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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: FEBRUARY 28, 2002
ISONICS CORPORATION
(Name of small business issuer as specified in its charter)
CALIFORNIA 001-12531 77-0338561
- ---------- --------- ----------
State of Commission File IRS Employer
Incorporation Number Identification No.
5906 McINTYRE STREET, GOLDEN, COLORADO 80403
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Address of principal executive offices
303-279-7900
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Telephone number, including
Area code
NOT APPLICABLE
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Former name or former address if changed since last report
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ITEM 5 - OTHER EVENTS
Isonics Corporation attaches to this Form 8-K disclosure that amends in
their entirety certain items previously set forth in its Annual Report on form
10-KSB for the fiscal year ended April 30, 2001. The items being amended hereby
are as follows:
Item 1 - Description of Business
Item 2 - Description of Property
Item 3 - Legal Proceedings
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Market for Common Equity and Related Stockholder Matters
Item 6(b) - Risk Factors
Item 9 - Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act
Item 10 - Executive Compensation
Item 11 - Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
Item 12 - Certain Relationships and Related Party Transactions
Item 13 - Exhibits and Reports on Form 8-K
The remaining items of the Form 10-KSB filed for the fiscal year ended
April 30, 2001 remain un-amended, except to the extent amended or supplemented
by information contained in reports subsequently filed under the Securities
Exchange Act of 1934.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 25th day of March 2002.
ISONICS CORPORATION
By: /s/ James E. Alexander
---------------------------------
James E. Alexander
President and Chief Executive Officer
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ITEM 1. BUSINESS
BECAUSE WE WANT TO PROVIDE YOU WITH MORE MEANINGFUL AND USEFUL INFORMATION,
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS"
(AS SUCH TERM IS DEFINED IN SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED). THESE STATEMENTS REFLECT OUR CURRENT EXPECTATIONS REGARDING OUR
POSSIBLE FUTURE RESULTS OF OPERATIONS, PERFORMANCE, AND ACHIEVEMENTS. THESE
FORWARD-LOOKING STATEMENTS ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
WHEREVER POSSIBLE, WE HAVE TRIED TO IDENTIFY THESE FORWARD-LOOKING
STATEMENTS BY USING WORDS SUCH AS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT,"
"PLAN," "INTEND," AND SIMILAR EXPRESSIONS. THESE STATEMENTS REFLECT OUR CURRENT
BELIEFS AND ARE BASED ON INFORMATION CURRENTLY AVAILABLE TO US. ACCORDINGLY,
THESE STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES, AND CONTINGENCIES,
WHICH COULD CAUSE OUR ACTUAL RESULTS, PERFORMANCE, OR ACHIEVEMENTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, SUCH STATEMENTS. WE HAVE
DESCRIBED THESE RISKS, UNCERTAINTIES AND CONTINGENCIES UNDER "ITEM 6,
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - FACTORS THAT MAY
AFFECT FUTURE OPERATING RESULTS." WE HAVE NO OBLIGATION TO UPDATE OR REVISE ANY
SUCH FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF THIS REPORT.
GENERAL DISCUSSION
ISONICS CORPORATION
We are an advanced materials and technology company. We are developing and
we anticipate commercializing products created from materials, including
materials whose natural isotopic ratios have been modified as well as
non-isotopic (natural) materials. An isotope is one of two or more species (or
nuclides) of the same chemical element that differ from one another only in the
number of neutrons in the atom's nucleus. The different number of neutrons can
create significantly different nuclear properties. The most well-known of these
properties is radioactivity. Radioactive isotopes (or radioisotopes) can be
found in nature. Most of our radioisotopes, however, are man-made. Stable
isotopes, as distinguished from radioisotopes, are not radioactive. Several
manufacturers, located primarily in republics that once were part of the Soviet
Union, produce these isotopes. We buy these isotopes from the manufacturers and
resell them in the form of common chemical compounds. For example, oxygen-18 is
sold as water, and carbon-13 is sold as carbon dioxide. Today our business
addresses the material needs of two primary markets:
- life sciences (involving isotopic materials) and
- semiconductor materials and products (including both isotopic and
non-isotopic materials).
While we currently are focusing on these two markets, we continue to
evaluate other applications for both stable and radioisotopes and non-isotopic
materials. We also sell isotopes for use in basic scientific research and
industrial applications. We believe our core competency is our ability to
identify, develop, source, and commercialize products and services based on
isotopically engineered materials as well as non-isotopic semi-conductor
materials.
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We were formed in March 1992, as a partnership, and were subsequently
incorporated in California in March 1993, as A&R Materials, Inc. In
September 1996, we changed our name to Isonics Corporation. Our web site is
www.isonics.com. The common stock of Isonics is traded on the Nasdaq SmallCap
Market under the symbol "ISON." The market for our stock has historically been
characterized generally by low volume, and broad price and volume volatility. We
cannot give any assurance that a stable trading market will develop for our
stock or our warrants.
The address of our principal executive offices and our telephone and
facsimile numbers at that address are:
Isonics Corporation
5906 McIntyre Street
Golden, Colorado 80403
Telephone No.: (303) 279-7900
Facsimile No.: (303) 279-7300
We currently have two subsidiaries through which we conduct some of our
operations. The following chart identifies those subsidiaries and our ownership
interest in each:
<Table>
<Caption>
NAME AND HEADQUARTERS PLACE OF FORMATION OWNERSHIP PERCENTAGE BUSINESS
- --------------------- ------------------ -------------------- --------
Chemotrade GmbH Germany 100% Chemotrade and its subsidiary are value-added
Dusseldorf, Germany re-sellers of stable and radioactive isotopes.
Chemotrade Leipzig GmbH Germany 75% (through They supply radioactive isotopes for
Leipzig, Germany Chemotrade) pharmaceutical and industrial research as well
as for industrial and medical imaging,
calibration sources and for brachytherapy
applications. Additionally, they supply various
stable isotope labeled compounds for
pharmaceutical research and drug design, as
well as oxygen-18 for use in producing a
radioisotope used in positron emission
tomography. Their market is primarily
Europe, but sales are also made to North
America and Asia.
</Table>
The foregoing does not include Isonics' minority ownership in two
companies:
- Interpro Zinc, LLC, a Colorado entity which engages in the research
and development for the recovery and recycling of zinc metal from
various sources. Isonics has a 25% interest in this entity.
- Institut of Umwelttechnologien GmbH ("IUT"), an entity based in
Berlin, Germany which performs research and development, and
manufacturing of radioisotopes. Isonics has a 6% interest in this
entity through Chemotrade.
TRADING SYMBOLS
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<Table>
Common Stock............................................... "ISON"
Class B Warrants........................................... "ISONL"
Class C Warrants........................................... "ISONZ"
</Table>
OUR ISOTOPE BUSINESS. In order to develop our products, it is usually
necessary to increase ("enrich") or decrease ("deplete") the concentration of a
particular isotope or isotopes. There are over 280 naturally occurring stable
isotopes of 83 different elements. The number of isotopes of any given element
varies widely. Stable isotopes of a given element typically do not differ
significantly in their chemical behavior. Stable isotopes of an element differ
in mass and diameter, as well as several nuclear properties, such as
cross-section, spin, and magnetic movement. Differences in these properties can
result in substantially different effects, and some of these different effects
have the potential for commercial application.
Isotopes are typically referred to by their atomic mass number, which
number is derived from the number of protons and neutrons in the atom's nucleus.
For example, oxygen-18 has eight protons and ten neutrons in its nucleus, and
silicon-28 has fourteen protons and fourteen neutrons in its nucleus. In ultra
chemically pure crystals, grown for electronics or optical applications,
isotopic impurities can be the greatest contributor to crystal disorder because
of mass and diameter differences. Eliminating these variations by using a single
enriched isotope (i.e. an isotopically pure substance) increases thermal
conductivity and optical transparency, and thus improves product performance.
Similarly, enriching or depleting isotopes based upon their nuclear
cross-sections allows materials to be engineered for applications in the nuclear
power industry, for controlled doping of semiconductors in the computer
industry, and for use as targets to produce radioisotopes for the life sciences
and other industries.
STABLE ISOTOPES. Stable isotopes may be thought of as extremely pure
materials. Not only are these isotopes chemically pure, but they frequently
consist of only one isotope depending on the level of enrichment. This extra
degree of purification, accomplished on the sub-atomic level, provides enhanced
performance properties as distinguished from normal (i.e., chemical only) purity
materials. Depleted isotopes are the elimination (or reduction in level) of an
isotope, or isotopes, and can prevent the creation of undesirable byproducts in
subsequent processing steps. In some instances the undesirable byproducts are
produced during the intended use of the non-depleted isotope material. Stable
isotopes have commercial uses in several areas, including, but not limited to:
- energy generation;
- medical research, diagnostics, and drug development;
- product tagging and stewardship;
- semiconductors; and
- optical materials.
We have successfully developed and commercialized several isotope products
(notably, even-numbered cadmium isotopes for use with helium-cadmium lasers and
depleted zinc oxide for nuclear power plants). We intend to promote the
emergence and growth of new stable isotope applications.
