds equal to the exercise price per share of the shares sold will be used to repay the loan. See "--Certain Transactions." No stock options were exercised during fiscal 1996 by any Named Person. 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 and employees, 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 42 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. 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. 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 November 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 50,000 shares in any calendar year pursuant to grants under the Incentive Plan. The Plans will be administered by the Compensation Committee of the Board (the administrator referred to as the "Committee"). The Plans permit the Committee to grant options that are either incentive stock options, as defined in Section 422 of the Code or nonqualified stock options, on terms (including the exercise price, which may not be less than 85% of the fair market value of the Common Stock, and the vesting schedule) determined by the Committee, subject to certain statutory and other limitations in the Plans and certain limitations imposed by state blue sky authorities. In addition to, or in tandem with, awards of stock options, the Committee may grant participants restricted stock awards to purchase Common Stock for not less than 85% of its fair market value at the time of grant. The other terms of such restricted stock awards may be determined by the Committee. The Committee may also grant stock bonus awards of Common Stock either in addition to, or in tandem with, other awards under the Plans, under such terms, conditions and restrictions as the Committee may determine. Under the Plans, stock bonuses may be awarded for the satisfaction of performance goals established in advance. In the event of a 43 dissolution, merger, consolidation or similar corporate transaction (each such transaction a "Change of Control") (other than a merger into a parent, wholly owned subsidiary or a reincorporation, in each event without substantial change of equity interest), outstanding awards may be assumed, converted, replaced or substituted by the successor corporation, which assumption, conversion, replacement or substitution will be binding on all participants in the 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) Savings & Retirement Plan (the "401(k) Plan"), a defined contribution profit-sharing plan intended to qualify under Section 401 of the Code. The shareholders of the Company approved the 401(k) Plan in November 1996. Under the 401(k) Plan, a participating employee can make pre-tax contributions, subject to limitations under the Code, of a percentage (not to exceed 15%) of his or her total compensation. Employee contributions and the investment earnings thereon are fully vested at all times. The Company may make matching contributions for the benefit of eligible participating employees. INDEMNIFICATION OF DIRECTORS AND OFFICERS AND LIMITATION OF LIABILITY The Company's Restated Articles of Incorporation (the "Restated Articles") include a provision that eliminates to the fullest extent permitted by law the personal liability of its directors to the Company and its shareholders for monetary damages for breach of the directors fiduciary duties. This limitation has no effect on a director's liability (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that a director believes to be contrary to the best interests of the Company or its shareholders or that involved the absence of good faith on the part of the director, (iii) for any transaction from which the director derived an improper personal benefit, (iv) for acts or omissions that show a reckless disregard for the director's duty to the Company or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the Company or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Company or its shareholders, (vi) under Section 310 of the California Corporations Code (the "California Code") concerning contracts or transactions between the Company and a director or (vii) under Section 316 of the California Code concerning directors' liability for improper dividends, loans and guarantees. The provision does not extend to acts or omissions of a director in his or her capacity as an officer. Further, the provision will not affect the availability of injunctions and other equitable remedies available to the Company's shareholders for any violation of a director's fiduciary duty to the Company or its shareholders. The Restated Articles further authorize the Company to indemnify its agents (as defined in Section 317(a) of the Code, which includes directors and officers) through Bylaw provisions, agreements with agents, votes of shareholders or disinterested directors or otherwise, to the fullest extent permissible under California law. Pursuant to this provision, the Company's Bylaws provide for indemnification of directors and officers. The Bylaws also permit the Company to enter into indemnity agreements with individual directors, officers, employees and other agents. The Company has entered into such agreements with its directors and executive officers effective upon the closing of this offering. These agreements, together with the Company's Bylaws and Restated Articles, may require the Company, among other things, to indemnify directors or officers against certain liabilities that may arise by reason of their status or service as directors (other than liabilities resulting from willful misconduct of a culpable nature), to advance expenses to them as they are incurred (provided that they undertake to repay the amount advanced if it is ultimately determined by a court that they are not entitled to indemnification), and to obtain and maintain directors and officers insurance if available on reasonable terms. Section 317 of the California Code, the Company's Bylaws and the indemnity agreements provide for the indemnification of officers, directors and other corporate agents in terms sufficiently broad to indemnify such persons, under certain circumstances, for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. At present, there is no pending litigation or proceeding involving a director, officer or 44 employee of the Company regarding which indemnification is sought, nor is the Company aware of any threatened litigation that may result in claims for indemnification. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that, in the opinion of the Securities and Exchange Commission (the "Commission"), such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. 45 CERTAIN TRANSACTIONS Since May 1, 1994, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which the Company was or is to be a party in which the amount involved exceeds $60,000 and in which any director, executive officer, holder of more than 5% of the Common Stock, or any member of the immediate family of any such person had or will have a direct or indirect material interest other than compensation arrangements, see "Management," and as described below. In connection with the Placement, Placement Notes in an aggregate principal amount of $370,000 were issued to Lindsay Gardner, a director of the Company, one employee of the Company and four affiliates of directors or officers of the Company at a discount totalling approximately $41,000 and otherwise on the same terms as the other Private Investors. In addition, DayStar Partners, an entity of which Larry J. Wells, a director of the Company, is an affiliate, acquired $200,000 principal amount of Placement Notes and Placement Warrants to acquire approximately 41,745 shares of Common Stock on the same terms as other Private Investors, and the Company entered into a consulting agreement with Larry Wells Co., Inc., another entity of which Mr. Wells is an affiliate, pursuant to which the Company paid the entity $85,000. Pursuant to the consulting agreement, that entity advised the Company concerning the Placement and following completion of the Placement has consulted with the Company as requested concerning financing matters and acquisition opportunities. 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 equal to the exercise price per share of the shares sold will be used to pay amounts owed under the note. In addition, the Company has agreed to loan to such officers, pursuant to a five-year note with interest at the minimum applicable federal rate, an amount equal to the federal and state tax liability incurred by them as a result of exercising such options, and to pay compensation to such officers equal to the amount of interest payable under the loans and the amount of taxes payable as a result of such compensation. The predecessor entity to the Company was a general partnership. At the time of incorporation in 1993, Mr. Alexander and Mr. Rubizhevsky exchanged their partnership interests for 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." 46 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)(9)........... 890,390 34.5 890,390 19.8 Boris Rubizhevsky(3)(7)(8)......... 791,035 30.7 791,035 17.5 Lindsay Gardner(4)................. 95,760 3.7 95,760 2.1 Larry Wells(5)..................... 41,745 1.6 41,745 0.9 All executive officers and directors as a group (7 persons)(6)........................ 2,022,123 78.4 2,062,123 45.7
- -------- (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 23,192 shares of Common Stock issued in connection with the Placement. (5) Includes 41,745 shares issuable upon the exercise of Placement Warrants held by an entity with which Mr. Wells is affiliated. (6) 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 111,318 shares of Common Stock issued in connection with the Placement, 38,526 shares of Common Stock issuable upon conversion of Preferred Stock held by Mr. Rubizhevsky's wife and options to purchase 40,000 shares of Common Stock issuable at the closing of this offering. (7) Includes 38,526 shares of Common Stock issuable upon conversion of Preferred Stock held by Mr. Rubizhevsky's wife. (8) Includes 23,192 shares issuable upon the exercise of Placement Warrants held by the mother, father, mother-in-law and father-in-law of Mr. Rubizhevsky. (9) Includes 23,192 shares issuable upon the exercise of Placement Warrants held by the brother-in-law, mother-in-law and father-in-law of Mr. Alexander. 47 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 1,814,796 shares of Common Stock held of record by five shareholders, 6,250 shares of Class A Non-Voting Preferred Stock which will convert into 96,315 shares of Common Stock upon the closing of this offering, options and warrants to purchase 686,268 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 414,134 shares of Common Stock associated with the Placement. COMMON STOCK Subject to preferences that may be applicable to any Preferred Stock outstanding at the time, the holders of outstanding shares of Common Stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as the Board of Directors may from time to time determine. Each shareholder is entitled to one vote for each share of Common Stock held on all matters submitted to a vote of shareholders. Cumulative voting for the election of directors is specifically authorized by the Bylaws. Under cumulative voting for the election of directors, upon a proper and timely request by a shareholder, each shareholder is entitled to cast a number of votes equal to the number of shares held multiplied by the number of directors to be elected. The votes may be cast for one or more candidates. Thus, under cumulative voting, a majority of the outstanding shares will not necessarily be able to elect all of the directors, and minority shareholders may be entitled to greater voting power with respect to election of directors than if cumulative voting did not apply. The Company's bylaws provide that so long as the Company is a "listed company" as defined by applicable California law, there will not be cumulative voting in connection with the election of directors. Upon the closing of this offering, however, the Company will not be a listed company as so defined, and therefore cumulative voting will continue to apply in connection with the election of directors. The Common Stock is not entitled to preemptive rights and is not subject to conversion or redemption. Upon liquidation, dissolution or winding up of the Company, the remaining assets legally available for distribution to shareholders, after payment of claims or creditors and payment of any liquidation preferences, if any, on outstanding Preferred Stock, are distributable ratably among the holders of the Common Stock and any participating Preferred Stock outstanding at that time. Each outstanding share of Common Stock is, and all shares of Common Stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK The Board of Directors is authorized, subject to any limitations prescribed by California law, to provide for the issuance of shares of Preferred Stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the rights, preferences and privileges of the shares of each unissued series and any qualifications, limitations or restrictions thereon, and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding), without any further vote or action by the shareholders. The Board of Directors may authorize the issuance of Preferred Stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of Common Stock. Thus, the issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no current plans to issue any shares of Preferred Stock. 48 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. 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 49 Common Stock), for at least 20 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. 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 all reasonable 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 50 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 COMMON STOCK AND WARRANTS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND SALE OF SUCH SECURITIES AND THE APPLICABILITY OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS. An investor must allocate the cost of each unit between its two elements (one Share and one Warrant to purchase one share of Common Stock) in accordance with their relative fair market values at the time of issuance. The portion of the aggregate cost allocated to each element will constitute the investor's initial federal income tax basis for that element. No gain or loss will be recognized by a holder of a Warrant held for investment on the holder's purchase of Common Stock for cash upon exercise of the Warrant. The adjusted tax basis of the Common Stock so acquired will be equal to the tax basis of the Warrant plus the exercise price. The holding period of the Common Stock acquired upon the exercise of the Warrant will begin on the date the Warrant is exercised and the Common Stock is purchased. The sale of a share of Common Stock or the sale of a Warrant will result in the recognition of gain or loss to the holder in an amount equal to the difference between the amount realized (generally the cash and the fair market value of any other property received) and the holder's adjusted tax basis for the property sold. The sale of Common Stock will result in capital gain or loss, provided the Common Stock is a capital asset in the hands of the holder. The sale of a Warrant (other than a sale to the Company) will also result in a capital gain or loss, provided the Warrant is a capital asset in the hands of the holder and the Common Stock underlying the Warrant would be a capital asset to the holder if acquired by the holder. Such capital gain or loss will be long-term capital gain or loss if the Common Stock or Warrant being sold or exchanged has been held for more than 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. 51 A Warrant that expires unexercised will be deemed to have been sold or exchanged for no consideration on the expiration date. The holder of an expired Warrant would recognize loss to the extent of the holder's basis in that Warrant. Any loss to the holder of an expired Warrant will be a capital loss if the Warrant was held as a capital asset and if the Common Stock underlying the Warrant would have been a capital asset had such Warrant been exercised. Any capital loss will be long-term if the holding period of the Warrant exceeds one year when it expires. The use of capital losses to offset ordinary income is strictly limited for noncorporate shareholders and prohibited for corporate shareholders. No gain or loss will be recognized by the Company upon the acquisition, exercise or expiration of any Warrants. REGISTRATION RIGHTS In connection with the Placement, the Company agreed to file a registration statement no later than nine months after the date of this Prospectus to register the resale of the Placement Shares. Issuable upon exercise of the Placement Warrants. The Company has also agreed to keep such a registration statement effective until such shares have been sold or until such shares can be sold without restrictions pursuant to Rule 144. If such registration statement does not remain effective, then the Private Investors have certain additional demand registration rights. In addition, the Private Investors have piggyback registration rights to require the Company to include the Placement Shares in registration statements filed by the Company registering Common Stock under the Securities Act, either for its own account or for the account of any other stockholder. The Company has also agreed to register the shares of Common Stock issuable upon exercise of a warrant granted to a law firm. See "Management--Employment and Consulting Agreements." As part of the Registration Statement of which this Prospectus forms a part, the Company has registered the Warrants and the shares of Common Stock obtainable upon exercise of the 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. The Company has also applied to list the Common Stock and Warrants on the Boston Stock Exchange under the trading symbols "INC" and "INCW," respectively. 52 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 2,761,111 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 1,911,111 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 issued and outstanding 1,911,111 shares upon the completion of this offering (except for 309,144 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 414,134 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 587,134 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 2,761,111 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. 