RADIOISOTOPES. The radioisotopes we acquire and sell are typically used in
medical diagnostic, treatment and therapy applications. In most cases we first
acquire an enriched or depleted stable isotope "target," which is then exposed
to an appropriate form of radiation to create a specific radioisotope. A key
property of a radioisotope is its half-life. The half-life is a measure of how
fast a radioisotope decays into either a stable isotope or another radioisotope.
Since most radioisotopes used in life science applications have short
half-lives, they are rarely found in nature. Therefore, radioisotopes have to be
made from a target material, usually in a nuclear reactor or a cyclotron, and
must generally be used immediately. A nuclear reactor or a cyclotron generates
the appropriate form of radiation required to convert the target material into
the desired radioisotope.
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NON-ISOTOPIC MATERIALS. In January 2002, we commenced our
silicon-on-insulator ("SOI") operations under an alliance agreement with Silicon
Quest International, Inc. ("SQI") whereby SQI agreed to exclusively manufacture
and supply SOI wafers for Isonics.
COMPANY STRATEGY
We believe our strength lies in our ability to bring the necessary
resources together to identify, evaluate, develop, engineer and successfully
commercialize applications for stable and radioactive isotopes, non-isotopic
materials, and value-added products manufactured from these materials. This
strength is reflected in management's experience in taking depleted zinc from a
cost prohibitive concept to a successful commercial reality.
We believe we have created a product development model that can serve as a
basis for our current and future expansion. To capitalize on the commercial
opportunities that have been identified for stable isotopes, we have adopted a
business strategy designed to maximize the value of our technologies, business
development, and management resources, while minimizing capital costs. This
strategy involves:
- focusing on development of high value-added products, which products
should give us a competitive advantage in large or growing markets;
- leveraging research and development expenditures through
collaborations, government programs, and corporate and academic
partnerships;
- minimizing early capital needs by obtaining stable and radioactive
isotopes through alliances and supply agreements with existing stable
and radioactive isotope sources, followed by investment in
Isonics-owned isotope production facilities when markets are better
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.
COMMENCEMENT OF SILICON-ON-INSULATOR OPERATIONS
SEI LICENSE AGREEMENT. On September 14, 2001 we licensed technology owned by
Silicon Evolution, Inc. ("SEI") which has allowed us to enter the business of
manufacturing SOI wafers and other silicon wafers. We issued 500,000 shares of
our newly-created Series B Preferred Stock to SEI which automatically converted
into 500,000 shares of our common stock following our November 13, 2001
shareholders' meeting. The license is exclusive, perpetual, and does not bear
any royalty obligation. The license includes an exclusive sublicense to us of
technology that SEI had licensed from Wacker Siltronic Corporation and Wacker
Siltronic AG (both referred to as "Wacker") - corporations that are not
affiliated with SEI. SEI's obligations to Wacker are in default, and it is
possible that Wacker may try to invalidate our right to use its technology. If
Wacker is able to invalidate this sublicense, we will attempt to work around the
related technology issues, although the tact we may take in doing so will depend
on the arguments, if any, Wacker advances.
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The technology we licensed from SEI allows the owner of the technology
to manufacture SOI wafers for integrated circuit component (IC's or "Chips")
and micro mechanical system (MEMS) manufacturers. We licensed SEI's core
intellectual property (IP) technology for precision wafer polishing,
cleaning, and bonding silicon wafers to produce thick film SOI in the 100 mm,
150 mm, 200 mm, and 300mm form factors.
SEI filed bankruptcy on November 21, 2001. Since we licensed assets
from SEI and since we are also a $93,000 secured creditor of SEI, we believe
that our position in the bankruptcy should the trustee in bankruptcy
challenge us is strong in both our capacities. However, the trustee for SEI
may attempt to challenge our status as a secured creditor or as a licensee.
If the trustee were to succeed in any such challenge, it could potentially
affect our ability to continue our SOI operations.
AGREEMENT WITH SILICON QUEST INTERNATIONAL. In an effort to commence our SOI
business operations, on December 19, 2001 we entered into an alliance
agreement with SQI whereby SQI agreed to exclusively manufacture and supply
SOI wafers for Isonics. In addition, SQI will provide sales and marketing
services as requested by Isonics. The alliance agreement expires on January
24, 2003 and dictates that if the agreement is not amended or extended, then
SQI is prohibited from manufacturing SOI wafers without our written
permission until January 24, 2004. In connection with this agreement we
issued a common stock purchase warrant (valued at $83,000) to purchase
100,000 shares of restricted common stock at $1.50 per share. The warrant
vested immediately and is exercisable in its entirety beginning December 19,
2002. The warrant expires on December 19, 2004. We shipped our first SOI
wafers in late January 2002.
SOI BUSINESS OPERATIONS. Based on our market research, it appears to us that the
use of SOI wafers is growing rapidly in three major markets:
- integrated circuits,
- MEMS manufacturing, and
- micro-optical chips for fiber-optic network devices.
Chip designers are relentlessly driven by the marketplace to seek innovative
ways to improve device performance in three key areas:
- speed,
- power consumption, and
- size.
Based on our review, it appears that the SOI technology enables
circuit designers to improve device speed approximately 30%; and as the oxide
provides a superior source of insulation, leakage current is reduced,
providing an energy savings of better than 30%, as well as enabling circuits
to be spaced on a finer pitch. SOI technology also provides a degree of
radiation hardening to integrated circuits, thus improving circuit
reliability and resistance to soft errors induced by background radiation
sources. In MEMS and micro-optical device fabrication the use of SOI
technology wafers significantly simplifies the manufacturing process.
In our effort to commence our SOI operations, on November 26, 2001 we
hired the former Founder, Vice President of Technology and Chairman of the
Board of Directors of SEI to function in the role of Vice President, Advanced
Wafer Technology.
In summary, we have obtained and paid-for a license to the technology
that has allowed us to commence our SOI business on a limited basis but there
are additional items that must be resolved before we will be able to operate
the SOI business on a full scale basis. Although we believe that the wafer
manufacturing business will complement our silicon-28 research project, we
cannot offer any assurance that we will be able to complete the steps
necessary for us to be able to commence operations on a full scale basis.
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RECENT BUSINESS DISPOSITIONS
SALE OF DEPLETED ZINC BUSINESS- DISPUTE WITH EAGLE-PICHER. On December 1, 1999,
we sold our depleted zinc business to Eagle-Picher Technologies, LLC
("Eagle-Picher") for $8.2 million, of which $6.7 million was paid on December 1,
1999. Eagle-Picher was obligated to make three additional payments of $500,000
each on November 30, 2000, 2001, and 2002, representing the balance of $1.5
million. These installments were contingent upon the performance of an
unaffiliated supplier of depleted zinc whose contract with us was assigned to
Eagle-Picher. Eagle-Picher failed to pay the first and second installments,
failed to meet other contractual requirements, and has made allegations that we
failed to provide complete disclosure with respect to future plans of a depleted
zinc purchaser. As a result, we are engaged in binding arbitration with
Eagle-Picher as described in "ITEM 3 -LEGAL PROCEEDINGS".
REORGANIZATION AND SUBSEQUENT SALE OF INTERNATIONAL PROCESS RESEARCH
CORPORATION. On April 30, 1998, we purchased all of the outstanding capital
stock of International Process Research Corporation ("IPRC") from a previously
unaffiliated corporation (Metallurgy International, Inc.). IPRC was a materials
processing and contract research and development company. Through December 1,
1999, IPRC performed key steps in our depleted zinc manufacturing process. We
acquired IPRC to assure future availability of this manufacturing technology
(which we subsequently sold to Eagle-Picher), and to provide an infrastructure
platform for performing value-added processing of other isotopes. IPRC had also
jointly developed new, lower-cost technologies to enable its customers to better
meet the various metallurgical and mineral processing needs. In connection with
the acquisition, we issued 353,982 shares of our common stock (valued at
$708,000) in exchange for all of the outstanding shares of IPRC. We accounted
for the acquisition as a purchase.
On May 1, 2000, we substantially reorganized IPRC to focus on the recovery
and recycling of zinc metal from various sources, including galvanized steel
scrap, electric arc furnace dust, and brass scrap. We chose this course of
action for two reasons. First, we believed the market potential for this, and
related processes, was significant. Second, the profound and lengthy slump in
the mineral processing and mining industries significantly eroded IPRC's
historical customer base. We continued to meet the demands of a few remaining
customers through various sub-contractor relationships. We also kept the
physical infrastructure in place at our Golden, Colorado location in case the
market conditions warranted a reentry into IPRC's historical markets. We used a
significant portion of this infrastructure in our zinc recovery and recycling
project.
In January 2001, we acquired the patent rights related to the recovery and
recycling of zinc processes from three unaffiliated parties. We issued a total
of 75,000 shares of our common stock valued at $131,000 for these rights. On
February 1, 2001, we sold IPRC and transferred the patent rights for the zinc
recovery process to Interpro Zinc, LLC, a newly-formed entity owned by Dr.
Robert H. Cuttriss, formerly president of IPRC, James E. Alexander, president,
chief executive officer, and chairman of the board of directors of Isonics
Corporation, and Boris Rubizhevsky, senior vice president and director of
Isonics Corporation. Each of the three aforementioned individuals owns 25% of
Interpro Zinc, LLC. Isonics Corporation owns the remaining 25%. Each individual
contributed $100,000 to Interpro Zinc, LLC to continue the development of the
zinc recovery technology. Interpro Zinc, LLC has informed us that they will be
actively seeking further investment to continue their development and
commercialization efforts.
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As a part of the February 1, 2001, transaction, Interpro Zinc, LLC assumed
approximately $700,000 in liabilities associated with the operations of IPRC and
agreed to indemnify us against any contingent liabilities related to the IPRC
site in Golden.
The disinterested directors of Isonics approved the transaction after
receiving advice from management not participating in the transaction, as well
as independent consultants, and believe that the transaction was fair and
reasonable to, and in the best interests of, Isonics and our shareholders.
From May 1, 2000, through January 31, 2001, IPRC did not engage in any
revenue producing activities. We have no intention of returning to the contract
research and development activities that IPRC engaged in prior to May 1, 2000.
We signed a cooperation agreement (which expired December 31, 2001) with
Interpro Zinc, LLC to continue leasing office, laboratory, and storage space at
our current location. Effective January 1, 2002, we extended the agreement on a
month-to-month basis for $4,000 per month. We anticipate relocating to another
facility, possibly in the Denver area, later this calendar year. At this time we
cannot determine what effect, if any, this will have on our operations.
PRODUCTS
Our revenues have historically derived from sales from a broad range of
sources. The mix of our revenues has changed significantly during the past three
years:
In fiscal 1999, our revenues were generated from depleted zinc sales, other
stable isotopes sales, radioisotopes sales and from contract research and
development activities.
In fiscal 2000, our revenues were again generated from depleted zinc sales,
oxygen-18 and other stable isotopes sales, radioisotopes sales, and from
contract research and development activities. We sold our depleted zinc business
in December 1999 and did not recognize any revenues from depleted zinc sales
after that time.
During fiscal 2001, our revenues were solely generated from sales of stable
and radioactive isotopes because of the prior sale of the depleted zinc
operations and the cessation by IPRC of its contract research and development
activities.
During the nine months ended January 31, 2002, our revenues were generated
from sales of stable and radioactive isotopes and, commencing January 2002, from
sales of SOI wafers.
We are attempting to develop new product lines which we expect to add to
our revenue stream, but we do not expect any significant revenues from these new
products during fiscal 2002. The following is a more specific discussion of our
current products.
ISOTOPICALLY PURE SEMICONDUCTOR MATERIALS
The majority of semiconductor devices built today use natural silicon as
the starting material. Silicon has many desirable characteristics as compared to
other semiconductor materials, and the semiconductor industry has invested
billions of dollars to improve and optimize their manufacturing technologies for
silicon-based devices. Devices fabricated on single crystal silicon have
performance characteristics that are governed by the electrical and physical
characteristics of silicon including:
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- carrier mobilities,
- effective mass of the carriers,
- energy band-gap,
- electrical conductivity, and
- thermal conductivity.
Carrier mobilities, for example, govern signal transit times and thus place
a limit on device speed. Thermal conductivity governs power dissipation, which,
in turn, places an upper limit on the packing densities achievable for devices
on a chip, or on the amount of power that can safely be generated in the circuit
without significantly degrading circuit performance.
The semiconductor industry trend of adding more transistors to a single
chip to increase performance, and shrinking the size of transistors to both
increase performance and decrease costs, has resulted in increased power
requirements and significantly higher operating temperatures. Nowhere is this
trend more evident than in microprocessors. Historically, the 80286, 80386, and
80486 generations of microprocessors typically did not need external heat sinks
to remove heat and function properly. High operating temperatures and thermal
management were not issues outside of mainframe or workstation computers.
Beginning with the Pentium-Registered Trademark-, Sparc-Registered
Trademark-, and Alpha-Registered Trademark- microprocessors, heat sinks and fans
became necessary to control the higher operating temperatures. According to the
Semiconductor Industry Association, when the microprocessor's power requirements
exceed approximately 110 watts, heat sinks and fans will no longer be adequate
and active cooling (refrigeration) will be required. Most of the major computer
companies have already demonstrated cryogenically cooled computers that operate
up to one-third faster than their conventionally cooled counterparts. These
cryogenic cooling devices can cost upwards of $400 per microprocessor.
A significant body of research, generated over the last twenty years,
supports the thesis that isotopically pure semiconductor materials have superior
thermal conductivity properties compared to natural, multi-isotopic materials.
We believe this solution (i.e., using isotopically pure semiconductor materials
to manage operating temperatures) is compatible with virtually every other heat
management solution currently implemented or envisioned to date. Critically, it
does not require changing a single device design or manufacturing process
because isotopically pure semiconductor materials are essentially chemically and
physically identical to naturally-occurring semiconductor materials. For
example, silicon has three naturally occurring stable isotopes:
- silicon-28 (92% natural abundance),
- silicon-29 (5% natural abundance), and
- silicon-30 (3% natural abundance).
By purifying silicon to 99.9% silicon-28, the thermal conductivity is
improved 60% at room temperature and over 600% at 423 degrees Fahrenheit.
In 1997, we began a program to introduce 99.9% isotopically pure silicon-28
as a superior substitute to natural silicon for the manufacture of semiconductor
devices. SEE "RESEARCH AND DEVELOPMENT." Our first efforts toward developing
isotopically pure semiconductors involved securing the intellectual property
rights to commercialize silicon-28 and similar materials. These efforts
culminated in our acquiring exclusive rights to two Yale University patents. SEE
"PATENTS AND PROPRIETARY RIGHTS."
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We then began acquiring sufficient quantities of pure silicon-28 to make
epitaxial wafers. These wafers have been sold or given to numerous manufacturers
and academic institutions to perform additional tests to validate previous
findings and to confirm the substitutability of pure silicon-28 for natural
silicon in their manufacturing processes. These tests support our belief that
pure silicon-28 is not only a viable substitute material for natural abundance
silicon, but that the anticipated thermal conductivity property improvements are
significant.
The next step in our development program is to make bulk wafers of pure
silicon-28. The manufacture of bulk wafers requires substantially more material
than we could economically acquire from our existing suppliers, however. Our
efforts to secure an unlimited, U.S.-based, economical supply of silicon-28
culminated with the December 1999 signing of an agreement with Eagle-Picher to
provide silicon-28 to us on an exclusive basis. Under our agreement with
Eagle-Picher, we expected to receive the initial 200-kilogram delivery by
December 31, 2000. Eagle-Picher failed to make timely delivery of this amount.
We had identified several benefits to our contractual arrangement with
Eagle-Picher:
- Eagle-Picher had promised to deliver 200 kilograms of isotopically-pure
silicon-28 by December 31, 2000;
- Eagle-Picher accepted full payment for the 200 kilograms in our equity,
thus allowing us to conserve our cash for our other business activities;
and
- Eagle-Picher intended to produce the silicon-28 at a reasonable contract
price, at facilities located in the United States.
Unfortunately, Eagle-Picher did not meet its commitments and failed to
deliver the silicon-28 when promised. As a result, we are in arbitration with
Eagle-Picher to resolve the disputes which resulted from Eagle-Picher's
failures. SEE "SALE OF DEPLETED ZINC BUSINESS - DISPUTE WITH EAGLE PICHER,"
"LEGAL PROCEEDINGS," and "MANAGEMENT'S DISCUSSION AND ANALYSIS." We do not know
whether Eagle-Picher will ever develop its technology to the point where it can
supply the necessary quantities of silicon-28. Because we are in arbitration
with Eagle-Picher, even if they can produce silicon-28 we do not know whether
they will permit us to purchase the silicon-28 from them on favorable terms.
We have identified other sources available for supplying silicon-28, but
those sources are not domestic. We have not placed large orders with these
suppliers because of the cost involved. At an expected cost of approximately
$25.00 per gram, 200 kilograms would cost approximately $5.0 million. In
addition, certain other possible sources for bulk quantities of silicon-28 are
in the process of developing their technology and are not in commercial
production. In June 2001 we placed an order for sample quantities of silicon-28
in the form of trichlorosilane with a Russian supplier. An initial sample was
received in August 2001 for the evaluation of chemical purity, and a larger
sample (anticipated to be delivered in the second quarter of calendar 2002),
will be evaluated to determine whether trichlorosilane from this supplier will
provide acceptable silicon-28 epitaxial wafers. If we can use trichlorosilane
from this supplier for our purposes and if we can obtain it at a reasonable
price and on reasonable terms, and subject to financing, we expect to place an
order for sufficient trichlorosilane to produce 200 kilograms of silicon-28.
We anticipate very little revenue from silicon-28 based products in fiscal
2002, as we are still developing this business. Nonetheless, if we are able to
complete our research and development efforts successfully and market silicon-28
based products, we project to begin generating revenues in subsequent fiscal
years.
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We are also examining other semiconductor materials including gallium and
zinc. As with silicon, gallium and zinc have multiple, naturally occurring
stable isotopes. Our development program for gallium, which we began in
October 2000, is similar to the one outlined above for silicon-28. At this time
we have begun funding research and development of separation technology and
procuring small amounts of isotopically pure gallium-69 and gallium-71 as
trimethylgallium for use in chemical vapor deposition reactors. In October 2001,
we also delivered a small amount of zinc-64 oxide to Cermet, Inc., for the
manufacture of single crystal zinc oxide wafers and intend to procure
isotopically pure zinc-64 as diethylzinc for use in chemical vapor deposition
reactors.