53 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 the Underwriters an over-allotment option, exercisable within 45 days of the date of this Prospectus, to purchase up to 127,500 shares of Common Stock and/or 127,500 Warrants at the public offering price per share of Common Stock and per Warrant, respectively, offered hereby, less underwriting discounts and the non-accountable expense allowance, for the sole purpose of covering over- allotments, if any. The over-allotment option may be exercised to purchase units (each consisting of one Share of Common Stock and one Warrant), or shares of Common Stock or Warrants or any combination thereof. 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 54 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. 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 2,579,591 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 more than one year after the effective date of this Prospectus, which exercise was solicited by a Representative, and to the extent not inconsistent with the guidelines of the NASD or the Rules and Regulations of the Commission, the Company has agreed to pay the Representative a commission which shall not exceed 5% of the aggregate exercise price of such Warrants in connection with bona fide services provided by the Representative relating to any Warrant solicitation. In addition, the individual must designate the firm entitled to payment of such Warrant solicitation fee. No compensation, however, will be paid to a Representative in connection with the exercise of Warrants if (a) the market price of the Common Stock is lower than the exercise price, (b) the Warrants were held in a discretionary account or (c) the Warrants were exercised in an unsolicited transaction. 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 from nine business days (or other such applicable periods as Rule 10b-6 may provide) before the solicitation activity until the latter of the termination of such 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. 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 undertakes to waive unconditionally its rights to receive a commission on the exercise of such Warrants. The Company has agreed to engage Pryor, McClendon, Counts & Co., Inc., one of the Representatives, as a management and financial consultant for three years from the closing of this offering and to pay that firm a consulting fee of $3,000 per month for such services. 55 The foregoing is a summary of the material terms of the agreements described above but does not purport to state all of the terms of such agreements. 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. 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 Commission a Registration Statement on Form SB-2 under the Securities Act with respect to the shares of Common Stock and Warrants offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and its exhibits. For further information with respect to the Company and the Units, Common Stock and Warrants offered hereby, reference is made to the Registration Statement and exhibits. Statements contained in this Prospectus regarding the contents of any contract or any other document to which reference is made are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement, including the exhibits thereto, may be inspected without charge at the Commission's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of certain prescribed rates. 56 GLOSSARY OF TERMS CELL GROWTH MEDIA: Substances used in a gel or solution that promote the growth and multiplication of cells from simple or more complex organisms. Organisms grown (fed) cell growth media labeled with enriched stable isotopes result in new and more complex stable isotope labeled compounds. CGMP (CURRENT GOOD MANUFACTURING PRACTICE): Part of quality assurance aimed at ensuring that products are consistently manufactured to a quality appropriate to their intended use; it incorporates manufacturing, engineering, quality control and quality assurance activities. CROSS SECTION: A fundamental property of the nucleus of an isotope, cross section is a measure of the probability of interaction of the nucleus with another nucleus, particle or photon. DEPLETED STABLE ISOTOPE: An isotope of an element whose concentration or "abundance" has been decreased with respect to that of the naturally occurring element. DEPLETED ZINC (DZ): Zinc oxide in which the stable isotope Zn-64 has been depleted for application in nuclear power plants for corrosion control and the mitigation of radiation fields. DOPING: An impurity, such as boron, is added in small amounts to a pure semiconductor to alter its conductive properties. ENRICHED STABLE ISOTOPE: An isotope of an element whose concentration or "abundance" has been increased with respect to that of the naturally occurring element. HIGH PURITY MATERIALS, CHEMICAL: Materials in which the relevant chemical compound makes up more than >99.99% of the material. H.PYLORI (Helicobacter pylori): A pathogenic bacterium found in the human stomach, responsible for most peptic ulcers and some stomach cancers. ISOTOPE: One of two or more naturally occurring species of atom having the same atomic number, hence constituting the same element, but differing in mass number. As atomic number is equivalent to the number of protons in the nucleus, and mass number is the sum total of the protons plus the neutrons in the nucleus, isotopes of the same element differ from one another only in the number of neutrons in their nuclei. Isotopes may be radioactive or stable. Isonics deals only with stable isotopes. ISOTOPICALLY PURE MATERIALS: Materials in which a particular isotope has been enriched to 99.5% abundance or greater in an element or in a compound. ISOTOPICALLY ENGINEERED MATERIALS (IEM): Materials in which the natural abundance of isotopes of constituent elements has been substantially altered to enhance performance characteristics or provide unique properties. MAGNETIC MOMENT: A fundamental property of the nucleus of an isotope, magnetic moment is a vector quantity related to the intrinsic spin of a charged particle. It is unique to each isotope and can be used to describe how a spinning, charged particle will interact with an externally imposed magnetic field (as in an NMR instrument or imaging scanner). MASS SPECTROMETER: An apparatus that converts molecules and atoms into ions and then separates the ions according to their mass-to-charge ratio. Mass spectrometers are used to identify atoms and isotopes, and determine the chemical composition of a sample. NUCLEAR MAGNETIC RESONANCE (NMR): A phenomenon exhibited by a large number of atomic nuclei, in which nuclei in a static magnetic field absorb energy from a radio-frequency field at certain characteristic frequencies. 57 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. 58 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 GOODWILL (net of accumulated amortization of none, $79, and $99)..................................... 472 393 373 OTHER ASSETS....................................... 8 4 33 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.............................. 2,218 2,360 2,360 2,361 ===== ====== ========= =========
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 87 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 4 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. GOODWILL Goodwill resulted from the acquisition of Isoserve, Inc., (see Note 10) and is being amortized on a straight-line basis over six years. The Company evaluates the realizability of goodwill annually to determine potential impairment by comparing the undiscounted future cash flows of the related assets. The Company modifies or adjusts goodwill if an impairment is indicated. Based upon its most recent evaluation, the Company believes that no material impairment of goodwill exists as of April 30, 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 returns and 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 $ 8 $ -- 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 of Series A Preferred were outstanding at April 30, 1995 and 1996, respectively. Each 10 shares of Series A preferred stock along with $5 per share 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) RESERVED COMMON STOCK
JULY 31, 1996 -------- Conversion of outstanding convertible preferred stock............ 100,780 Exercise of stock options........................................ 725,690 ------- 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 for 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 $1,372,000 in nonconvertible promissory notes, collateralized by the Company's assets. Interest is payable monthly at 12% through May 1, 1997. If the notes are not paid in full by May 1, 1997, the remaining principal and interest at 15% is payable in equal monthly payments from June 1997 through May 1998. In the event of an initial public offering of the Company's common stock, all principal and accrued but unpaid interest is due five days after the closing of such offering. In connection with the issuance of the promissory notes, the Company issued warrants to the noteholders to purchase a total of 286,414 shares of common stock, exercisable for a period of five years commencing in August 1996. Of the warrants issued, 143,207 are exercisable at $0.4217 per share and 143,207 are exercisable at $3.3727 per share. If the Company defaults in its payment obligations, then additional warrants totaling 377,458 are exercisable at $.01 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 $394,000 and will be amortized to operations as additional interest expense over the term of the promissory notes. Of the total amount issued, promissory notes in the amount of $570,000 were issued to officers, directors and affiliates of the Company or such persons. Of the warrants issued, 127,552 were received by related parties. In September 1996, two executive officers of the Company exercised stock options to each acquire 108,853 shares of Common Stock at an exercise price of $1.52 per share. In each case, the Company loaned the executive officer $165,000, representing the exercise price of the option, and the officer executed a promissory note reflecting the loan. Each executive officer pledged the purchased shares as collateral for the loan pursuant to a pledge agreement. Each loan bears interest at an annual rate equal to the minimum applicable federal rate, and interest is payable annually; principal and accrued but unpaid interest is due five years from the date of the note. Until each note has been paid in full and upon any sale of such option shares by the respective executive, a portion of the sales proceeds will be used to pay amounts owed under the note. In addition, the Company has agreed to loan to each such officer, pursuant to a five-year note with interest at the minimum applicable federal rate, an amount equal to the federal and state tax liability incurred by him as a result of exercising such option, and to pay compensation to such officer equal to the amount of interest payable under his loan and the amount of taxes payable as a result of such compensation. F-15 The gas centrifuge plant owned by a third party where Isonics products are processed. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 Recent Developments....................................................... 13 Use of Proceeds........................................................... 13 Dividend Policy........................................................... 13 Capitalization............................................................ 14 Dilution.................................................................. 16 Selected Financial Data................................................... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 18 Business.................................................................. 23 Management................................................................ 39 Certain Transactions...................................................... 46 Principal Shareholders.................................................... 47 Description of Capital Stock.............................................. 48 Shares Eligible for Future Sale........................................... 53 Underwriting.............................................................. 54 Legal Matters............................................................. 56 Experts................................................................... 56 Additional Information.................................................... 56 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 (AS UNITS, EACH CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE WARRANT) [LOGO OF ISONICS CORPORATION] --------------- 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 Boston Stock Exchange Listing Fee.................................. 15,000 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..................... 5,000 Miscellaneous...................................................... 70,035 -------- 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 1,378,809 $ 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 1 Investor 8/96 Common Stock 48,379 100,000 Cash 1 Investor 9/96 Common Stock 49,292 $ 101,885 Cash 2 Investors 9/96 Common Stock 217,706 $ 330,000 Notes 11 Investors 9/96 Notes and Warrants 286,414 $1,372,000 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 315,377 shares of Common Stock. II-2 ITEM 27. EXHIBITS.
EXHIBIT NUMBER EXHIBIT TITLE ------- ------------- 1.01 Form of Underwriting Agreement. 3.01 Registrant's Amended and Restated Articles of Incorporation.*** 3.02 Registrant's Bylaws. 3.03 Registrant's Amended and Restated Articles of Incorporation, to be in effect at the closing of this offering. 4.01 Specimen Common Stock Certificate.*** 4.02 Form of 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 Opinion of Fenwick & West LLP. 10.01 Registrant's 1996 Stock Option Plan.*** 10.02 Form of Employment Agreement between the Registrant and certain officers of the Registrant.*** 10.03 Registrant's 1996 Executives Equity Incentive Plan.*** 10.04 Registrant's 1996 Equity Incentive Plan.*** 10.05 Memorandum of Agreement between Electrochemical Plant, AO Techsnabexport, Co., Ltd. and Registrant.*** 10.06 Option Agreement between the Registrant and Yale University.** 10.07 Office Lease Agreement between Paulsen Properties and the Registrant as of January 1, 1996, as amended.*** 10.08 Letter from Yale University to Registrant dated February 10, 1996.*** 10.09 Form of Indemnity Agreement to be entered into by Registrant with each of its directors and executive officers.*** 10.10 Warrant Agreement dated as of September 27, 1996 by and among Registrant and certain investors.*** 10.11 Registration Rights Agreement dated as of September 27, 1996 by and among Registrant and certain investors.*** 10.12 Employment Agreement between the Registrant and James E. Alexander.*** 10.13 Employment Agreement between the Registrant and Boris Rubizhevsky.*** 10.14 Security Agreement dated March 31, 1995 between the Company and Isoserve, Inc. 10.15 Consulting Agreement between the Registrant and Larry Wells Co., Inc. 11.01 Statement regarding computation of per share earnings.*** 21.01 Subsidiaries of the Registrant.*** 23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).*** 23.02 Consent of Grant Thornton LLP, independent certified public accountants. 24.01 Power of Attorney (see Page II-5 of this Registration Statement).
- -------- * To be supplied. ** Confidential Treatment Requested. *** Previously filed. 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 AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN THE CITY OF SAN JOSE, STATE OF CALIFORNIA, ON NOVEMBER 19, 1996. Isonics Corporation /s/ James E. Alexander By: _________________________________ JAMES E. ALEXANDER, PRESIDENT AND CHIEF EXECUTIVE OFFICER IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT TO REGISTRATION STATEMENT WAS SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES STATED.
SIGNATURES TITLE DATE PRINCIPAL EXECUTIVE OFFICER: /s/ James E. Alexander President, Chief November 19, 1996 - ------------------------------- Executive Officer JAMES E. ALEXANDER and Director PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER: /s/ Paul J. Catuna Chief Financial November 19, 1996 - ------------------------------- Officer and PAUL J. CATUNA Director of Administration ADDITIONAL DIRECTORS Boris Rubizhevsky* Senior Vice November 19, 1996 - ------------------------------- President and BORIS RUBIZHEVSKY Director Lindsay A. Gardner* Director November 19, 1996 - ------------------------------- LINDSAY A. GARDNER Larry J. Wells* Director November 19, 1996 - ------------------------------- LARRY J. WELLS
*By: /s/ Paul Catuna --------------------------------- PAUL CATUNA, ATTORNEY-IN-FACT II-5
EXHIBIT NUMBER EXHIBIT TITLE PAGE ------- ------------- ---- 1.01 Form of Underwriting Agreement. 3.01 Registrant's Amended and Restated Articles of Incorporation.*** 3.02 Registrant's Bylaws. 3.03 Registrant's Amended and Restated Articles of Incorporation, to be in effect at the closing of this offering. 4.01 Specimen Common Stock Certificate.*** 4.02 Form of 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 Opinion of Fenwick & West LLP. 10.01 Registrant's 1996 Stock Option Plan.*** 10.02 Form of Employment Agreement between the Registrant and certain officers of the Registrant.*** 10.03 Registrant's 1996 Executives Equity Incentive Plan.*** 10.04 Registrant's 1996 Equity Incentive Plan.*** 10.05 Memorandum of Agreement between Electrochemical Plant, AO Techsnabexport, Co., Ltd. and Registrant.*** 10.06 Option Agreement between the Registrant and Yale University.** 10.07 Office Lease Agreement between Paulsen Properties and the Registrant as of January 1, 1996, as amended.*** 10.08 Letter from Yale University to Registrant dated February 10, 1996.*** 10.09 Form of Indemnity Agreement to be entered into by Registrant with each of its directors and executive officers.*** 10.10 Warrant Agreement dated as of September 27, 1996 by and among Registrant and certain investors.*** 10.11 Registration Rights Agreement dated as of September 27, 1996 by and among Registrant and certain investors.*** 10.12 Employment Agreement between the Registrant and James E. Alexander.*** 10.13 Employment Agreement between the Registrant and Boris Rubizhevsky.*** 10.14 Security Agreement dated March 31, 1995 between the Company and Isoserve, Inc. 10.15 Consulting Agreement between the Registrant and Larry Wells Co., Inc. 11.01 Statement regarding computation of per share earnings.*** 21.01 Subsidiaries of the Registrant.*** 23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).*** 23.02 Consent of Grant Thornton LLP, independent certified public accountants. 24.01 Power of Attorney (see Page II-5 of this Registration Statement).