WE SUPPLY ISOTOPES FOR LIFE SCIENCES APPLICATIONS
For the past several years, we have supplied stable isotopes in elemental
and simple compound forms for use in life science applications. In 1998, we
expanded our product offerings to include radioisotopes. We will continue
selling our current stable and radioactive isotope products, develop new
products along similar lines, and expand our product offerings by vertically
integrating the products offered. From time to time we evaluate building
additional isotope separation facilities in the United States or Western Europe.
We currently do not have the capital to do so, but it is an important aspect of
our stated strategic plans because we expect that it will reduce our reliance on
foreign manufacturers. In addition, we intend to expand our value-added
manufacturing capabilities.
Our existing and emerging life sciences products include isotopes used for
a large number of purposes and can be categorized as follows:
- stable isotope labeled compounds;
- isotopes used in diagnostic breath tests;
- isotopes used in biomedical research;
- isotopes used in medical imaging and therapy;
- isotopes used in positron emission tomography;
- isotopes used in brachytherapy; and
- isotopes used to calibrate medical diagnostic equipment.
Although there is currently little FDA oversight affecting our supply of
the raw material isotopes to our customers for their use in life science
applications, FDA regulation may increase in the next few years. It is not
immediately apparent what implications any additional regulation may have for
us. The following paragraphs provide a brief summary of our existing and
emerging life sciences products:
STABLE ISOTOPE LABELED COMPOUNDS ("SILCS"). SILCs are created by incorporating
known quantities of stable isotopes including carbon, nitrogen, hydrogen
(deuterium), oxygen, and other elements, into thousands of different chemical
compounds. SILCs allow researchers to investigate living systems, determine the
chemical structure of important biological compounds, design new drugs, and
measure extremely low levels of environmental toxins. We believe that greater
availability and lower cost of stable isotopes, and advances in instrumentation
to detect stable isotopes will continue to increase the demand for SILCs.
Our products are typically simple compound SILCs that are used by our
customers to synthesize more complex and higher-value SILCs. We market primarily
deuterium, carbon-13 and nitrogen-15 to our customers for this purpose. Examples
of existing and emerging applications for these products include:
METABOLIC STUDIES. Increasingly, studies of new drugs are performed with
isotope-labeled drugs to facilitate research on metabolism, distribution,
mode of action, and elimination. The FDA one day may require the isotope
labeling of all new drugs for investigational use during some or all phases
of pre-clinical and clinical evaluations of these drugs, although it does
not so mandate today.
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RATIONAL DRUG DESIGN. Drugs historically were designed using a screening
process in which prior experience was employed to determine what chemicals
might work to treat a condition, and then tests on subjects were performed.
Today specialized instrumentation is routinely available to determine the
chemical structure of large molecules, including the human proteins and
enzymes that a drug is designed to affect. This approach is known as
rational drug design. We believe that this new instrumentation, combined
with sophisticated SILCs, will prove beneficial in determining the chemical
structure of human proteins and enzymes. We believe rational drug design
will require an increasing supply of stable isotopes.
DIAGNOSTIC BREATH TESTS (DBTS). DBTs are a new class of non-invasive diagnostic
testing that are gaining worldwide acceptance. DBTs use stable isotope labeled
compounds to detect a wide range of human abnormalities, particularly digestive
disorders such as ulcers. The FDA has approved one test and similar approvals
exist in Europe. Demand for DBTs has increased as health care insurance
providers have determined to include reimbursement in many health insurance
plans. That demand, in turn, is expected to accelerate as regulatory approval is
awarded in other countries. Many other tests based on the same principles as
DBTs are in various stages of development worldwide. We supply stable isotope
raw material to companies developing DBT chemicals. While these sales are not
currently a large source of revenues, we continue our sales and marketing
efforts in order to monitor the development and direction of this potentially
very large market.
We do not manufacture the DBTs. DBT manufacture is subject to extensive
government regulation. The products and instruments in which our isotopes are
used may be subject to the scrutiny of FDA review and approval, as well as
ongoing FDA inspection of most aspects of the production, marketing,
distribution, and usage. We believe that the production and marketing of DBTs
are also subject to similar regulatory controls in foreign countries where we
might seek to market our isotopes for use in DBTs. Consequently, new products
cannot be introduced commercially until after approval which may or may not be
granted after several years.
BIOMEDICAL RESEARCH. Traditionally, numerous aspects of the many phases of drug
development have been carried out using radioisotope-labeled versions of
promising compounds. We supply precursor compounds labeled with radioisotopes,
such as carbon-14 and phosphorous-33, to manufacturers who incorporate them into
more complex radioisotope labeled compounds. These complete radioisotopes are in
turn used in basic research and pharmaceutical development. The carbon-14
precursors are produced under contract by IUT, a company in which we hold a
minority interest.
While rational drug design and stable isotope labeled compounds represent
competition for this more traditional approach to research and drug development,
we believe a combination of increasing drug development activity and a large
body of data and experience will ensure a strong market for these products.
Importantly, we also supply some of the basic stable isotope products used to
make the compounds of these competing technologies.
MEDICAL IMAGING AND THERAPY. Radioisotopes have been used for years in the
diagnosis and treatment of many medical conditions. The trend in these two areas
has been towards increasingly more specific chemicals that, after labeling with
the radioisotope and injection into the patient, quickly concentrate at the
disease site(s). In theory, the appropriate choice of chemical and radioisotope
labels facilitate disease detection and stage determination which improves
therapy selection, administration and monitoring. The medical community is
developing and testing several classes of chemical compounds ranging from
monoclonal antibodies to peptides for use in the detection, and, eventually, the
treatment of many diseases. The FDA has approved some of these for use.
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We currently supply stable isotopes of thallium, zinc, cadmium, xenon,
strontium, and many others that are routinely used in a variety of medical
imaging and therapy applications. These are used in their enriched stable form,
such as Xenon-129, or converted to a specific radioactive isotope in a cyclotron
or nuclear reactor. We believe that the increased supply of new isotopes
combined with the ongoing development of highly specific biochemical therapies
represents a major growth opportunity in this market segment.
POSITRON EMISSION TOMOGRAPHY ("PET"). Although this very powerful nuclear
medicine imaging technology has been available for over 25 years, its complexity
and cost until recently had relegated PET to a research role. Technology and
infrastructure improvements have reduced the cost and complexity of performing
PET studies. PET's unique ability to diagnose multiple metabolic abnormalities,
particularly cancer, has resulted in recent approvals by the FDA and favorable
reimbursement levels by Medicare, Medicaid, and third party insurers. Similar
approvals are now common in Europe and parts of Asia though reimbursement levels
vary. We believe PET studies are growing at rates of approximately 20 to 50%
annually worldwide.
Oxygen-18 is a rare stable isotope of oxygen. Oxygen-18 is used to produce
fluorine-18, a radioisotope which is the source of the positrons tracked by the
PET imaging equipment. Demand for oxygen-18 is currently greater than the
supply. Although we do not produce oxygen-18 ourselves, we purchase oxygen-18
from two sources and resell oxygen-18 to end users worldwide. In fiscal 1999, we
introduced a novel program to recycle "used" oxygen-18; we believe that this
program which allows our customers to benefit from the disposal of depleted
oxygen-18 provides an economic advantage to our customers and provides a
competitive advantage for us over our competitors.
BRACHYTHERAPY. Cancer therapy continues to evolve to target specific types of
cancer more effectively. Today, external beam radiotherapy and chemotherapy are
the predominant technologies used in cancer treatment. However, another
technology, brachytherapy, is emerging in the treatment of specific cancers such
as prostate cancer.
In brachytherapy, small sealed radioactive seeds are inserted directly into
the tumor using a variety of minimally invasive surgical methods. The
radioisotope, which is placed inside the seed, is selected and manufactured to
ensure that only the cancerous tissue immediately adjacent to the implanted seed
is irradiated. This minimizes the irradiation of nearby healthy tissue, a common
adverse side effect that occurs with external beam radiotherapy. There are three
primary criteria that govern the selection of the radioisotope to be implanted
in the patient:
- half-life,
- type of radiation emitted, and
- strength of the radiation emitted.
The half-life and form of radiation emitted is dictated by the radioisotope
selected. Strength of the radiation is determined during the manufacturing
process.
Several companies (Nycomed-Amersham, Theragenics, North American
Scientific, and others) already offer, or have plans to offer, brachytherapy
products for the treatment of prostate cancer. Studies continue in the
applicability of this technique for other tumor types, including some breast and
eye cancers. We currently supply several companies with radioisotopes (or stable
isotope targets to be made into radioisotopes) for this application. We believe
this market represents one of the largest growth opportunities for
radioisotopes. It also represents a significant opportunity to provide
value-added products/services in the form of manufactured subcomponents such as
the seeds.
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CALIBRATION STANDARDS. There are many medical devices that measure levels of
radiation in patients. These devices need to be calibrated using standards of
known radiation strength and type in order to ensure their accuracy. These
standards derive from radioisotopes such as cobalt-57 and gadolinium-153. We
supply many of the stable isotope target materials, as well as radioisotopes, to
many of the manufactures of the equipment needing calibration.
Medical equipment calibration standards is one of the largest markets for
radioactive source standards. These medical devices are found in the nuclear
medicine departments at thousands of hospitals around the world. The continued
growth in the numbers and complexity of nuclear medicine imaging equipment,
especially PET, ensure growth in the demand for these radioisotopes.
DISTRIBUTION METHOD
We operate sales offices in Columbia, Maryland; Dusseldorf, Germany; and
Leipzig, Germany. We also identify customers through industry sales journals,
website identification and trade shows. In addition, many customers come to us
by referral from existing customers. There are a limited number of suppliers in
the isotope industry and, therefore, most customers are aware of the products
and services we offer. Customers directly place the orders and we either ship
directly to the customer through our sales offices or the product is shipped
directly from the supplier. We use commercial courier services such as Federal
Express and DHL to ship all products. Our manufacturer of SOI wafers, SQI, is
responsible for packaging and shipping wafers to our customers.
SIGNIFICANT CUSTOMERS
At January 31, 2002, three customers accounted for approximately 55% of
total net accounts receivable. Three customers (Perkin Elmer Life Sciences,
Eastern Isotopes, and Reviss Ltd.) accounted for approximately 24%, 19% and 5%,
respectively, of net revenues for the nine months ended January 31, 2002. Two
customers (Perkin Elmer Life Sciences and Reviss Ltd.) accounted for
approximately 38% and 11%, respectively, of the German segment's net revenues
for the nine months ended January 31, 2002. These same two customers accounted
for approximately 59% of the German segment's accounts receivable at January 31,
2002.
At April 30, 2001, five customers, accounted for approximately 50% of total
net accounts receivable. Five customers (Perkin Elmer Life Sciences, Eastern
Isotopes, Reviss Ltd., Commisariat and IPL) accounted for approximately 16%, 9%,
7%, 5% and 4%, respectively of net revenues for the year ended April 30, 2001.
Two customers (Perkin Elmer Life Sciences and Reviss Ltd) accounted for
approximately 24% and 11%, respectively of the German segment's revenue for the
year ended April 30, 2001. One of these customers accounted for approximately
23% of our German segment's accounts receivable at April 30, 2001.
Significant reductions in sales to any of our large customers have had, and
may in the future have, a material adverse effect on us by reducing our revenues
and our gross margins. Present or future customers could terminate their
purchasing patterns with us or significantly change, reduce, or delay the amount
of isotope or other products ordered from us.
RESEARCH AND DEVELOPMENT
Consistent with our product development strategy, we are seeking to
identify and evaluate new stable and radioactive isotope products and potential
markets for economic and technical feasibility. We will, in addition, continue
funding research and development to improve technologies for isotope separation
and materials processing technologies. During the nine months ended January 31,
2002, fiscal 2001 and fiscal 2000, research and development expenses were
approximately $348,000, $1,134,000 and $1,224,000, respectively.
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In fiscal 2002, we are focusing our research and development efforts on the
production of high chemical-purity silicon-28 silane gas, silicon-28
trichlorosilane and silicon-28 epitaxial wafers. Silicon-28 trichlorosilane
(which was produced in the United States) was provided to a major wafer
manufacturer, who used this material to produce test wafers for two major
semiconductor manufacturers. In addition, we are focused on refining our
processes associated with the production of SOI Wafers. This work is currently
being performed at the SQI facilities.
In fiscal 2001, we focused our research and development efforts on the
production of high chemical-purity silicon-28 silane gas, silicon-28
trichlorosilane and silicon-28 epitaxial wafers. Through IPRC (which we owned
100% through January 31, 2001), we also performed research and development for
the recovery and recycling of zinc from various sources such as scrap metals,
including galvanized steel and brass, and electric arc furnace dust.
In fiscal 2000, we focused our efforts on the production of high
chemical-purity silicon-28 silane gas and silicon-28 epitaxial wafers as
described above; and the zinc recovery and recycling, also as described above.
We transferred the zinc recovery program in conjunction with the sale of
our former subsidiary to Interpro Zinc, LLC and we are no longer directly
engaged in research and development efforts for zinc recovery and recycling. We
continue to be engaged in these efforts indirectly through our 25% ownership of
Interpro Zinc, LLC.
SILICON-28.
To expand our capacity and to ensure product quality, we were proceeding to
build our own silane gas facility in Golden, Colorado. We have postponed
building this plant due to Eagle-Picher's inability to supply silicon-28. We
will continue to use outside sources to perform processing as required for our
needs until circumstances and financing warrant proceeding with our contemplated
facility.
In August 2001, we entered into a marketing agreement with a major wafer
manufacturer. We have since supplied silicon-28 trichlorosilane (which was
produced in the United States) to this wafer producer for the manufacture of
silicon-28 epitaxial wafers. These wafers are being supplied to interested
customers worldwide for evaluation in a number of semiconductor devices. This
agreement is critical in assuring that silicon-28 epitaxial wafers will be
available to meet the increasingly stringent quality demands of the
semiconductor industry. Any revenues generated under this agreement will be
split 50-50 with the wafer manufacturer.
In May 2001, we entered into a one-year silicon-28 joint development
program with Advanced Micro Devices (AMD), a major microprocessor manufacturer.
We will supply AMD with silicon-28 wafers. AMD will use our products to make and
rigorously test state-of-the-art microprocessors to accurately quantify the
benefits of high thermal conductivity silicon-28 in this application. We expect
to use the results of the testing program to find the proper balance between
performance and cost. In addition to AMD, another major microprocessor
manufacturer is currently evaluating silicon-28 epitaxial wafers that were
delivered in September 2000.
In fiscal 2001, we delivered a second batch of epitaxial wafers to Cypress
Semiconductor, and we also sold a small quantity of silicon-28 epitaxial wafers
to two Japanese semiconductor manufacturers for their evaluation.
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In fiscal 2001, we entered into two new research programs at universities;
- The University of Texas (Austin) will evaluate the use of silicon-28
epitaxial wafers as substrates for SiGe:C based transistors, and
- The University of California (Santa Cruz) will use silicon-28 epitaxial
wafers to build novel thermoelectric coolers
In fiscal 2000, we funded two new university research programs and
participated in two others.
- The first funded program is at Southern Methodist University, Dallas,
Texas. The Southern Methodist University Program will measure the thermal
conductivity of silicon-28 thin films with various electrical dopants, and
model the effect of epitaxial layer thickness on the temperature of silicon
and gallium arsenide transistors. This program is still underway.
- The second funded program was at North Carolina State University, Raleigh,
North Carolina. The North Carolina State University Program modeled and
built power semiconductor devices and determined the effect of silicon-28
epitaxial layers on the device's temperature distribution. This program has
been completed, and the unpublished results indicate that significantly
smaller leakage currents were found in diodes built on silicon-28 wafers,
as compared to natural silicon wafers, indicating that lower temperatures
were achieved.
- Innovations for High Performance Microelectronics (IHP), a German research
organization, is evaluating silicon-28 epitaxial wafers in their SiGe:C
technology being developed for wireless telecommunications applications.
This program is still underway.
- DIMES, a research organization associated with Delft University in the
Netherlands is evaluating silicon-28 SOI wafers to determine if improved
cooling can be accomplished. This program is still underway.
Additionally, in fiscal 2000, we entered into a Cooperative Research &
Development Agreement with Lawrence Berkeley Laboratory in Berkeley, California,
to study the properties of various silicon isotopes. This agreement is part of a
U.S. Department of Energy program to apply Russian nuclear weapons technology to
commercial applications. Delays within the Department of Energy have pushed the
start of this program to our fiscal year 2002.
We also supplied silicon-28 silane gas to ATMI, Inc. in Danbury,
Connecticut, and will participate in their Office of Naval Research funded
program to investigate isotopically pure silicon carbide. Initial data from this
program have shown an improvement in the thermal conductivity of isotopically
pure silicon carbide epitaxial layers. This is the first data that we are aware
of that has shown improvement in an isotopically modified compound
semiconductor. This program is still underway.
During fiscal 1999, we signed a joint research and development agreement
with Silex Systems, Ltd. The agreement calls for Silex to partially fund some of
our development activities and for Silex to assess the feasibility of building a
silicon isotope separation plant using Silex's patented laser isotope separation
process. This agreement reflects our effort to ensure a large supply of silicon
isotopes at a reasonable cost to support the large-scale manufacture of
isotopically pure silicon wafers. According to Silex, in 2001 they started a
stable isotope separation program that includes silicon.
The adoption of silicon-28 by semiconductor manufacturers will depend on
the outcome of the evaluations underway. Even though silicon-28 is a one-for-one
substitution for normal silicon, semiconductor companies are very conservative
about changing anything in their manufacturing process, for fear that their
yields will suffer. Typically the testing sequence at these companies is:
1) A detailed analysis of the silicon-28 wafers to make sure that they are
equivalent to standard wafers and that their is no risk of contamination to
the semiconductor fabrication facility or other wafers in process,
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2) Manufacture and testing of test transistors to ensure that the
electrical parameters are unchanged,
3) Gate oxide integrity testing as a function of oxide thickness to
determine any changes from standard wafers,
4) Manufacture and testing of a device using a well documented (generally
older) technology to determine any yield or performance improvements,
5) Manufacture and testing of a device using state-of-the-art technology to
determine any yield or performance improvements. Depending on the specific
company, this could be technology already in production or technology
scheduled for future production such as 0.18 or 0.13 micron design rules,
6) Repeat step 5 with a sufficient quantity of wafers from a qualified
wafer supplier to generate a statistically valid conclusion, and finally
7) Production planning for the introduction of a new product based on
silicon-28.