- -------- * To be supplied. ** Confidential Treatment Requested. *** Previously filed. EX-1.01 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.01 ______SHARES OF COMMON STOCK AND ______ REDEEMABLE WARRANTS ISONICS CORPORATION UNDERWRITING AGREEMENT San Jose, California November ___, 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, no par value 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, which must be purchased together on the basis of one share and one Warrant, 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. 333-13289) 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 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 -2- to state a material fact required to be stated therein and necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that this representation and warranty does not apply to (i) statements made in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriters by or on behalf of the Underwriters expressly for use in such preliminary prospectus, Registration Statement or Prospectus, or (ii) statements made in the initial preliminary prospectus which were revised in any subsequent preliminary prospectus or the Registration Statement and Prospectus. (c) When the Registration Statement becomes effective and at all times subsequent thereto up to the Closing Date (as defined in Section 2(c) hereof) and 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, except where the failure to have such authorizations, approvals, orders, licenses, certificates, franchises or permits would not have a material and adverse effect on the Business; the Company and each of its subsidiaries have been doing business in compliance in all material respects with all such authorizations, approvals, orders, licenses, certificates, franchises and permits and all federal, state, local and foreign laws, rules and regulations; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the -3- 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) At the dates as of which such information is set forth in the Prospectus, the Company had a duly authorized, issued and outstanding capitalization as set forth in the Prospectus under the headings "Capitalization" and "Description of Capital Stock" and will have the adjusted capitalization set forth therein on the Closing Date and the Option Closing Date, if any, based upon the assumptions set forth therein, and the Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement and as described in the Prospectus. The Securities and all other securities issued or issuable by the Company conform or, when issued and paid for, will conform, in all material respects to all statements with respect thereto contained in the Registration Statement and the Prospectus. All issued and outstanding shares of capital stock of each subsidiary of the Company have been duly authorized and validly issued and are fully paid and 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 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 -4- 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 financial statements of the Company, together with the related notes and schedules thereto, included in the Registration Statement, each Preliminary Prospectus and the Prospectus fairly present the financial position, changes in stockholders' equity and the results of operations of the Company and its consolidated subsidiaries (of which there are none) at the respective dates and for the respective periods to which they apply and such financial statements have been prepared in conformity with generally accepted accounting principles and the Regulations, consistently applied throughout the periods involved. Except as disclosed in the Prospectus, there has been no material adverse change or development involving a material prospective change in the Business, whether or not arising in the ordinary course of business since the date of the financial statements included in the Registration Statement and the Prospectus and the outstanding debt, the property, both tangible and intangible, and the business of the Company and its subsidiaries taken as a whole conform in all material respects to the descriptions thereof contained in the Registration Statement and the Prospectus. Financial information set forth in the Prospectus under the headings "Prospectus Summary - Selected Financial Data," "Capitalization," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," fairly present, on the basis stated in the Prospectus, the information set forth therein and have been derived from or compiled on a basis consistent with that of the audited and unaudited financial statements included in the Prospectus. (h) The Company (i) has paid all federal, state, local, franchise, and foreign taxes for which it is liable (except for immaterial non- payments, if any), including, but not limited to, withholding taxes and amounts payable under Chapters 21 through 24 of the Internal Revenue Code of 1986, as amended (the "Code"), and has furnished all information returns it is required to furnish pursuant to the Code, (ii) has established adequate reserves for such taxes which are not due and payable, and (iii) does not have any material tax deficiency or claims outstanding, proposed or assessed against it. (i) No transfer tax, stamp duty or other similar tax is payable by or on behalf of the 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. (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 -5- 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) could reasonably be expected to materially and adversely affect the Business. (k) The Company has the corporate power and authority to authorize, issue, deliver, and sell the Securities and to enter into this Agreement, the Warrant Agreement, and the 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, in each of the above instances which could reasonably be expected to materially and adversely affect the Business. (l) No consent, approval, authorization or order of, and no filing with, any court, regulatory body, government agency or other body, domestic or foreign, is required for the issuance and sale of the Securities pursuant hereto, and the Prospectus and the Registration Statement, the performance of this Agreement, the Warrant Agreement, and the Representatives' -6- 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 reasonably be expected to result in a material reduction in the future earnings of the Company; (ii) the Company has not sustained any material loss or interference with its business or properties from fire, flood, windstorm, accident or other calamity, whether or not covered by insurance; (iii) the Company has not paid or declared any dividends or other distributions with respect to its capital stock, and the Company is not in default in the payment of principal or interest on any outstanding debt obligations; (iv) there has not been any change in the capital stock (other than upon the sale of the Firm Securities, the Option Securities and the 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; and (vi) there has not been any material adverse change in the Business. (o) Except as disclosed in or specifically contemplated by the Prospectus, and subject to the risks and uncertainties described in the Prospectus under the headings entitled "Risk Factors ___ Protection of Intellectual Property" and "Business ___ Patents and Proprietary Rights," (i) the Company has sufficient trade names, licenses, approvals and governmental -7- authorizations to conduct its business as now conducted; (ii) the expiration of any trade names, licenses, approvals or governmental authorizations would not have a material adverse effect on the Business; (iii) the Company has no knowledge of any infringement by it or its subsidiaries of trademark, trade name rights, patent rights, copyrights, licenses, trade secret or other similar rights of others; and (iv) there is no claim being made against the Company regarding trademark, trade name, patent, copyright, license, trade secret or other infringement which could reasonably be expected to have a material adverse effect on the Business. (p) No default exists in the due performance and observance of any term, covenant or condition of any material license, contract, indenture, mortgage, installment sale agreement, lease, deed of trust, voting trust agreement, stockholders agreement, note, loan or credit agreement, or any other material agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company is a party or by which the Company may be bound or to which the property or assets (tangible or intangible) of the Company are subject or affected, except for such defaults, if any, which individually and in the aggregate would not have a material adverse effect on the Business. (q) To the Company's knowledge, there are no investigations involving the Company by any governmental agency. There 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 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 -8- take, directly or indirectly, any action designed to or which has constituted or which might be expected to cause or result in unlawful stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. (t) Except for a security interest granted to Isoserve, Inc. pursuant to a Security Agreement between Isoserve and the Company, the Company has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property stated in the Prospectus to be owned or leased by it, free and clear of all liens, charges, claims, encumbrances, pledges, security interests, or other restrictions or equities of any kind whatsoever, other than those referred to in the Prospectus and liens for taxes not yet due and payable or for such as do not materially affect the value of the Company's real and personal property, taken as a whole. (u) To the Company's knowledge, Grant Thornton LLP ("Grant Thornton"), whose report is filed with the Commission as a part of the Registration Statement, is an independent certified public accountant as required by the Act and the Regulations. (v) The Company has caused to be duly executed legally binding and enforceable agreements pursuant to which all persons or entities, other than as set forth in the Prospectus, that directly or beneficially own Common Stock, as of the effective date of the Registration Statement, have agreed not to, directly or indirectly, offer, offer to sell, sell, grant any option for the sale of, transfer, assign, pledge, hypothecate or otherwise encumber or dispose of any shares of Common Stock or securities convertible into Common Stock, exercisable or exchangeable for or evidencing any right to purchase or subscribe for any shares of Common Stock (either pursuant to Rule 144 of the Regulations or otherwise) or dispose of any interest therein for a period from the date of the Prospectus until and including the day of like number in the twelfth consecutive month next following the date that the Registration Statement becomes effective, without 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) Except as disclosed to the Representatives, there are no claims, payments, arrangements or understandings, whether oral or written, for services in the nature of a finder's or origination fee with respect to the sale of the Securities hereunder or any other arrangements, agreements, understandings, payments or issuance with respect to the Company or any of its officers, directors, stockholders, employees or affiliates that may affect the 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 -9- 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. (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 -10- 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) Except for the absence of policies which are disclosed in the Prospectus, the Company maintains insurance by insurers of recognized financial responsibility of the types and in the amounts as the Company believes are prudent and adequate for the business in which it is engaged, including, but not limited to, insurance covering real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. The Company has delivered to the Underwriter's Counsel satisfactory summaries of these insurance policies. The Company has no reason to believe that it will not be able to renew existing insurance coverage with respect to the Company as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business, in either case, at a cost that would not have a material adverse effect on the financial condition, operations, business, assets or properties of the Company. The Company has not failed to file any material claims, has no material disputes with its insurance company regarding any claims submitted under its insurance policies, and has complied in material respects with all material provisions contained in its insurance policies where the failure to could reasonably be expected to have a material adverse effect on the Business. 2. Purchase, Sale and Delivery of the Securities. ---------------------------------------------- (a) On the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to 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, warranties, 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 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 (which shares and Warrants may only be purchased together on the basis of one share and one 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 -11- 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 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 -12- 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, 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. -13- (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 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. -14- (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; (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. -15- 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. (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. -16- (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 reasonable and appropriate actions to qualify the Common Stock and Warrants in all jurisdictions of the United States which do not require the Company to qualify as a foreign corporation or to file a general consent to service of process in order to permit secondary sales of such securities pursuant to the Blue Sky laws of those jurisdictions. (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 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 or Moody's OTC Manual and to continue such inclusion for a period of not less than five (5) years (or, if sooner, the date on which the Common Stock and Warrants are listed on the New York Stock Exchange, American Stock Exchange, or Nasdaq National Market). (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, or except pursuant to incentive or benefit plans approved by the Board of Directors of the Company, pursuant to options or warrants outstanding on the Closing Date, or in connection with acquisitions of companies, products or technologies. (t) Until the completion of the distribution of the Securities in connection with the initial public offering of the Securities, the Company shall not without the prior written consent of 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. (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 Representative's Securities (or the shares of Common Stock issuable upon exercise of the Representative'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 Representative's Securities (or the shares of Common Stock issuable upon exercise of the Representative'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 agreed-upon by 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. -17- (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. Provided that such public relations firm performs in a commercially reasonable and satisfactory manner, the Company shall keep such public relations firm and any replacement for a total period of two (2) years from the Closing Date. Any replacement public relations firm shall be retained only with the consent of 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 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, -18- 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 Representative'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 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 -19- 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 Representative's reasonable opinion, is material, or omits to state a fact which, in the Representative's reasonable opinion, is material and is required to be stated therein or is necessary to make the statements therein not misleading, or that the Prospectus, or any supplement thereto, contains an untrue statement of fact which, in the Representative's reasonable opinion, is material, or omits to state a fact which, in the Representative'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 reasonably 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: (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, except where the failure to be so qualified or licensed would not have a material adverse effect on the Company's business and (C) to 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. -20- (ii) except as described in the Prospectus and except for A&R technology, a currently inactive subsidiary organized in the former Soviet Union which, to such counsel's knowledge, does not currently engage in any substantial activities, to such counsel's knowledge, the Company does not own an interest in any corporation, limited liability company, partnership, joint venture, trust or other business entity; (iii) to such counsel's knowledge, 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 which will be outstanding after the Closing Date 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; and none of such securities were issued in violation of the preemptive rights known to such counsel 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 known to such counsel, 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; 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 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 -21- free and clear of any adverse claim, provided that the Underwriters are purchasing such Securities in good faith and without notice of any adverse claim; (iv) based solely upon the oral advice of the Staff of the Commission, 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 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 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 such counsel's knowledge, (A) there are no agreements, contracts or other documents required by the Act to be described in the Registration Statement and the Prospectus and filed as exhibits to the Registration Statement other than those described in the Registration -22- 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 agreements to which the Company is a party that are expressly referred to in the Registration Statement and the Prospectus, are accurate in all material respects; (C) there is not pending or overtly threatened against