This a very time consuming process. While several companies are well into
in the evaluation process, we do not expect the introduction of products based
on silicon-28 wafers in our fiscal year 2002, and therefore do not expect
significant revenues from silicon-28 product sales in fiscal 2002. If our
efforts are successful, we hope to introduce silicon-28 products during our
fiscal year ending April 30, 2003, or shortly thereafter.
OTHER SILICON ISOTOPES.
In October 2001, we announced an agreement with Cermet, Inc., to research
the properties of isotopically pure zinc oxide. Zinc oxide single crystal wafers
are possible substrates for gallium nitride thin film devices and could benefit
from higher thermal conductivity. We will supply isotopically pure zinc oxide
which Cermet will use to produce single crystal wafers using their proprietary
process. This research and development program is expected to take from twelve
to eighteen months to complete.
We have an oral agreement with Voltaix, Inc. of North Branch, New Jersey to
act as a distributor of our products for the ion implantation industry. The
first product sold in accordance with the Voltaix agreement is silicon
tetrafluoride enriched in the silicon-29 isotope. This isotopically enriched
material allows higher beam currents and higher productivity than the natural
silicon tetrafluoride currently used in the gallium arsenide industry today.
ZINC RECOVERY AND RECYCLING.
Until February 1, 2001, we owned 100% of IPRC. It had been engaged in
contract research and development activities. During the course of its contract
research and development activities, IPRC was introduced to a patented
technology using chlorine gas to recover and recycle zinc from galvanized steel
scrap. Because we sold IPRC effective February 1, 2001, we do not expect to
incur additional research or development expenses relating to zinc recovery and
recycling, and we are no longer involved in this or any related activities. We
received a 25% interest in the purchaser and, therefore, still retain an
interest should the purchaser's research and development of zinc recovery prove
to be successful.
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PATENTS AND PROPRIETARY RIGHTS
We rely primarily on a combination of patents and patent applications,
trade secrets, confidentiality procedures and contractual provisions to protect
our technology. Despite our efforts to protect our rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our technology and
products is difficult. In addition, the laws of many countries do not protect
our rights in information, materials and intellectual property that we regard as
proprietary to as great an extent as do the laws of the United States. There can
be no assurance that our means of protecting our rights in proprietary
information, materials and technology will be adequate or that our competitors
will not independently develop similar information, technology, or intellectual
property. SEE "RISK FACTORS."
We currently have no patents in our own name, although we have filed
several patent applications. We have rights to several isotopically engineered
innovations regarding electronic and optical materials, which we believe may be
patentable. Ongoing work in the area of isotope separation by chemical means
(which is currently being performed by outside entities) may also lead to
patentable inventions.
In April 1999, we announced that we had entered into an exclusive licensing
agreement with Yale University that entitles us to exclusive intellectual
property rights to patents covering semiconductor devices derived from
isotopically engineered materials. The license requires payment by us of a
royalty based on a percentage of our, or our sublicensees', net sales of
products derived from technology covered by the Yale patents (#5,144,409, dated
September 1, 1992, and #5,442,191, dated August 15, 1995). Each of these patents
expire seventeen years after issuance.
COMPETITION
Many of our potential competitors are larger and have significantly greater
financial, technical, marketing and other resources than us. Some of our
competitors may form partnerships or alliances with large pharmaceutical or
electronics companies, with the resulting entity possessing greater market
strength than we have. We face competition relative to many of our products,
including:
STABLE ISOTOPE LABELED COMPOUNDS AND DIAGNOSTIC BREATH TEST PRODUCTS.
Several companies compete with us for a piece of the stable isotope labeled
compounds market. We will have additional competitors if we offer diagnostic
breath test products and additional stable isotope label compounds in the
future. Two of these companies, Cambridge Isotope Laboratories Inc. and Isotec,
Inc., have their own isotope separation facilities, while all of our competitors
produce some combination of stable isotope labeled compounds and diagnostic
breath test substrates. We are aware of at least one company in the United
States who has received FDA approval for a carbon-13 Urea Breath Test, a
specific type of diagnostic breath test. Several companies in Europe have also
received regulatory approval for diagnostic breath tests. Our principal current
competitors and potential competitors also include:
- Euriso-top,
- Aldrich Chemicals,
- Icon Services,
- Omicron,
- C/D/N Isotopes and
- Martek Biosciences.
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SEMICONDUCTOR MATERIALS.
SILICON-28. Although we have not yet identified significant competitors,
numerous companies in the United States and throughout the world are currently
manufacturing semiconductor materials and are working to improve the thermal
conductivity and other beneficial characteristics of semiconductor materials.
Many of these companies are larger than Isonics and have significantly greater
financial resources at their disposal. Given the size and importance of these
potential markets, we anticipate that substantial competition will emerge as the
markets develop.
SOI WAFERS. There are several competitors in the thick-film SOI wafer
business, many of whom are larger than Isonics and have significant financial
resources as compared to Isonics. Analog Devices, Okmetic and SEH-Japan are our
most significant competitors.
SUMMARY.
Many of the areas in which we either compete or intend to compete are
rapidly evolving. Competition may develop a patentable product or process that
may prevent us from competing in our intended markets. While we expect to
compete primarily on the basis of product performance, proprietary position and
price, in many cases the first company to introduce a product to the market will
obtain at least a temporary competitive advantage over subsequent market
entrants.
MANUFACTURING AND SUPPLY
We obtain stable isotopes from a variety of isotope sources, primarily
located in Russia or other former Soviet republics. We may invest in our own
isotope production facilities in the future upon our determining the optimum
production technology for a given isotope or family of isotopes. Other
facilities elsewhere in the world, including the Oak Ridge National Laboratory
in Oak Ridge, Tennessee, and private and pseudo-governmental facilities in Great
Britain, Germany, the Netherlands and the Republic of South Africa, have the
potential to produce stable isotopes.
To date, we have only been able to obtain limited quantities of silicon-28
for use in manufacturing epitaxial wafers. We are testing supplies of silicon-28
to determine their suitability for the manufacture of a bulk wafer needed to
continue our silicon-28 research and development program discussed above. We
believe that we will be able to obtain adequate supplies of silicon-28, but we
are unable to commit to the suppliers because of our lack of working capital. We
do not anticipate that Eagle-Picher will be a source of supply of silicon-28 to
us during the continuation of the arbitration process even if they resolve their
technical problems and are able to produce the product.
We have historically depended on a limited number of suppliers and
processors for most of our manufacturing processes. Currently, we are depending
on SQI for manufacturing our SOI wafers. SQI is operating pursuant to an
alliance agreement whereby they have agreed to manufacture and supply SOI wafers
to Isonics on an exclusive basis.
Except for our agreement with Eagle-Picher (which Eagle-Picher has
defaulted on) and SQI, we do not have any written agreements with our suppliers
and processors. Although we attempt to reduce our dependence on our suppliers,
disruption or termination of any of the sources could occur, and such
disruptions or terminations could have at least a temporary, materially adverse,
affect on our business, financial condition, and results of operations.
Moreover, a prolonged inability to obtain alternative sources for processing
could have a materially adverse affect on our relations with our customers.
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GOVERNMENT REGULATION
Regulation by government authorities in the United States and other
countries is a significant consideration in the research, development,
production, distribution and marketing of our products. In order to clinically
test, manufacture, distribute, market and sell products, we must follow safety
and other standards established by applicable regulatory authorities. We may be
subject to various laws, regulations and requirements relating to such matters
as the import and export of our products, ensuring safe working conditions,
laboratory and manufacturing practices, and the use, storage and disposal of
hazardous or potentially hazardous substances used in connection with our
research, development and manufacturing activities. The regulations potentially
material to our business are summarized below.
We are not currently subject to any FDA regulation because we do not
currently manufacture any Diagnostic Breath Tests, drug products or other
medical devices. Our customers may in many cases be subject to FDA regulation.
However, if we test, manufacture, market, distribute, export or sell diagnostic
products or medical devices in the future, we will also likely be subject to
extensive regulation nationally and internationally.
OTHER GOVERNMENT REGULATION
The import, export, handling, transportation, sale, storage and other
activities undertaken in connection with our non-medical products are subject
to, or potentially subject to, significant federal, state, local and foreign
government controls pertaining to hazardous chemicals, import export controls
and other matters. These regulations are complex, pervasive, and constantly
evolving. Our ability to effect and maintain compliance with these controls is
important to our commercial success. We are not currently engaged in any
activities that may require us to incur significant expenses related to
environmental compliance.
We rely predominantly on Russian and U.S. freight carriers to handle and
deliver all our shipments, and utilize domestic overnight courier services for
shipments to our customers. These carriers must comply with Department of
Transportation regulations in the shipping and packaging of the stable isotope
chemicals. We must also comply with Department of Transportation regulations
when packaging material kept in inventory for domestic shipment. As required
under federal and state law, we have prepared Material Safety Data Sheets, which
are enclosed with each product shipment. We must periodically update these Data
Sheets based on new literature reports.