the Company any action, arbitration, 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 by the Regulations to be disclosed in the Registration Statement which is not so disclosed (and such proceedings as are summarized in the Registration Statement are 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 overtly 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, operations or results of operations of the Company, which could reasonably be expected to materially adversely effect 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 questions 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 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, except as rights to indemnity or contribution may be limited by applicable law, and except for other customary exceptions set forth in such counsel's opinion), and to such counsel's knowledge none of the Company's execution, delivery or performance of this Agreement, the Warrant Agreement, and the Representatives' Warrant Agreement, the -23- 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 material breach or violation of any of the terms or provisions of, or constitutes a material default under, or result in the creation or imposition of any material lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction 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 identified by the Company to such counsel as material to the business of the Company, to which the Company is a party or by which it is bound, or (C) any federal, state or local statute, rule or regulation known to such counsel to be applicable to the Company or any judgment, decree or order known to such counsel of any arbitrator, court, regulatory body or administrative agency or other governmental agency or body (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, having jurisdiction over the Company or any of its activities or properties, in each case where such conflict, breach, violation or default would have a material adverse effect on the Company's business; (viii) no consent, approval, authorization or order, and no filing with, any court, regulatory body, government agency or other body (other than such as 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 such counsel's knowledge, the properties of the Company conform in all material respects to the description thereof contained in the Registration Statement and the Prospectus; (x) to the knowledge of such counsel, and except as disclosed in the Registration Statement and the Prospectus, (A) the Company is not in material breach of, or in material default under, any term or provision of any license, contract, agreement, 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, identified by the Company to such counsel as material to the business of the Company, in -24- each case where such breach or default would have a material adverse effect on the business of the Company, and (B) the Company is not in material violation of any term or provision of its articles of incorporation or by-laws, as amended, or in material violation of any franchise, license, permit, judgment, decree, order, statute, rule or regulation known to such counsel to be applicable to the Company, in each case where such breach, default or violation would have a material adverse effect on the Company's business; (xi) the statements in the Prospectus under "Dividend Policy," "Description of Capital Stock," and "Shares Eligible for Future Sale" 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; and (xiii) to such counsel's knowledge and based upon a review of the outstanding securities and the contracts furnished to such counsel by the Company, except as disclosed in the Registration Statement and Prospectus 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. In rendering such opinion, such counsel (A) need not express any opinion as to matters involving the application of laws other than the laws, rules and regulations of the United States (with such exceptions and limitations as are set forth in such counsel's opinion) and the laws, rules and regulations of the State of California; and (B) as to matters of fact, to the extent they deem proper, on certificates and written statements of responsible officers of the Company and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company, provided that copies of any such statements or certificates shall be delivered to Underwriters' Counsel if requested. 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, -25- completeness or satisfaction of any of the representations, warranties or conditions of the Company or herein contained. (f) Prior to each of the Closing Date and each Option Closing Date, if any, (i) there shall have been no material adverse change nor development involving a prospective material adverse change in the condition, financial or otherwise, prospects, stockholders' equity or the business activities of the Company, whether or not in the ordinary course of business, from the latest dates as of which such condition is set forth in the Registration Statement and Prospectus; (ii) except as disclosed on the Registration Statement prospectus, there shall have been no transaction, not in the ordinary course of business, entered into by the Company, from the latest date as of which the financial condition of the Company is set forth in the Registration Statement and Prospectus which is adverse to the Company; (iii) the Company shall not be in default under any provision of any instrument relating to any outstanding indebtedness which default has not been waived; (iv) except as disclosed in the Registration Statement Prospectus, the Company shall not have issued any securities (other than the Securities) or declared or paid any dividend or made any distribution in respect of its capital stock of any class and there has not been any change in the capital stock, or any material increase in the debt (long or short term) or liabilities or obligations of the Company (contingent or otherwise) except for the issuance of the Option Securities, the Representatives' Warrants, and shares of Common Stock issued upon the exercise of currently outstanding warrants or options, or options and warrants granted in the ordinary course of business consistent with prior practice; (v) no material amount of the assets of the Company shall have been pledged or mortgaged, except as set forth in the Registration Statement and Prospectus; (vi) no action, suit or proceeding, at law or in equity, shall have been pending or overtly 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 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; -26- (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; and (iii) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as described in or specifically contemplated by the Registration Statement and Prospectus, (a) the Company has not incurred up to and including the Closing Date or the Option Closing Date, as the case may be, other than in the ordinary course of its business, any material liabilities or obligations, direct or contingent; (b) the Company has not paid or declared any dividends or other distributions on its capital stock; (c) the Company has not entered into any transactions not in the ordinary course of business; (d) there has not been any change in the capital stock as described in the Registration Statement and Prospectus or material increase in long-term debt or any increase in the short-term borrowings (other than any increase in the short-term borrowings in the ordinary course of business) of the Company, (e) the Company has not sustained any material loss or damage to its property or assets, whether or not insured, (f) there is no litigation which is pending or overtly 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; -27- (ii) stating that it is their opinion that the financial statements of the Company included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act and the Regulations thereunder and that the Representatives may rely upon the opinion of Grant Thornton with respect to the financial statements and supporting schedules included in the Registration Statement; (iii) stating that, on the basis of a limited review which included a reading of the latest available unaudited interim financial statements of the Company (with an indication of the date of the latest available unaudited interim financial statements), a reading of the latest available minutes of the stockholders and board of directors and the various committees of the board of directors of the Company, consultations with officers and other employees of the Company responsible for financial and accounting matters and other specified procedures and inquiries, nothing has come to their attention which would lead them to believe that (A) the unaudited financial statements of the Company included in the Registration Statement, if any, do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Regulations or are not fairly presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements of the Company included in the Registration Statement, or (B) at a specified date not more than five (5) days prior to the effective date of the Registration Statement, there has been any change in the capital stock or material increase in long-term debt of the Company, or any material decrease in the stockholders' equity or net current assets or net assets of the Company as compared with amounts shown in the most recent balance sheet included in the Registration Statement, other than as set forth in or contemplated by the Registration Statement, or, if there was any change or decrease, setting forth the amount of such change or decrease. (iv) stating that they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings, statements and other financial information pertaining to the Company set forth in the Prospectus in each case to the extent that such amounts, numbers, percentages, statements and information may be derived from the general accounting records, including work sheets, of the Company and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter and found them to be in agreement; and -28- (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 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 that have been executed and delivered to the Company 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. -29- 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, 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 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 mutual: employees, counsel and hold harmless the Company, each of its directors, employees, each of its officers who has signed the Registration Statement, counsel to the Company, and each other person, if any, who controls the Company, within the meaning of the Act, to the same extent as the foregoing indemnity from the Company to the 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. 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 -30- 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. (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 been advised in writing by counsel that a conflict of interest exists between the indemnifying party and the indemnified parties making representation of such parties by the same counsel inappropriate (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events the reasonable fees and expenses of one additional counsel shall be borne by the indemnifying parties. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. Anything in this Section 7 to the contrary notwithstanding, an indemnifying party shall not be liable for any settlement of any claim or action effected without its written consent; provided, however, that such consent was not -------- ------- unreasonably withheld. (d) In order to provide for just and equitable contribution in any case in which (i) an indemnified party makes claim for indemnification pursuant to this Section 7, but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Section 7 provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any indemnified party, then each indemnifying party shall contribute to the amount paid as a result of such losses, claims, damages, expenses or liabilities (or actions in respect thereof) (A) in such proportion as is appropriate to reflect the relative benefits received by each of the contributing parties, on the one hand, and the party to be -31- 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 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, -32- the Company, any controlling person of either the Underwriter or the Company, and shall survive termination of this Agreement or the issuance and delivery of the Securities to the 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 Representative's reasonable opinion will in the immediate future have a material and adverse effect on the securities markets generally; or (ii) any material adverse change in the financial markets shall have occurred; or (iii) if trading on the New York Stock Exchange, the American Stock Exchange, or in the over-the-counter market shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required on the over-the-counter market by the NASD or by order of the Commission or any other government authority having jurisdiction; or (iv) if the United States shall have become involved in a war or major hostilities, or if there shall have been an escalation in an existing war or major hostilities or a national emergency shall have been declared in the United States; or (v) if a banking moratorium has been declared by a state or federal authority; or (vi) if the Company shall have sustained a loss material to the Company by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in the Representative'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, in each case having a material and adverse effect on the securities markets generally, as in the Representative's good faith 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. -33- 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 non-defaulting 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 Representative'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 Floor, New York, New York 10019, Attention: Daniel I. De Wolf, Esq. Notices to the Company shall be directed -34- 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. -35- 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. -36- SCHEDULE A NUMBER OF SHARES OF COMMON STOCK TO BE NUMBER OF WARRANTS TO NAME OF UNDERWRITERS PURCHASED BE PURCHASED - -------------------- --------- ------------ Pryor, McClendon, Counts & Co., Inc. National Securities Corporation TOTAL SCH. A-1 EX-3.02 3 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 Amended September 12, 1996
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 number of directors of the corporation shall be set at not less than four and not more than seven by resolution of the Board of Directors. Any amendment to these Bylaws which would alter the maximum number of directors set forth in the preceding sentence or change the Board to a fixed Board may only be adopted by approval of the outstanding shares (as defined in Section 152 of the Code); provided, however, that a Bylaw or amendment of 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 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 the 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-3.03 4 REGISTRANT'S AMENDED & RESTATED ARTICLES OF INC. EXHIBIT 3.03 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF ISONICS CORPORATION 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 Thirty Million (30,000,000), which shall consist of: (a) Twenty Million (20,000,000) shares which shall be designated as Common Stock; and (b) Ten Million (10,000,000) shares which shall be designated as Preferred Stock. Upon the filing of these articles, each issued and outstanding share of Common Stock shall be split into .145138 shares of Common Stock. ARTICLE IV 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. 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. EX-4.03 5 WARRANT AGREEMENT EXHIBIT 4.03 ISONICS CORPORATION AND CONTINENTAL STOCK TRANSFER & TRUST COMPANY AND PRYOR, McCLENDON, COUNTS & CO., INC. AND NATIONAL SECURITIES CORPORATION _______________________ WARRANT AGREEMENT Dated as of __________ __, 1996 THIS WARRANT AGREEMENT (the "Agreement"), dated this ___ day of ____________ 1996, by and among ISONICS CORPORATION, a California corporation (the "Company"), CONTINENTAL STOCK TRANSFER & TRUST COMPANY, as Warrant Agent (the "Warrant Agent"), PRYOR, McCLENDON, COUNTS & CO., INC. ("Pryor McClendon") and NATIONAL SECURITIES CORPORATION ("National"), its successors and assigns (Pryor McClendon and National are collectively referred to herein as the "Representatives"). W I T N E S S E T H: WHEREAS, in connection with (i) the Company's underwritten initial public offering pursuant to a registration statement on Form SB-2 of ____________ shares of Common Stock (as defined in Section 1), and ____________ redeemable common stock purchase warrants (the "Warrants"), each warrant entitling the holder thereof to purchase one additional share of Common Stock; (ii) the over-allotment option to purchase up to an additional ___________ shares of Common Stock and ____________ Warrants (the "Over-allotment Option"); and (iii) the sale to the Representatives of warrants (the "Representatives' Warrants") to purchase up to ___________ shares of Common Stock and/or ____________ Warrants, the Company will issue up to _____________ Warrants (subject to adjustment as provided herein and in the Representatives' Warrant Agreement); and WHEREAS, the Company desires to provide for the issuance of certificates representing the Warrants; and WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, registration, transfer, exchange and redemption of the Warrants, the issuance of certificates representing the Warrants, the exercise of the Warrants and the rights of the holders thereof. NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth and for the purpose of defining the terms and provisions of the Warrants and the certificates representing the Warrants and the respective rights and obligations thereunder of the Company, the Representatives, the holders of certificates representing the Warrants and the Warrant Agent, the parties hereto agree as follows: 1. Definitions. As used herein, the following terms shall have the ----------- following meanings, unless the context shall otherwise require: (a) "Act" shall mean the Securities Act of 1933, as amended. 1 (a) "Common Stock" shall mean the authorized stock of the Company of any class, whether now or hereafter authorized, which has the right to participate in the voting and in the distribution of earnings and assets of the Company without limit as to amount or percentage which at the date hereof consists of shares of ___________ Common Stock, no par value per share. (a) "Commission" shall mean the Securities and Exchange Commission. (a) "Corporate Office" shall mean the office of the Warrant Agent (or its successor) at which at any particular time its business in_____________, shall be administered, which office is located on the date hereof c/o Continental Stock Transfer & Trust Company, ______________. (a) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (a) "Exercise Date" shall mean, subject to the provisions of Section 5(b) hereof, as to any Warrant, the date on which the Warrant Agent shall have received both (i) the Warrant Certificate representing such Warrant, with the exercise form thereon duly executed by the Registered Holder hereof or his attorney duly authorized in writing, and (ii) payment in cash or by official bank or certified check made payable to the Warrant Agent for the account of the Company, of the amount in lawful money of the United States of America equal to the applicable Purchase Price (as hereinafter defined) in good funds. (a) "Exercise Price" shall mean, subject to modification and adjustment as provided in Section 8, $______ per share and further subject to the Company's right, in its sole discretion, to decrease the Exercise Price for a period of not less than 30 days on not less than 30 days' prior written notice to the Registered Holders and National. (a) "Initial Warrant Exercise Date" shall mean the Effective Date of the Prospectus. (a) "Initial Warrant Redemption Date" shall mean the Effective Date of the Prospectus. 2 (a) "Market Price" shall mean the last reported sale price, or, in case no such reported sale takes place on such day, the average of the last reported sales prices for the last three (3) trading days, in either case as officially reported by the principal securities exchange on which the Common Stock is listed or admitted to trading or by the Nasdaq SmallCap Market, or, if the Common Stock is not listed or admitted to trading on any national securities exchange or quoted by the Nasdaq, the average closing bid price as furnished by the Nasdaq or similar organization if Nasdaq is no longer reporting such information, or if the Common Stock is not quoted on Nasdaq, as determined in good faith (using customary valuation methods) by resolution of the members of the Board of Directors of the Company, based on the best information available to it. (a) "NASD" shall mean the National Association of Securities Dealers, Inc. (a) "Nasdaq" shall mean the Nasdaq SmallCap Market. (a) "Redemption Date" shall mean the date (which may not occur before the Initial Warrant Redemption Date) fixed for the redemption of the Warrants in accordance with the terms hereof. (a) "Redemption Price" shall mean the price at which the Company may, at its option, redeem the Warrants, in accordance with the terms hereof, which price shall be $0.05 per Warrant, subject to adjustment from time to time pursuant to the provisions of Section 9 hereof. (a) "Registered Holder" shall mean the person in whose name the Warrant Certificate representing the Warrant(s) in question shall be registered on the books maintained by the Warrant Agent pursuant to Section 6. (a) "Representative's Warrant Agreement" shall mean the agreement dated as of ___________ __, 1996 between the Company and the Representatives relating to and governing the terms and provisions of the Representatives' Warrants. (a) "Transfer Agent" shall mean Continental Stock Transfer & Trust Company, or its authorized successor. 3 (a) "Underwriting Agreement" shall mean the underwriting agreement dated as of ____________ __, 1996 between the Company and the several underwriters listed therein relating to the Offering. (a) "Warrant Certificate" shall mean a certificate representing one or more of the Warrants substantially in the form annexed hereto as Exhibit A. (a) "Warrant Expiration Date" shall mean, unless the Warrants are redeemed as provided in Section 9 hereof prior to such date, 5:00 p.m. (New York time), on ___________ [5 years from the date of the Prospectus], or the Redemption Date as defined herein, whichever date is earlier; provided that if such date shall in the State of New York be a holiday or a day on which banks located in the State of New York are authorized to close, then 5:00 p.m. (New York time) on the next following day which, in the State of New York, is not a day on which such banks are authorized to close. Upon five business days' prior written notice to the Registered Holders, the Company shall have the right to extend the Warrant Expiration Date. 1. Warrants and Issuance of Warrant Certificates. --------------------------------------------- (a) Each Warrant shall initially entitle the Registered Holder of the Warrant Certificate representing such Warrant to purchase at the Exercise Price therefor from the Initial Warrant Exercise Date until the Warrant Expiration Date one share of Common Stock upon the exercise thereof in accordance with the terms hereof, subject to modification and adjustment as provided in Section 8. (a) Upon execution of this Agreement, Warrant Certificates representing the number of Warrants sold pursuant to the Underwriting Agreement (subject to modification and adjustment as provided in Section 8) shall be executed by the Company and delivered to the Warrant Agent. (a) Upon exercise of the Representatives' Warrants as provided therein, Warrant Certificates representing all or a portion of Warrants to purchase up to an aggregate of shares of Common Stock (subject to modification and adjustment as provided in Section 8 hereof and in the Representative's Warrant Agreement), shall be countersigned, issued and delivered by the Warrant Agent upon written order of the Company signed by its Chairman of the Board, Chief Executive Officer, President or a Vice President and by its Chief Financial Officer, Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary. 4 (a) From time to time, up to the Warrant Expiration Date, the Warrant Agent shall countersign and deliver Warrant Certificates in required denominations of one or whole number multiples thereof to the person entitled thereto in connection with any transfer or exchange permitted under this Agreement. Except as provided herein, no Warrant Certificates shall be issued except (i) Warrant Certificates initially issued hereunder and those issued on or after the Initial Warrant Exercise Date, upon the exercise of fewer than all Warrants held by the exercising Registered Holder, (ii) Warrant Certificates issued upon any transfer or exchange of Warrants, (iii) Warrant Certificates issued in replacement of lost, stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7, (iv) Warrant Certificates issued pursuant to the Representative's Warrant Agreement, and (v) at the option of the Company, Warrant Certificates in such form as may be approved by its Board of Directors, to reflect any adjustment or change in the Exercise Price, the number of shares of Common Stock purchasable upon exercise of the Warrants or the Redemption Price therefor made pursuant to Section 8 hereof. 5 1. Form and Execution of Warrant Certificates. ------------------------------------------ (a) The Warrant Certificates shall be substantially in the form annexed hereto as Exhibit A (the provisions of which are hereby incorporated herein) and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Warrants may be listed, or to conform to usage. The Warrant Certificates shall be dated the date of issuance thereof (whether upon initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen or destroyed Warrant Certificates) and issued in registered form. Warrants shall be numbered serially with the letter "W" on the Warrants. (a) Warrant Certificates shall be executed on behalf of the Company by its Chairman of the Board, Chief Executive Officer, President or any Vice President and by its Chief Financial Officer, Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary, by manual signatures or by facsimile signatures printed thereon, and shall have imprinted thereon a facsimile of the Company's seal. Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. In any case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be such officer of the Company after the date of signature but before the date of issuance of the Warrant Certificates or before countersignature by the Warrant Agent and issue and delivery thereof, such Warrant Certificates, nevertheless, may be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Warrant Certificates had not ceased to be such officer of the Company. After countersignature by the Warrant Agent, Warrant Certificates shall be delivered by the Warrant Agent to the Registered Holder promptly and without further action by the Company, except as otherwise provided by Section 4(a) hereof. 1. Exercise. -------- (a) Warrants in denominations of one or whole number multiples thereof may be exercised by the Registered Holder 6 thereof commencing at any time on or after the Initial Warrant Exercise Date, but not after the Warrant Expiration Date, upon the terms and subject to the conditions set forth herein and in the applicable Warrant Certificate. Warrants may be exercised by their holders or redeemed by the Company as follows: Exercise of Warrants shall be accomplished upon surrender of the Warrant Certificate evidencing such Warrants, with the Form of Election to Purchase on the reverse side thereof duly filled in and executed, to the Warrant Agent at its business office, together with payment to the Warrant Agent of the Exercise Price (as of the date of such surrender) of the Warrants then being exercised and an amount equal to any applicable transfer tax and, if requested by the Company, any other taxes or governmental charges which the Company may be required by law to collect in respect of such exercise. Payment of the Exercise Price and other amounts may be made by wire transfer of good funds, or by certified or bank cashier's check, payable in lawful money of the United States of America to the order of the Warrant Agent, who shall in turn make prompt payment to the Company. No adjustment shall be made for any cash dividends, whether paid or declared, on any securities issuable upon exercise of a Warrant. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the Exercise Date and upon exercise thereof, the person entitled to receive the securities deliverable upon such exercise shall be treated for all purposes as the holder of the securities issued thereby as of the close of business on the Exercise Date. If Warrants in denominations other than whole number multiples thereof shall be exercised at one time by the same Registered Holder, the number of full shares of Common Stock which shall be issuable upon exercise thereof shall be computed on the basis of the aggregate number of full shares of Common Stock issuable upon such exercise. As soon as practicable on or after the Exercise Date and in any event within five business days after such date, if one or more Warrants have been exercised in the manner described in this subsection (a), the Warrant Agent on behalf of the Company shall cause to be issued to the person or persons entitled to receive the same a Common Stock certificate or certificates for the shares of Common Stock deliverable upon such exercise, and the Warrant Agent shall deliver the same to the person or persons entitled thereto. Upon the exercise of any one or more Warrants, the Warrant Agent shall promptly notify the Company in writing of such fact and of the number of securities delivered upon such exercise and, subject to subsection (b) below, shall cause payment in cash or by check made payable to the order of the Company, equal to the Exercise Price of such Warrants, to 7 be deposited promptly in the Company's bank account or paid directly to the Company, as specified by the Company. (a) The Company shall engage the Representatives as Warrant solicitation agents, and, at any time upon the valid exercise of any Warrants after one year from the date hereof, excluding any Warrant (i) exercise at a time when the Exercise Price exceeds the Market Price, (ii) held in a discretionary account or (iii) exercised in an unsolicited transaction, the Company shall instruct the Warrant Agent to, and the Warrant Agent shall, on a daily basis, within two business days after such exercise, notify the Representatives of the exercise of any such Warrants and shall, on a weekly basis (subject to collection of funds constituting the tendered Exercise Price, but in no event later than five business days after the last day of the calendar week in which such funds were tendered), remit to the Representatives an amount equal to five percent (5%) of the Exercise Price of such Warrants then being exercised unless the Representatives shall have notified the Warrant Agent that the payment of such amount with respect to such Warrant is violative of the General Rules and Regulations promulgated under the Exchange Act, or the rules and regulations of the Nasdaq or applicable state securities or "blue sky" laws, or the Warrants are those underlying the Representatives' Warrants in which event, the Warrant Agent shall have to pay such amount to the Company; provided, that, the Warrant Agent shall not be obligated to pay any amounts pursuant to this Section 4(b) during any week that such amounts payable are less than $1,000 and the Warrant Agent's obligation to make such payments shall be suspended until the amount payable aggregates $1,000, and provided further, that, in any event, any such payment (regardless of amount) shall be made not less frequently than monthly. Notwithstanding the foregoing, the Representatives shall be entitled to receive the commission contemplated by this Section 4(b) as Warrant solicitation agent only if: (i) the Representatives have provided actual services in connection with the solicitation of the exercise of a Warrant by a Registered Holder and (ii) the Registered Holder exercising a Warrant affirmatively designates in writing on the exercise form on the reverse side of the Warrant Certificate that the exercise of such Registered Holder's Warrant was solicited by the Representatives. (a) The Company shall not be required to issue fractional shares on the exercise of Warrants. Warrants may only be exercised in such multiples as are required to permit the issuance by the Company of one or more whole shares. If one or 8 more Warrants shall be presented for exercise in full at the same time by the same Registered Holder, the number of whole shares which shall be issuable upon such exercise thereof shall be computed on the basis of the aggregate number of shares purchasable on exercise of the Warrants presented. If any fraction of a share would, except for the provisions provided herein, be issuable on the exercise of any Warrant (or specified portion thereof), the Company shall pay an amount in cash equal to such fraction multiplied by the then current Market Price of a share of Common Stock, determined as follows: (1) If the Common Stock is listed, or admitted to unlisted trading privileges on a national securities exchange, or is traded on Nasdaq, the current market value of a share of Common Stock shall be the closing sale price of the Common Stock at the end of the regular trading session on the last business day prior to the date of exercise of the Warrants on whichever of such exchanges or Nasdaq which had the highest average daily trading volume for the Common Stock on such day; or (1) If the Common Stock is not listed or admitted to unlisted trading privileges on any national securities exchange, or listed, quoted or reported for trading on Nasdaq, but is traded in the over-the-counter market, the current market value of a share of Common Stock shall be the average of the last reported bid and asked prices of the Common Stock reported by the National Quotation Bureau, Inc. on the last business day prior to the date of exercise of the Warrants; or (1) If the Common Stock is not listed, admitted to unlisted trading privileges on any national securities exchange, or listed, quoted or reported for trading on Nasdaq, and bid and asked prices of the Common Stock are not reported by the National Quotation Bureau, Inc., the current market value of a share of Common Stock shall be an amount, not less than the book value thereof as of the end of the most recently completed fiscal quarter of the Company ending prior to the date of exercise, determined by the members of the Board of Directors of the Company exercising good faith and using customary valuation methods. 1. Reservation of Shares; Listing; Payment of Taxes; etc. ------------------------------------------------------ (a) The Company covenants that it will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue upon exercise of Warrants, such number of shares of Common Stock as shall then be issuable 9 upon the exercise of all outstanding Warrants. The Company covenants that all shares of Common Stock which shall be issuable upon exercise of the Warrants shall, at the time of delivery thereof, be duly and validly issued and fully paid and nonassessable and free from all preemptive or similar rights, taxes, liens and charges with respect to the issue thereof, and that upon issuance such shares shall be listed on each securities exchange, if any, on which the other shares of outstanding Common Stock of the Company are then listed. (a) The Company covenants that if any securities to be reserved for the purpose of exercise of Warrants hereunder require registration with, or approval of, any governmental authority under any federal securities law before such securities may be validly issued or delivered upon such exercise, then the Company will file a registration statement under the federal securities laws or a post-effective amendment, use its best efforts to cause the same to become effective and to keep such registration statement current on or after the Initial Warrant Exercise Date and while any of the Warrants are outstanding and deliver a prospectus which complies with Section 10(a)(3) of the Act, to the Registered Holder exercising the Warrant (except, if in the opinion of counsel to the Company, such registration is not required under the federal securities law or if the Company receives a letter from the staff of the Commission stating that it would not take any enforcement action if such registration is not effected; provided, however, that (i) if at the time of exercise of any Warrants -------- ------- the Company does not have in place an effective registration statement or is otherwise, in the good faith determination of the Board of Directors of the Company, precluded by applicable laws from issuing the underlying shares of Common Stock, the Company may, in lieu of issuance of the shares of Common Stock, elect to redeem the Warrants duly surrendered for exercise for a price per Warrant equal to the difference between the Market Price of the securities for which such Warrant is exercisable on the date of such submission and the Exercise Price of such Warrants, and in the event of such redemption, the Company will pay to the holder of such Warrants the above described redemption price in cash within 10 business days after receipt of notice from the Warrant Agent that such Warrants have been submitted for exercise, and (ii) if the Market Price of the Common Stock is less than the Exercise Price, then the Company need not take such actions to file a registration statement (or a post effective amendment to a registration statement) with respect to the issuance of Common Stock upon exercise of the Warrants until such time as the Company has been subject to the requirements of Section 12 or 15(d) of the Securities Exchange Act of 1934, as amended, for a period of at least twelve calendar months immediately preceding the filing of the registration statement). The Company will use its best efforts to obtain appropriate approvals or registrations under state "blue sky" securities laws with respect to any such securities. However, Warrants may not be exercised by, 10 or shares of Common Stock issued to, any Registered Holder in any state in which such exercise would be unlawful. (a) The Company shall pay all documentary, stamp or similar taxes and other governmental charges that may be imposed with respect to the issuance of Warrants, or the issuance or delivery of any shares of Common Stock upon exercise of the Warrants; provided, however, that if shares of Common Stock -------- ------- are to be delivered in a name other than the name of the Registered Holder of the Warrant Certificate representing any Warrant being exercised, then no such delivery shall be made unless the person requesting the same has paid to the Warrant Agent the amount of transfer taxes or charges incident thereto, if any; provided, however, that the Company shall not be required (i) to pay any tax which may be payable in respect of any transfer involved in the transfer and delivery of Warrant Certificates or (ii) to issue or deliver any certificate for shares of Common Stock or other securities upon the exercise of any Warrant Certificate until any such tax shall have been paid, all such tax being payable by the holder of such Warrant Certificate at the time of surrender. (a) The Warrant Agent is hereby irrevocably authorized as the Transfer Agent to requisition from time to time certificates representing shares of Common Stock or other securities required to be issued upon exercise of the Warrants, and the Company will comply with all such requisitions. 