The shipments received at our Columbia, Maryland facility are subject to
Federal and State regulations pertaining to hazardous chemicals and hazardous
waste disposal. These shipments are stored in an area of the facility designated
for such materials. We believe we are in compliance, in all material respects,
with applicable federal and state environmental regulatory requirements.
The shipments from Russian manufacturing sources now enter the U.S. duty
free (without tariff). If the shipments become subject to tariff, we may not be
able to sell the imported products. Further, the products may cease to be
commercially viable because of these increased tariff costs.
The Nuclear Regulatory Commission has authority to regulate importation and
exports of deuterium containing chemicals whose ratio of deuterium atoms to
hydrogen atoms exceed 1:5,000. At present, the deuterium containing compounds
that we import do not require any special licenses or importation authorization.
The Nuclear Regulatory Commission regulates exports of deuterium containing
chemicals under general license. We will not be able to ship these chemicals to
countries that require a special license for such shipments. None of these
countries represents significant current or expected future markets for our
products.
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Our facilities and employees must also comply with environmental and other
regulations concerning our operations. Failure to ensure compliance with such
federal, state, or local laws and regulations could have a material adverse
effect on us.
In addition, the manufacture, distribution and export of some of our
current or potential products and technology may be subject to governmental
controls pertaining to materials and technology that have potential military,
nuclear power or nuclear weapons purposes. These controls include export license
requirements or other restrictions. We may be unable to obtain or maintain such
licenses. Further, the failure to obtain or maintain such licenses, or comply
with other restrictions that might be placed on such manufacturing and exports,
may have a material adverse effect on us and our operations.
PRODUCT LIABILITY AND INSURANCE
Our business exposes us to substantial product, environmental, occupational
and other liability risks. These risks are inherent in product research and
development, manufacturing, marketing, distribution, and in the use of our
products and operations. We have, and will attempt to renew product liability
insurance (which currently expires April 30, 2002) in order to protect ourselves
from such potential exposures, however there can be no guarantee that upon
expiration of our current coverage that adequate insurance coverage will be
available, and at an acceptable cost. Furthermore, a product liability or other
claim could materially and adversely affect our business or financial condition.
The terms of our customer agreements provide that liability is limited to our
standard warranty to replace non-conforming product, and liability for
consequential damages caused by the improper use of our products is limited by
contractual terms. Nevertheless, one or more third parties could file suit
against us based on product liability, breach of warranty or other claims. The
foregoing contract clauses might effectively limit our liability in any such
actions.
EMPLOYEES
As of February 28, 2002, we had 16 full and part-time employees. Six of our
employees have Ph.D.s in scientific or engineering disciplines. Approximately
five employees are involved in research and product development, two in
sourcing, and nine in business development and administration. An employee's
responsibilities may also encompass areas other than his or her primary area of
responsibility. We consider our relations with our employees to be good. None of
our employees is covered by a collective bargaining agreement.
ITEM 2. PROPERTIES
We relocated our headquarters to Golden, Colorado in December 1998, into
facilities leased by IPRC. IPRC's lease expires in June 2002. Following the sale
of IPRC to Interpro Zinc, LLC in February 2001, we entered into a cooperation
agreement with Interpro Zinc, LLC that allows us to continue leasing office,
laboratory, and storage space through December 31, 2001 at a rate of $2,500.
Effective January 1, 2002, we extended this arrangement on a month-to-month
basis for $4,000 per month.
We lease 1,750 square feet of office space in Columbia, Maryland that
expires December 1, 2003. Chemotrade leases office space in Dusseldorf and
Leipzig, Germany that expires July 31, 2003. IUT leases production and
administration facilities in Berlin, Germany.
22
<Page>
ITEM 3. LEGAL PROCEEDINGS
We are involved in an arbitration matter pending before the American
Arbitration Association in Dallas, Texas (the "AAA") involving our dispute with
Eagle-Picher Industries, Inc. and its subsidiary, Eagle-Picher Technologies, LLC
(collectively referred to as "Eagle-Picher"). We filed this arbitration demand
on March 26, 2001, and Eagle-Picher filed a competing claim. These competing
claims have been consolidated into a single proceeding (No. 71Y1980017501)
before the AAA in which Eagle-Picher is the claimant, and we are the respondent
and counter-claimant. The arbitration hearing was originally scheduled for
April 2002 but has been rescheduled for late June 2002. We have been informed by
our legal counsel that it will likely take a minimum of six-to-nine months or
longer to complete the arbitration phase.
On December 1, 1999, we sold our depleted zinc business to Eagle-Picher
Technologies, LLC for $8,230,000, including $1,500,000 due in equal installments
on November 30, 2000, 2001 and 2002. We received cash of approximately
$6,730,000 from Eagle-Picher at the closing, of which approximately $1,150,000
was used to pay certain accrued liabilities and debt. Upon completion of the
sale, we recognized a net gain on the sale amounting to $5,088,000.
Eagle-Picher's obligation to pay the final $1,500,000 was subject to the
performance of our former depleted zinc supplier under the terms of a supply
agreement that was transferred to Eagle-Picher in the sale.
For the year ended April 30, 2000, we were recognizing the $1,500,000 on a
straight-line basis as our former supplier performed. As of April 30, 2000, we
had recognized additional gain of $208,000. Eagle-Picher failed to make the
first additional payment due November 30, 2000. We believe that the unaffiliated
supplier performed as required, and that Eagle-Picher has no cause for its
non-payment. We have demanded payment from Eagle-Picher, but Eagle-Picher made
an unacceptable counteroffer. A total of $458,000 of the contingent gain had
been recognized at the time of Eagle-Picher's default, of which $250,000 had
been recognized in the year ended April 30, 2001. We ceased recognizing any
additional contingent gain as a result of Eagle Picher's failure to make the
first payment when due. We established a reserve for the notes receivable and
reversed the gain recognized in fiscal 2001, resulting in a net loss of $208,000
in fiscal 2001.
Additionally, Eagle-Picher was to supply us with 200 kilograms of
silicon-28 by December 31, 2000, to be used in research and development
activities. We gave Eagle-Picher a common stock warrant to obtain 4,000,000
shares of our common stock, however, these common stock warrants and the
underlying shares, were contingent upon the delivery of silicon-28 by
Eagle-Picher by December 31, 2000. Eagle-Picher exercised its common stock
warrant, under a net exercise provision in the warrant agreement, and received
3,130,435 shares of our common stock, in March 2000. Because Eagle-Picher
exercised its common stock warrant pursuant to the terms of the net exercise
provision, Eagle-Picher did not pay cash to exercise the common stock warrant.
Eagle-Picher disputed our calculation and believed we should have issued to it
an additional 155,279 shares of common stock.
In addition to its refusal to pay the aforementioned installments of
$500,000 due November 30, 2000 and 2001, Eagle-Picher did not deliver 200
kilograms of silicon-28, meeting the specifications as set forth in our
agreement, by December 31, 2000. We know that Eagle-Picher's silicon-28
production facility in Oklahoma has encountered certain technical difficulties,
which Eagle-Picher refers to as a FORCE MAJEURE. We believe that Eagle-Picher's
technical difficulties do not meet the definition of FORCE MAJEURE per our
agreements, which would entitle Eagle-Picher to a delay in the delivery
requirement.
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<Page>
As Eagle-Picher is claiming FORCE MAJEURE, it believes it is entitled to
retain its ownership to the 3,130,435 shares obtained through the net exercise
of the common stock warrant and believes it also should receive the disputed
155,279 shares of our common stock. We continue to dispute Eagle-Picher's claims
and on January 26, 2001, our Board of Directors authorized us to cancel
Eagle-Picher's common shares and return those shares to the "authorized,
unissued" category. We cancelled the shares on February 20, 2001.
We notified Eagle-Picher of our intention to pursue the dispute resolution
process, as set forth in the agreement with Eagle-Picher, in December 2000. The
dispute resolution process consists of three phases. The first phase was
negotiations between designated members of senior management of the two
companies. Several meetings were held in December 2000 and January 2001. No
resolution was reached.
The second phase was mediation. Eagle-Picher notified us of its desire to
mediate this dispute on January 18, 2001. A mediation session was held on
January 26, 2001. Again, no resolution was reached. The third phase is binding
arbitration. On March 26, 2001, we filed for binding arbitration. We are
claiming damages against Eagle-Picher of $75,500,000.
On February 8, 2001, Eagle-Picher informed us that they would be seeking
damages, in excess of $10,000,000, for alleged misrepresentations regarding the
status of the depleted zinc business at the time of the sale. We believe these
allegations to be groundless, and we believe we made full and complete
disclosure to Eagle-Picher at the time of the sale.