1. Exchange and Registration of Transfer. ------------------------------------- (a) Warrant Certificates may be exchanged for other Warrant Certificates representing an equal aggregate number of Warrants of the same class or may be transferred in whole or in part. Warrant Certificates to be exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and, promptly following satisfaction of the terms and provisions hereof, the Company shall execute and the Warrant Agent shall countersign, issue and deliver in exchange therefor the Warrant Certificate or Certificates which the Registered Holder making the exchange shall be entitled to receive. (a) The Warrant Agent shall keep, at its office, books in which, subject to such reasonable regulations as it may prescribe, it shall register Warrant Certificates and the transfer thereof in accordance with customary practice. Upon due presentment for registration of transfer of any Warrant Certificate at such office, the Company shall execute and the Warrant Agent shall issue and deliver to the transferee or 11 transferees a new Warrant Certificate or Certificates representing an equal aggregate number of Warrants of the same class. (a) With respect to all Warrant Certificates presented for registration of transfer, or for exchange or exercise, the subscription or exercise form, as the case may be, on the reverse thereof shall be duly endorsed or be accompanied by a written instrument or instruments of transfer and subscription, in form satisfactory to the Company and the Warrant Agent, duly executed by the Registered Holder thereof or his attorney-in-fact duly authorized in writing. (a) A service charge may be imposed on the Registered Holder by the Warrant Agent for any exchange or registration of transfer of Warrant Certificates. In addition, the Company may require payment by such holder of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. (a) All Warrant Certificates surrendered for exercise or for exchange in case of mutilated Warrant Certificates shall be promptly canceled by the Warrant Agent and thereafter retained by the Warrant Agent until termination of this Agreement. (a) Prior to due presentment for registration of transfer thereof, the Company and the Warrant Agent may deem and treat the Registered Holder of any Warrant Certificate as the absolute owner thereof and of each Warrant represented thereby (notwithstanding any notations of ownership or writing thereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. 1. Loss or Mutilation. Upon receipt by the Company and the Warrant ------------------ Agent of evidence satisfactory to them of the ownership of and the loss, theft, destruction or mutilation of any Warrant Certificate and (in the case of loss, theft or destruction) of indemnity satisfactory to them, and (in case of mutilation) upon surrender and cancellation thereof, the Company shall execute and the Warrant Agent shall (in the absence of notice to the Company and/or the Warrant Agent that a new Warrant Certificate has been acquired by a bona fide purchaser) countersign and deliver to the Registered Holder in lieu thereof a new Warrant Certificate of like tenor representing an equal aggregate number of Warrants. Applicants for a substitute Warrant Certificate shall also comply with such other reasonable regulations and pay such other reasonable charges as the Warrant Agent may prescribe. 12 1. Adjustments of Number and Kind of Shares Purchasable and Exercise ----------------------------------------------------------------- Price. The number and kind of securities or other property purchasable upon - ----- exercise of a Warrant shall be subject to adjustment from time to time upon the occurrence, after the date hereof, of any of the following events: (a) Dividends, Stock Splits, Reverse Splits, Etc. In case the -------------------------------------------- Company shall (i) pay a dividend in, or make a distribution of, shares of Common Stock or of capital stock convertible into Common Stock on its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of such shares or (iii) combine its outstanding shares of Common Stock into a smaller number of such shares, the total number of shares of Common Stock purchasable upon the exercise of each Warrant outstanding immediately prior thereto shall be adjusted so that the Registered Holder of any Warrant Certificate thereafter surrendered for exercise shall be entitled to receive, at the same aggregate Exercise Price, the number of shares of Common Stock which such holder would have owned or have been entitled to receive immediately following the happening of any of the events described above had such Warrant been exercised in full immediately prior to the happening of such event. Any adjustment made pursuant to this subsection shall, in the case of a stock dividend or distribution, become effective as of the record date therefor and, in the case of a subdivision or combination, be made as of the effective date thereof. If, as a result of an adjustment made pursuant to this subsection, the Registered Holder of any Warrant Certificate thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock of the Company, the Board of Directors of the Company (whose determination shall be conclusive and shall be evidenced by a Board resolution filed with the Warrant Agent) shall determine the allocation of the adjusted Exercise Price between or among shares of such classes of capital stock. (a) No Change in Aggregate Exercise Price. In the event of any ------------------------------------- adjustment of the total number of shares of Common Stock purchasable upon the exercise of Warrants pursuant to subsection (a) above, the aggregate Exercise Price of each such Warrant shall remain unchanged, but the number of shares of capital stock obtainable on exercise of each such Warrant shall be adjusted as provided in subsection (a) above. (a) Reorganization or Reclassification. In the event of a ---------------------------------- capital reorganization or a reclassification of the Common Stock (except as provided in subsection (a) above or subsection (e) below), any Registered Holder of a Warrant, upon exercise of such Warrant, shall be entitled to receive, in substitution for the Common Stock to which he would have become entitled upon exercise immediately prior to such reorganization or reclassification, the shares (of any class or classes) or other securities or property of the Company (or cash) that he would have been entitled to receive at the same aggregate Exercise Price upon such reorganization or reclassification if such Warrant had been exercised immediately prior thereto; and in any such case, appropriate provision (as determined by the Board of Directors of the Company, whose determination shall be conclusive and 13 shall be evidenced by a certified Board resolution filed with the Warrant Agent) shall be made for the application of this Section 8 with respect to the rights and interests thereafter of the Registered Holders of all then outstanding Warrants (including but not limited to the allocation of the Exercise Price between or among shares of classes of capital stock), to the end that this Section 8 (including the adjustments of the number of shares of Common Stock or other securities purchasable and the Exercise Price thereof) shall thereafter be reflected, as nearly as reasonably practicable, in all subsequent exercises of the Warrants for any shares or securities or other property (or cash) thereafter deliverable upon the exercise of the Warrants. (a) Certificate of Adjustment. Whenever the number of shares of ------------------------- Common Stock or other securities purchasable upon exercise of a Warrant is adjusted as provided in this Section 8, the Company will promptly file with the Warrant Agent a certificate signed by a Chairman or Co-Chairman of the Board or the President or a Vice President of the Company and by the Chief Financial Officer, Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Company setting forth the number and kind of securities or other property purchasable upon exercise of a Warrant, as so adjusted, stating that such adjustments in the number or kind of shares or other securities or property conform to the requirements of this Section 8, and setting forth a brief statement of the facts accounting for such adjustments. Promptly after receipt of such certificate, the Company, or the Warrant Agent at the Company's request, will deliver, by first class, postage prepaid mail, a brief summary thereof (to be supplied by the Company) to the registered holder's of the outstanding Warrant Certificates; provided, however, that failure to file or to -------- ------- give any notice required under this subsection, or any defect therein, shall not affect the legality or validity of any such adjustments under this Section 8; and provided, further, that, where appropriate, such notice may be given in -------- ------- advance and included as part of the notice required to be given pursuant to Section 12 hereof. (a) Merger or Consolidation. In case of any consolidation of the ----------------------- Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Common Stock), or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, the corporation formed by such consolidation or merger or the corporation which shall have acquired such assets, as the case may be, shall execute and deliver to the Warrant Agent a supplemental warrant agreement provided that the Registered Holder of each Warrant then outstanding shall have the right thereafter (until the expiration of such Warrant) to receive, upon exercise of such Warrant, solely the kind and amount of shares of stock and other securities and property (or cash) receivable upon such consolidation, merger, sale or transfer by a holder of the number of shares of Common Stock of the Company for which such Warrant might have been exercised immediately prior to such consolidation, merger, sale or transfer. Such supplemental warrant agreement shall provide for adjustments which shall be as nearly equivalent as may be 14 practicable to the adjustments provided in this Section. The above provision of this Subsection shall similarly apply to successive consolidations, mergers, sales or transfers. (a) Effect of Adjustments on Warrant Certificates. Irrespective --------------------------------------------- of any adjustments in the number of kind of shares issuable upon exercise of Warrants, Warrant Certificates theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the similar Warrant Certificates initially issuable pursuant to this Warrant Agreement. (a) Assistance of Accounting Firm in Making Computations. The ---------------------------------------------------- Company may retain a firm of independent public accountants of recognized standing, which may be the firm regularly retained by the Company, selected by the Board of Directors of the Company or the Executive Committee of said Board, and not disapproved by the Warrant Agent, to make any computation required under this Section, and a certificate signed by such firm shall, in the absence of fraud or gross negligence, be conclusive evidence of the correctness of any computation made under this Section. (a) "Common Stock". For the purpose of this Section, the term -------------- "Common Stock" shall mean (i) the class of stock designated as Common Stock in the Certificate of Incorporation of the Company, as amended, at the date of this Agreement, or (ii) any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value. In the event that at any time as a result of an adjustment made pursuant to this Section, the Registered Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive any shares of capital stock of the Company other than shares of Common Stock, thereafter the number of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in this Section, and all other provisions of this Agreement, with respect to the Common Stock, shall apply on like terms to any such other shares. 1. Redemption. ---------- (a) Commencing on the Initial Warrant Redemption Date, the Company may, on 30 days' prior written notice, redeem all, but not less than all, the Warrants at five cents ($0.05) per Warrant, provided, however, that -------- ------- before any such call for redemption of Warrants can take place, the average closing sale price for the Common Stock as reported by Nasdaq, if the Common Stock is then traded on the Small Cap Market (or the average closing sale price, if the Common Stock is then traded on the Nasdaq National Market or on a national securities exchange) shall have equalled or exceeded $_____ per share (200% of the initial public offering price 15 per share of Common Stock) for any twenty (20) consecutive trading days ending on the day prior to the date on which the notice contemplated by (b) and (c) below is given (subject to adjustment in the event of any stock splits or other similar events as provided in Section 8 hereof). (a) In case the Company shall exercise its right to redeem all of the Warrants, it shall give or cause to be given notice to the Registered Holders of the Warrants, by mailing to such Registered Holders a notice of redemption, first class, postage prepaid, at their last address as shall appear on the records of the Warrant Agent. Any notice mailed in the manner provide herein shall be conclusively presumed to have been duly given whether or not the Registered Holder receives such notice. Not less than five (5) business days prior to the mailing to the Registered Holders of the Warrants of the notice of redemption, the Company shall deliver or cause to be delivered to the Representatives a similar notice telephonically and confirmed in writing, and if the Representatives are engaged as Warrant solicitation agents, the Company shall also cause to be delivered to the Representatives a list of the Registered Holders (including their respective addresses and number of Warrants beneficially owned) to whom such notice of redemption has been or will be given. (a) The notice of redemption shall specify (i) the redemption price, (ii) the Redemption Date, which shall in no event be less than thirty (30) days after the date of mailing of such notice, (iii) the place where the Warrant Certificate shall be delivered and the redemption price shall be paid, (iv) that the Representatives shall receive the commission contemplated by Section 4(b) hereof, and (v) that the right to exercise the Warrant shall terminate at 5:00 p.m. (New York time) on the business day immediately preceding the date fixed for redemption. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a holder (a) to whom notice was not mailed or (b) whose notice was defective. An affidavit of the Warrant Agent or the Secretary or Assistant Secretary of the Company that notice of redemption has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (a) Any right to exercise a Warrant shall terminate at 5:00 p.m. (New York time) on the business day immediately preceding the Redemption Date. The redemption price payable to the Registered Holders shall be mailed to such persons at their addresses of record. 16 (a) If the Representatives act as the Warrant solicitation agents for the Company, the Company shall indemnify the Representatives and each person, if any, who controls the Representatives within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from the registration statement or prospectus referred to in Section 5(b) hereof to the same extent and with the same effect (including the provisions regarding contribution) as the provisions pursuant to which the Company has agreed to indemnify the Representatives contained in Section 7 of the Underwriting Agreement. (a) Five business days prior to the Redemption Date, the Company shall furnish to the Representatives, as Warrant solicitation agents, (i) an opinion of counsel to the Company, dated such date and addressed to the Representatives, and (ii) a "cold comfort" letter dated such date addressed to each of the Representatives, signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities. (a) On and after the date fixed for redemption, the Registered Holders shall have no rights with respect to the Warrants except to receive the $.05 per Warrant upon surrender of their Warrant Certificates. 1. Concerning the Warrant Agent. ---------------------------- (a) The Warrant Agent acts hereunder as agent and in a ministerial capacity for the Company and the Representatives, and its duties shall be determined solely by the provisions hereof. The Warrant Agent shall not, by issuing and delivering Warrant Certificates or by any other act hereunder, be deemed to make any representations as to the validity or value or authorization of the Warrant Certificates (except its 17 countersignature thereof) or the Warrants represented thereby or of any securities or other property delivered upon exercise of any Warrant or whether any stock issued upon exercise of any Warrant is fully paid and nonassessable. (a) The Warrant Agent shall not at any time be under any duty or responsibility to any holder of Warrant Certificates to make or cause to be made any adjustment of the Exercise Price or the Redemption Price provided in this Agreement, or to determine whether any fact exists which may require any such adjustments, or with respect to the nature or extent of any such adjustments, when made, or with respect to the method employed in making the same (except with respect to the exercise of Warrant Certificates after actual notice of any adjustment of the Exercise Price). It shall not (i) be liable for any recital or statement of fact contained herein or for any action taken, suffered or omitted by it in reliance on any Warrant Certificate or other document or instrument believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties (except its countersignature on the Warrant Certificates and such statements or recitals as describe the Warrant Agent or action taken or to be taken by it), (ii) be responsible for any failure on the part of the Company to comply with any of its covenants and obligations contained in this Agreement or in any Warrant Certificate, or (iii) be liable for any act or omission in connection with this Agreement except for its own negligence, bad faith or willful misconduct. (a) The Warrant Agent may at any time consult with counsel satisfactory to it (who may be counsel for the Company or for the Representatives) and shall incur no liability or responsibility for any action taken, suffered or omitted by it in good faith in accordance with the opinion or advice of such counsel. (a) Any notice, statement, instruction, request, direction, order or demand of the Company shall be sufficiently evidenced by an instrument signed by the Chairman of the Board of Directors, Chief Executive Officer, Chief Financial Officer, President or any Vice President (unless other evidence in respect thereof is herein specifically prescribed). The Warrant Agent shall not be liable for any action taken, suffered or omitted by it in accordance with such notice, statement, instruction, request, direction, order or demand reasonably believed by it to be genuine. 18 (a) The Company agrees to pay the Warrant Agent reasonable compensation for its services hereunder and to reimburse it for its reasonable expenses hereunder; the Company further agrees to indemnify the Warrant Agent and save it harmless from and against any and all losses, expenses and liabilities, including judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent in the execution of its duties and powers hereunder except losses, expenses and liabilities arising as a result of the Warrant - ------ Agent's negligence, bad faith or willful conduct. (a) The Warrant Agent may resign its duties and be discharged from all further duties and liabilities hereunder (except liabilities resulting as a result of the Warrant Agent's own gross negligence or willful misconduct), after giving 30 days' prior written notice to the Company. At least 15 days prior to the date such resignation is to become effective, the Warrant Agent shall cause a copy of such notice of resignation to be mailed to the Registered Holder of each Warrant Certificate at the Company's expense. Upon such resignation, or any inability of the Warrant Agent to act as such hereunder, the Company shall appoint in writing a new warrant agent. If the Company shall fail to make such appointment within a period of 15 days after it has been notified in writing of such resignation by the resigning Warrant Agent, then the Registered Holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a new warrant agent. Any new warrant agent, whether appointed by the Company or by such a court, shall be a bank or trust company having a capital and surplus, as shown by its last published report to its stockholders, of not less than $10,000,000 or a stock transfer company. After acceptance in writing of such appointment by the new warrant agent is received by the Company, such new warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as the Warrant Agent, without any further assurance, conveyance, act or deed; but if for any reason it shall be necessary or expedient to execute and deliver any further assurance, conveyance, act or deed, the same shall be done at the expense of the Company and shall be legally and validly executed and delivered by the resigning Warrant Agent. Not later than the effective date of any such appointment the Company shall file notice thereof with the resigning Warrant Agent and shall forthwith cause a copy of such notice to be mailed to the Registered Holder of each Warrant Certificate. Any corporation into which the Warrant Agent or any new warrant agent may be converted or merged, any 19 corporation resulting from any consolidation to which the Warrant Agent or any new warrant agent shall be a party, or any corporation succeeding to the corporate trust business of the Warrant Agent or any new warrant agent shall be a successor warrant agent under this Agreement without any further act, provided that such corporation is eligible for appointment as successor to the Warrant Agent under the provisions of the preceding paragraph. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed to the Company and to the Registered Holders of each Warrant Certificate. (a) The Warrant Agent, its subsidiaries and affiliates, and any of its or their officers or directors, may buy and hold or sell Warrants or other securities of the Company and otherwise deal with the Company in the same manner and to the same extent and with like effect as though it were not Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. (a) The Warrant Agent shall retain for a period of two years from the date of exercise any Warrant Certificate received by it upon such exercise. (a) The Warrant Agent shall account promptly to the Company with respect to Warrants exercised and concurrently pay to the Company all moneys received by the Warrant Agent for the purchase of securities or other property through the exercise of such Warrants. 1. Modification of Agreement. ------------------------- The Warrant Agent and the Company may by supplemental agreement make any changes or corrections in this Agreement (i) that they shall deem appropriate to cure any ambiguity or to correct any defective or inconsistent provision or manifest mistake or error herein contained; or (ii) that they may deem necessary or desirable and which shall not adversely affect the interests of the holders of Warrant Certificates; provided, however, that this Agreement -------- ------- shall not otherwise be modified, supplemented or altered in any respect except with the consent in writing of the Registered Holders representing not less than 66-2/3% of the Warrants then outstanding; provided, further, that no change in -------- ------- the number or nature of the securities purchasable upon the exercise of any Warrant, or to increase the Exercise Price therefor or to accelerate of the Warrant Expiration Date, shall be made without the consent in writing of the Registered Holder of the Warrant Certificate representing such Warrant, other than such changes as are presenting specifically prescribed by this Agreement as originally executed. In addition, this Agreement may not be modified, amended or supplemented without the prior written consent of both 20 of the Representatives, other than to cure any ambiguity or to correct any provision which is inconsistent with any other provision of this Agreement or to make any such change that is necessary or desirable and which shall not adversely affect the interests of the Representatives and except as may be required by law. 1. Notices. ------- All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first-class registered or certified mail, postage prepaid, as follows: if to the Registered Holder of a Warrant Certificate, at the last address of such holder as shown on the registry books maintained by the Warrant Agent; if to the Company at 4010 Moorpark Ave., Suite 119, San Jose, California 95113 Attention: CEO, or at such other address as may have been furnished to the Warrant Agent in writing by the Company; and if to the Warrant Agent, at 40 Wall Street, New York, New York 10005. Copies of any notice delivered pursuant to this Agreement shall also be delivered to Pryor, McClendon, Counts & Co., Inc., 3 Penn Plaza, 1515 Market Street, Suite 819, Philadelphia, Pennsylvania 19102, Attention: Malcolmn Pryor and to National Securities Corporation, 1001 Fourth Avenue, Suite 2200, Seattle, Washington 98154-1100, Attention: General Counsel, or at such other address as may have been furnished to the Company and the Warrant Agent in writing. 1. Governing Law. ------------- This Agreement shall be governed by and construed in accordance with the laws of the state of California without giving effect to conflicts of laws. 1. Binding Effect. -------------- This Agreement shall be binding upon and inure to the benefit of the Company, the Representatives, the Warrant Agent and their respective successors and assigns and the Registered Holders from time to time of Warrant Certificates or any of them. Nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy or claim, in equity or at law, or to impose upon any other person any duty, liability or obligation. 1. Termination. ----------- This Agreement shall terminate at the close of business on the Expiration Date of all of the Warrants or such earlier date upon which all Warrants have been exercised or redeemed, except that the Warrant Agent shall account to the Company for all Warrants outstanding and all cash held by it and the provisions of Section 10 hereof shall survive such termination. 1. Counterparts. ------------ This Agreement may be executed in several counterparts, which taken together shall constitute a single document. 21 1. Holders of Warrants Not Deemed Shareholders. No holder of a ------------------------------------------- Warrant, as such, shall be entitled to vote, receive dividends or be deemed the holder of Common Stock or any other securities of the Company which may at any time be issuable on the exercise of the Warrants represented thereby for any purpose whatever, nor shall anything contained herein or in any Warrant Certificate be construed to confer upon any holder of a Warrant, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value or change of stock to no par value, consolidation, merger, conveyance or otherwise), or to receive notice of meetings or other actions affecting shareholders, or to receive dividend or subscription rights, or otherwise, until such Warrant Certificate shall have been exercised in accordance with the provisions hereof and the receipt of the Exercise Price and any other amounts payable upon such exercise by the Warrant Agent. 1. Benefits of this Agreement. Nothing in this Agreement or in the -------------------------- Warrant Certificates shall be construed to give to any person or corporation other than the Company, the Representatives, the Warrant Agent, and their respective successors and assigns hereunder and the Registered Holders of the Warrant Certificates any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Representatives, the Warrant Agent, their respective successors and assigns hereunder and the Registered Holders of the Warrant Certificates. 22 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the first date first above written. ATTEST: ISONICS CORPORATION By:__________________________ By:__________________________ Name:________________________ Name:________________________ Title:__________________________ Title:_______________________ ATTEST: CONTINENTAL STOCK TRANSFER & TRUST COMPANY, as Warrant Agent By:__________________________ By:__________________________ Name:________________________ Name:________________________ Title:_______________________ Title:_______________________ PRYOR, McCLENDON, COUNTS & CO., INC. By:__________________________ Name: Malcolmn D. Pryor Title: Chairman NATIONAL SECURITIES CORPORATION, INC. By:__________________________ Name: Steven A. Rothstein Title: Chairman 23 EXHIBIT A No. W _______ VOID AFTER ___________ ___, 2001 ___________ WARRANTS REDEEMABLE WARRANT CERTIFICATE TO PURCHASE ONE SHARE OF COMMON STOCK ISONICS CORPORATION CUSIP #__________________ THIS CERTIFIES THAT, FOR VALUE RECEIVED or its registered assigns (the "Registered Holder") is the owner of the number of Redeemable Warrants (the "Warrants") specified above. Each Warrant initially entitles the Registered Holder to purchase, subject to the terms and conditions set forth in this Certificate and the Warrant Agreement (as hereinafter defined), one fully paid and nonassessable share of Common Stock, par value $____ per share, of Isonics Corporation, a California corporation (the "Company"), at any time between the date of the Prospectus (the "Initial Warrant Exercise Date"), and the earlier to occur of the Expiration Date (as hereinafter defined ) and the Redemption Date (as hereinafter defined) upon the presentation and surrender of this Warrant Certificate with the Subscription Form on the reverse hereof duly executed, at the corporate office of American Stock Transfer & Trust Company, as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of $_____ per share, subject to adjustment (the "Exercise Price"), in lawful money of the United States of America in cash or by check made payable to the Warrant Agent for the account of the Company. This Warrant Certificate and each Warrant represented hereby are issued pursuant to and are subject in all respects to the terms and conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated ____________ __, 1996, by and between the Company, Pryor, McClendon, Counts & Co., Inc. ("Pryor McClendon") and National Securities Corporation ("National", Pryor McClendon and National are collectively referred to herein as the "Representatives") and the Warrant Agent. 1 In the event of certain contingencies provided for in the Warrant Agreement, the Exercise Price and the number of shares of Common Stock subject to purchase upon the exercise of each Warrant represented hereby are subject to modification or adjustment. Each Warrant represented hereby is exercisable at the option of the Registered Holder, but no fractional interests will be issued. In the case of the exercise of less than all the Warrants represented hereby, the Company shall cancel this Warrant Certificate upon the surrender hereof and shall execute and deliver a new Warrant Certificate or Warrant Certificates of like tenor, which the Warrant Agent shall countersign, for the balance of such Warrants. The term "Expiration Date" shall mean 5:00 p.m. (New York time) on the date which is five (5) years after the Initial Warrant Exercise Date or the date fixed for redemption hereof, whichever date is earlier. If each such date shall in the State of New York be a holiday or a day on which the banks are authorized to close, then the Expiration Date shall mean 5:00 p.m. (New York time) the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. The Company shall not be obligated to deliver any securities pursuant to the exercise of this Warrant unless a registration statement under the Securities Act of 1933, as amended (the "Act'), with respect to such securities is effective or an exemption thereunder is available. The Company has covenanted and agreed that it will file a registration statement under the Federal securities laws, use its best efforts to cause the same to become effective, use its best efforts to keep such registration statement current, if required under the Act, while any of the Warrants are outstanding, and deliver a prospectus which complies with Section 10(a)(3) of the Act to the Registered Holder exercising this Warrant; provided, however, that (i) if at the time of exercise -------- ------- of any of the Warrants the Company does not have in place an effective registration statement or is otherwise, in the good faith determination of the Board of Directors of the Company, precluded by applicable laws from issuing the shares of Common Stock issuable upon such exercise, the Company may, in lieu of issuance of those shares, elect to redeem the Warrants duly surrendered for exercise for a price per Warrant equal to the difference between the Market Price (as defined below) of a share of the Common Stock on the date of such submission and the Exercise Price, and in the event of such redemption, the Company will pay to the Registered Holder the above-described redemption price in cash within 10 business days after receipt of notice from the Warrant Agent that such Warrants have been submitted for exercise, and (ii) if the Market Price of the Common Stock is less than the Exercise Price, then the Company need not take such actions to file a registration statement (or a post-effective amendment to a registration statement) with respect to the issuance of Common Stock upon exercise of the Warrants until such time as the Company has been subject to the requirements of Section 12 or 15(d) of the Securities Exchange Act of 1934, as amended, for a period of at least 2 twelve calendar months immediately preceding the filing of the registration statement. This Warrant shall not be exercisable by a Registered Holder in any state where such exercise would be unlawful. The term "Market Price" shall mean the last reported sale price, or, in case no such reported sale takes place on such day, the average of the last reported sales prices for the last three (3) trading days, in either case as officially reported by the principal securities exchange on which the Common Stock is listed or admitted to trading or by the Nasdaq SmallCap Market, or, if the Common Stock is not listed or admitted to trading on any national securities exchange or quoted by the Nasdaq, the average closing bid price as furnished by the Nasdaq through Nasdaq or similar organization if Nasdaq is no longer reporting such information, or if the Common Stock is not quoted on Nasdaq, as determined in good faith (using customary valuation methods) by resolution of the members of the Board of Directors of the Company, based on the best information available to it. This Warrant Certificate is exchangeable, upon the surrender hereof by the Registered Holder at the corporate office of the Warrant Agent, for a new Warrant Certificate or Warrant Certificates of like tenor representing an equal aggregate number of Warrants, each of such new Warrant Certificates to represent such number of Warrants as shall be designated by such Registered Holder at the time of such surrender. Upon due presentment and payment of any tax or other charge imposed in connection therewith or incident thereto, for registration of transfer of this Warrant Certificate at such office, a new Warrant Certificate or Warrant Certificates representing an equal aggregate number of Warrants will be issued to the transferee in exchange therefor, subject to the limitations provided in the Warrant Agreement. Prior to the exercise of any Warrant represented hereby, the Registered Holder shall not be entitled to any rights of a stockholder of the Company, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided in the Warrant Agreement. Subject to the provisions of the Warrant Agreement, this Warrant may be redeemed at the option of the Company, at a redemption price of $0.05 per Warrant, at any time commencing after _______________ [the date 12 months from the date of the Prospectus], provided that the average closing sale price for the Common Stock as reported by the Nasdaq Small Cap Market, if the Common Stock is then traded on the Nasdaq SmallCap Market (or the average closing sale price, if the Common Stock is then traded on the Nasdaq National Market or a national securities exchange), shall have equalled or exceeded $_____ per share for any twenty (20) consecutive trading days ending on the fifth trading day prior to the date on which the Notice of Redemption, as defined below, is given (subject to adjustment in the event of any stock splits or other similar events). Notice of redemption (the "Notice of Redemption") shall be given not later than the thirtieth day before the date fixed for redemption, or as 3 provided in the Warrant Agreement. On and after the date fixed for redemption, the Registered Holder shall have no rights with respect to the Warrants except to receive the $0.05 per Warrant upon surrender of this Warrant Certificate. Upon certain circumstances, the Representatives may be entitled to receive an aggregate of five percent (5%) of the Exercise Price of the Warrants represented hereby, if it is engaged as a Warrant solicitation agent by the Company. Prior to due presentment for registration of transfer hereof, the Company and the Warrant Agent may deem and treat the Registered Holder as the absolute owner hereof and of each Warrant represented hereby (notwithstanding any notations of ownership or writing hereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary, except as provided in the Warrant Agreement. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of Delaware without giving effect to conflicts of laws. This Warrant Certificate is not valid unless countersigned by the Warrant Agent. 4 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, manually or in facsimile by two of its officers thereunto duly authorized and a facsimile of its corporate seal to be imprinted hereon. Dated: [SEAL] ISONICS CORPORATION By:_____________________________ Name:_________________________ Title:______________________ By:_____________________________ , Secretary COUNTERSIGNED: _____________________________, as Warrant Agent By:_____________________________ Authorized Officer 5 SUBSCRIPTION FORM To Be Executed by the Registered Holder in Order to Exercise Warrants The undersigned Registered Holder hereby irrevocably elects to exercise ________ Warrants represented by this Warrant Certificate, and to purchase the securities issuable upon the exercise of such Warrants, and requests that certificates for such securities shall be issued in the name of PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER ________________________________________ ________________________________________ ________________________________________ (please print or type name and address) and be delivered to __________________________________________ __________________________________________ __________________________________________ (please print or type name and address) and if such number of Warrants shall not be all the Warrants evidenced by this Warrant Certificate, that a new Warrant Certificate for the balance of such Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below. EXH.A-6 IMPORTANT: PLEASE COMPLETE THE FOLLOWING 1. The exercise of this Warrant was solicited by: _____________________________________. [ ] 2. The exercise of this Warrant was not solicited. [ ] Dated: ______________________ __________________________________ __________________________________ __________________________________ Address _________________________________ Social Security or Taxpayer Identification Number _________________________________ Signature Guaranteed _________________________________ EXH.A-7 ASSIGNMENT To Be Executed by the Registered Holder in Order to Assign Warrants FOR VALUE RECEIVED, _____________________, hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER _______________________________________ _______________________________________ _______________________________________ _______________________________________ (please print or type name and address) ______________________________________ of the Warrants represented by this Warrant Certificate, and hereby irrevocably constitutes and appoints __________________________ Attorney to transfer this Warrant Certificate on the books of the Company, with full power of substitution in the premises. Dated: _____________________ __________________________________ Signatured Guaranteed __________________________________ THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT EXH.A-8 OR ANY CHANGE WHATSOEVER AND MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EXH.A-9 EX-5.01 6 FORM OF OPINION OF FENWICK & WEST LLP Exhibit 5.01 November 19, 1996 Isonics Corporation 4010 Moorpark Avenue, Suite 119 San Jose, California 95117 Re: Isonics Corporation ------------------- Ladies and Gentlemen: At your request, we have examined the Registration Statement on Form SB-2 filed with the Securities and Exchange Commission (the "SEC") on October 2, 1996 (the "Registration Statement") in connection with registration under the Securities Act of 1993, as amended, of (1) up to 850,000 shares of your Common Stock (the "Firm Shares"), (2) up to 850,000 Common Stock Purchase Warrants (the "Firm Warrants"), (3) up to 127,500 shares of Common Stock (the "Option Shares") and 127,500 Common Stock Purchase Warrants (the "Option Warrants") (the Firm Shares and Option Shares sometimes referred to as the "Shares" and the Firm Warrants and Option Warrants sometimes referred to as the "Warrants") issuable upon exercise of the Underwriters' over-allotment option (the Shares and Warrants to be sold in units, each unit to consist of one Share and one Warrant), (4) up to 977,500 shares of Common Stock that are issuable upon exercise of the Warrants, (5) up to 85,000 Representatives' Warrants, each Representatives' Warrant exercisable to acquire one share of Common Stock and one common stock purchase warrant (the "Underlying Warrant") to acquire one share of Common Stock, and the 170,000 shares of Common Stock that are issuable upon exercise of the Representatives' Warrants and the Underlying Warrants. All of the foregoing securities will be referred to collectively as the "Securities." As your counsel, we have examined the proceedings taken by you in connection with the issuance by you of the Securities that may be sold by you. It is our opinion that the Securities to be issued and sold by you pursuant to the Registration Statement, when issued, sold and paid for in the manner referred to in the Registration Statement, will be legally issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to all references to us in the Registration Statement, and the Prospectus constituting a part thereof any amendments thereto which have been approved by us. Very truly yours, Fenwick & West LLP EX-10.06 7 OPTION AGREEMENT 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 - ------------------------------------------------------------------------------ Investor [Confidential] Non-investor 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-10.14 8 SECURITY AGREEMENT EXHIBIT 10.14 SECURITY AGREEMENT This Security Agreement ("Agreement") is made as of this 31st day of March, 1995, by A&R MATERIALS, INC., a California corporation ("Debtor"), in favor of ISOSERVE, INC., a Colorado corporation ("Secured Party"). 1. For valuable consideration, and to secure the payment and performance of the obligations hereinafter described, Debtor hereby grants to Secured Party, pursuant to Division 9 of the California Uniform Commercial Code, a security interest in the property described in Schedule "A" attached hereto and ------------ incorporated herein by this reference (hereinafter collectively referred to as "Collateral"). 2. This Agreement and the security interest created hereby are given for the purpose of securing payment of the Royalty and the Remaining Balance, as those terms are defined in that certain Asset Purchase Agreement dated as of March 31, 1995, by and between Debtor and Secured Party. 3. Debtor represents, warrants and agrees that: (a) Debtor has full title to the Collateral; (b) upon perfection, the security interest granted hereunder to Secured Party will constitute a valid and perfected security interest in the Collateral; and (c) Debtor will execute all such financing statements as Secured Party deems necessary to create and perfect a valid security interest in the Collateral. 4. Secured Party may, at its sole discretion, permit the substitution of any Collateral upon written request of Debtor. 5. Debtor shall be deemed to be in default hereunder upon notice of default following the occurrence of any one or more of the following events of default: (a) Debtor's failure to pay, within fifteen (15) days after the same shall become due, any obligation secured hereby; (b) the making of any levy, seizure or attachment of or on any of the Collateral; or (c) appointment of a receiver, trustee, custodian or similar officer for all or any part of the Collateral or the affairs of Debtor, or any assignment for the benefit of creditors or the commencement of any proceedings under any bankruptcy or insolvency law by or against Debtor. 6. Upon the occurrence of any event of default, Secured Party shall have, in any jurisdiction where enforcement hereof is sought, in addition to all other rights and remedies which Secured Party may have under law, all rights and remedies of a secured party under the Uniform Commercial Code. 7. This Security Agreement expresses the entire understanding of the parties hereto with respect to the subject matter hereof, and may not be altered or amended except with the written consent of Debtor and Secured Party. This Security Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. This Security Agreement shall be governed by and construed in accordance with California law. Any notices required by this Security Agreement shall be deemed to have been duly given, made and received only when delivered against receipt, or five (5) days after mailing if sent by registered or certified mail, postage prepaid, return receipt requested, addressed to Debtor at 4606 Meridian Avenue, Suite K, San Jose, California 95124, or at such other address as Debtor may designate in writing from time to time. IN WITNESS WHEREOF, Debtor, intending to be legally bound hereby, has caused this Security Agreement to be executed and delivered as of the date first above written. "Debtor" A&R MATERIALS, INC. By /s/ James E. Alexander _______________________ Its ______________________ 2 SCHEDULE "A" DESCRIPTION OF COLLATERAL 1. All of the assets (other than cash, cash equivalents and receivables) of Debtor's depleted zinc business existing as of March 31, 1995. 2. All dethyl zinc inventory which, as of March 31, 1995, is in the form of depleted zinc product and tails and which Debtor has acquired from Secured Party as of March 31, 1995 (collectively, the "Feed Stock"). 3. All rights of Debtor to purchase depleted zinc manufactured from any portion or all of the Feed Stock (collectively, the "Purchase Rights"). 4. All of Debtor's rights and interests in, to and under all contracts and agreements (other than the Purchase Rights) to which Secured Party is a party and pursuant to which Secured Party has assigned to Debtor the right to purchase or sell depleted zinc. 5. All customer lists, customer files, mailing lists, developments, improvements, processes, techniques, methods, trade secrets and confidential information of any nature whatsoever which relate to Secured Party's stable isotope business and which Debtor has acquired from Secured Party as of March 31, 1995. 6. All correspondence, plans, ledgers, journals, employment records and other books and records, inquiries from customers, manuals, procedures, technical data, rights of copyright and proprietary information, if any, relevant to Secured Party's stable isotope business and acquired by Debtor as of March 31, 1995. 7. All of Debtor's rights to the name "Isoserve", as well as Debtor's rights, if any, to variations of, or names similar to, the foregoing, and all of Debtor's goodwill, if any, relating to such name. 8. All future proceeds of any and all of the foregoing. EX-10.15 9 CONSULTING AGREEMENT EXHIBIT 10.15 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT (the "Agreement") is made and entered into as of August 28, 1996, by and between A&R Materials, Inc., a California corporation ("Company"), and Larry Wells Co., Inc., a California corporation ("Consultant"). Company desires to retain Consultant in a consulting capacity to assist it in strategic planning and financing matters, and Consultant wishes to be so retained. ACCORDINGLY, THE PARTIES AGREE AS FOLLOWS: 1. DUTIES OF CONSULTANT; TERM. Consultant hereby undertakes to assist the Company in the following capacities: (i) analysis of the Company's financial situation, its market position, and its competitive position vis-a-vis its competitors and --------- presentation of the analysis to potential private accredited investors in the Company; (ii) continuing interaction with the Company in assisting the Company to strategically position and market itself to the financial community; (iii) consult with directors at meetings of the board of directors and board committees; (iv) participate as requested by the Company in the selection of co- managers and syndicate participants; (v) participate as requested by the Company in shaping the long term strategic direction of the Company and how it will be implemented through the planned public offering (collectively, the "Services"). No written work product is contemplated. Consultant shall perform the Services specified in a timely and professional manner. The Consultant may use subcontractors, at no additional cost to the Company, to assist, from time to time, as appropriate in rendering the Services. The term of this Agreement shall be two years, commencing on the date first set forth above. 2. REPRESENTATIONS OF CONSULTANT. Consultant hereby represents and warrants to Company that (i) Consultant has (and any subcontractors engaged by Consultant will have) the expertise and general skills necessary to perform the Services in accordance with this Agreement, (ii) Consultant is not (and any subcontractors will not be) a party to or bound by any agreement, obligation or understanding which restricts or limits in any way Consultant's right to enter into this Agreement or Consultant's right or ability to perform Consultant's obligations under this Agreement, and (iii) neither Consultant nor any subcontractor shall use the trade secrets, intellectual property rights, copyrights, or other proprietary rights of any third party in the performance of Consultant's obligations under this Agreement. 3. COMPENSATION. 3.1 FEE. Company agrees to pay to Consultant on execution of this Agreement (or, if later, when the loan proceeds are received) a consulting fee of $30,000 plus 10% of the amount of 9.9% Loan Notes sold, excluding (a) the first $500,000 of such Notes and (b) Notes sold to officers, directors, employees or existing shareholders of the Company ("Insiders"). Thus, by way of example, if a total of $1,400,000 of Loan Notes was sold, of which $250,000 was to Insiders, the consulting fee would be $95,000 [i.e., ($30,000) + 10% ($1,400,000 - $500,000 - $250,000)]. The consulting fee shall be non-refundable under any circumstances. 3.2 NO REIMBURSEMENT OF EXPENSES. Unless otherwise agreed in writing by Company, Consultant shall not be reimbursed for out-of-pocket or other expenses incurred in connection with this Agreement. 4. MISCELLANEOUS. 4.1 NOTICES. Except as otherwise provided in the Agreement, any notice or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given (i) on the date of service if served personally, (ii) the day after transmission by telex or facsimile transmission, or (iii) four days after mailing if mailed, by first class mail, certified or registered with return receipt requested, postage prepaid to the follow addresses: If to Consultant: Larry Wells Larry Wells Co., Inc. 10600 North DeAnza Blvd., Suite 215 Cupertino, CA 95014 If to Company A&R Materials, Inc. 4010 Moorpark Avenue, Suite 119 San Jose, CA 95117 Attn: President 4.2 HEADINGS. The headings appearing at the beginning of the several paragraphs contained herein have been inserted for identification and reference purposes and shall not by themselves determine the construction or interpretation of this Agreement. 4.3 ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the respective heirs, executors, administrators, successors, legal representatives and assigns of the parties. 4.4 ENFORCEMENT. If any portion of this Agreement shall be determined to be invalid or unenforceable, the remainder shall be valid and enforceable to the maximum extent possible. 4.5 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts entered into between California residents and wholly to be performed in California. 4.6 ENTIRE AGREEMENT AND MODIFICATION. This Agreement constitutes and contains the entire agreement of the parties respecting the subject matter hereof and supersedes any and all prior negotiations, correspondence, understandings and agreements between the parties respecting the subject matter hereof. This Agreement may only be modified by a written instrument signed by the parties hereto. 4.7 INDEPENDENT CONTRACTOR. Consultant enters into this Agreement as, and shall continue to be, an independent contractor. Under no circumstances shall Consultant look to Company as Consultant's employer. Neither party has any authority to bind the other party to any third party or otherwise to act as the agent or representative of such other party. Consultant agrees to pay all federal, state and other income taxes due and to properly file appropriate tax returns. IN WITNESS WHEREOF, the parties have executed this Consulting Agreement as of the date first set forth above. COMPANY: A&R MATERIALS, INC., a California corporation By: /s/ James E. Alexander ----------------------- Its: President and Chief Executive Officer CONSULTANT: LARRY WELLS CO., INC., a California corporation By: ------------------------- Larry Wells, President EX-23.02 10 CONSENT OF GRANT THORNTON 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 November 18, 1996 -----END PRIVACY-ENHANCED MESSAGE-----