Discovery is ongoing, consequently it is premature for us to predict any
likely outcome. We intend to vigorously defend against Eagle-Picher's claim and
to prosecute our own claims against Eagle-Picher until successfully resolved or
a settlement is reached.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not hold a meeting of our shareholders during the fourth quarter of
the fiscal year ended April 30, 2001. We did hold a meeting of our shareholders
on November 13, 2001. At this meeting our directors were re-elected (proposal
no. 1) and shareholders approved three proposals: proposal no. 2 for an increase
in our authorized capitalization, proposal no. 3 for an amendment to our 1996
Executives' Equity Incentive Plan, and proposal no. 4 for an amendment to our
1996 Equity Incentive Plan to increase the amount of shares available under
these plans. The votes for these proposals were as follows:
PROPOSAL TWO: AMENDMENT OF THE ARTICLES OF INCORPORATION
<Table>
<Caption>
-----------------------------------------------------------------------------
SHARES FOR SHARES AGAINST SHARES WITHHELD
-----------------------------------------------------------------------------
5,422,259 281,043 2,735,209
-----------------------------------------------------------------------------
</Table>
PROPOSAL THREE: AMENDMENT OF THE 1996 EXECUTIVES' EQUITY INCENTIVE PLAN
<Table>
<Caption>
-----------------------------------------------------------------------------
SHARES FOR SHARES AGAINST SHARES WITHHELD
-----------------------------------------------------------------------------
5,372,682 323,420 2,742,409
-----------------------------------------------------------------------------
</Table>
PROPOSAL FOUR: AMENDMENT OF THE 1996 EQUITY INCENTIVE PLAN
24
<Page>
<Table>
<Caption>
-----------------------------------------------------------------------------
SHARES FOR SHARES AGAINST SHARES WITHHELD
-----------------------------------------------------------------------------
5,378,134 316,268 2,744,109
-----------------------------------------------------------------------------
</Table>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On September 22, 1997, our Units (consisting of one share of common stock
and one Class A warrant) started trading on the Over The Counter (OTC) Bulletin
Board under the symbol ISONU. In October 1997, we unbundled the Units and the
common stock and Class A warrants commenced trading on the OTC Bulletin Board.
Our Class A warrants expired by their terms on September 21, 2001. Currently the
trading symbols for our outstanding securities are as follows:
<Table>
Common Stock.................................................. "ISON"
Class B Warrants.............................................. "ISONL"
Class C Warrants.............................................. "ISONZ"
</Table>
The common stock is quoted on the Nasdaq SmallCap Market. As of
February 28, 2002, we have outstanding 202,500 Class C warrants, 430,110
registered Class B warrants, as well as 1,350,000 restricted Class B warrants.
The Class B warrants and the Class C warrants are quoted on the Nasdaq SmallCap
Market.
The following table sets forth the high and low bid prices for the common
stock (quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions) from May 1, 1999
through February 28, 2002, as reported by OTC Bulletin Board, and beginning
July 13, 2000, by the Nasdaq SmallCap Market.
<Table>
<Caption>
APRIL 30,
QUARTER ENDED 2002(THROUGH
JULY 31, 2001 OCT. 31, 2001 JAN. 31, 2002 FEBRUARY 28, 2002)
------------- -------------- ------------- -----------------
Common Stock (ISON)
High $ 1.85 $ 1.49 $ 1.17 $ 1.15
Low $ 1.14 $ .77 $ 0.97 $ 1.11
<Caption>
QUARTER ENDED
JULY 31, 2000 OCT. 31, 2000 JAN. 31, 2001 APR. 30, 2001
------------- ------------- ------------- -------------
Common Stock (ISON)
High 7.0625 4.0000 2.6250 1.6250
Low 3.3750 1.4375 1.0625 0.8125
</Table>
25
<Page>
<Table>
<Caption>
QUARTER ENDED
-------------
JULY 31, 1999 OCT. 31, 1999 JAN. 31, 2000 APR. 30, 2000
------------- ------------- ------------- -------------
Common Stock (ISON)
High 3.6250 2.1250 10.5000 17.9375
Low 1.8750 0.8750 1.2500 5.5625
</Table>
As of February 28, 2002, there were approximately 70 holders of record of
our common stock. This does not include an indeterminate number of persons who
hold our common stock in brokerage accounts and otherwise in "street name."
We have never declared or paid a cash dividend on our common stock. We
presently intend to retain our earnings to fund development and growth of our
business and, therefore, we do not anticipate paying cash dividends in the
foreseeable future. Additionally, the certificate of designation for the Series
A convertible preferred stock contains restrictions on our ability to pay
dividends to holders of our common stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN
OF OPERATION
(b) RISK FACTORS
ANY PERSON CONSIDERING THE PURCHASE OF ISONICS' COMMON STOCK OR WARRANTS SHOULD
UNDERSTAND THAT SUCH PURCHASE AND OWNERSHIP INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD PURCHASE OUR SECURITIES OR EXERCISE YOUR CLASS B WARRANTS AND/OR CLASS C
WARRANTS ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. Among the
risks that you should consider in determining whether to invest in our
securities are the following:
UNLESS WE ARE ABLE TO DEVELOP AND SELL NEW PRODUCTS PROFITABLY, WE MAY BE UNABLE
TO REMAIN COMPETITIVE, FURTHERING THE LIKELIHOOD THAT OUR LOSSES AND NEGATIVE
CASH FLOW WILL CONTINUE.
We have not operated profitably since our 1996 fiscal year. We recognized
net income for the year ended April 30, 2000, only because of the gain
recognized on the sale of our depleted zinc assets to Eagle-Picher. In addition,
through November 30, 1999, our revenues had historically been derived from our
depleted zinc operations.
As a consequence of our sale of the depleted zinc operations, our
operations and our ability to generate revenues are more heavily dependent upon
our ability to develop new products using stable and radioactive isotopes, and
to market and sell those products profitably. We may be unable to develop
products that can be profitably marketed and sold, which may prevent us from
paying creditors as debts are due, and, in turn, may materially impact our
ability to continue our business operations. SEE "BUSINESS."
We are critically short of working capital for our operations for a number
of reasons. These reasons include:
- Eagle-Picher's failure to pay the cash amounts it owes to us under our
contractual arrangements;
- Eagle-Picher's failure to deliver 200 kilograms of silicon-28 to us,
resulting in our need to use our capital to purchase the silicon-28 from
other suppliers and a delay in our ability to complete our research and
development program for silicon-28, resulting in a delay in our ability to
achieve revenues from silicon-28; and
26
<Page>
- Continuing operating losses and negative cash flow.
It is possible that the following circumstances may develop and may further
adversely impact our available working capital and materially impact our
ability to continue our business operations:
- unanticipated expenses in developing our new products or in producing or
marketing our existing products;
- the necessity of having to protect and enforce our intellectual property
rights;
- technological and market developments;
- a corporate decision to expand our production capacity through capital
investment or acquisition; and
- the possibility that we may suffer an adverse decision in our Eagle-Picher
arbitration as described in "LEGAL PROCEEDINGS".
We may not be able to obtain equity or debt financing on reasonable terms
when we need such financing. The unavailability of additional financing, when
needed, could have a material adverse effect on our business. SEE "MANAGEMENT'S
DISCUSSION AND ANALYSIS," AND "BUSINESS."
Our current working capital shortage and operating losses resulted in our
auditors including an explanatory paragraph in their opinion on our financial
statements as of and for the year ended April 30, 2001 that such factors raised
a substantial doubt regarding our ability to continue as a going concern.
WE HAVE RAISED CAPITAL DURING THE NINE MONTHS ENDED JANUARY 31, 2002 AND THE
YEAR ENDED APRIL 30, 2001, WHICH HAS RESULTED IN DILUTION TO OUR EXISTING
SHAREHOLDERS. THIS WAS NECESSARY IN ORDER TO PROVIDE NECESSARY WORKING CAPITAL
AND WE MAY BE REQUIRED TO RAISE ADDITIONAL CAPITAL, WHICH MAY RESULT IN
SUBSTANTIAL ADDITIONAL DILUTION.
During the nine months ended January 31, 2002, we issued 494,849 shares of
common stock for approximately $473,000 as the result of the exercise of common
stock warrants. Included in the exercised common stock warrants were 202,500
Class B warrants.
On December 13, 2000, we sold 337,500 units consisting of one share of our
common stock and two Class B warrants for $675,000 to a group of accredited
investors. As a result of subsequent adjustments, we issued an additional
112,504 shares of common stock and an additional 675,000 Class B warrants.
The exercise of the Class B warrants, and/or the Class C warrants may
provide us with some additional financing, but it is likely that no warrants
will be exercised unless the market price is in excess of the exercise price
($1.50 per share for the Class B warrants, and $2.50 per share for the Class C
warrants). Any such exercise will result in additional dilution to our
shareholders.
Furthermore, our efforts to raise working capital have resulted in dilution
adjustments to our outstanding common stock warrants associated with the
preferred stock private placement completed on July 29, 1999. These dilution
adjustments did not result in any additional investment in Isonics, but resulted
in the issuance of 604,649 additional common stock warrants for no additional
consideration and reduced the exercise price to $2.97 for all related common
stock warrants.
In addition to anti-dilution rights, there are provisions associated with
the preferred stock private placement completed on July 29, 1999 that if
triggered, would reduce the current conversion price and effectively allow the
preferred shares to convert to common stock at a ratio greater than a one for
one basis.
27
<Page>
As a result of the granting of restricted common stock and stock options at
$1.01 per share to a company employee, the preferred stock is now convertible at
approximately 1.49 shares of common stock for each share of Series A Convertible
Preferred Stock outstanding. As of February 28, 2002 there were 963,666 shares
of Series A Convertible Preferred Stock outstanding.
If we are successful in raising additional working capital, our
shareholders may incur additional dilution adjustments. SEE "MANAGEMENT'S
DISCUSSION AND ANALYSIS," AND "BUSINESS."
OPERATIONS IN RUSSIA, THE REPUBLIC OF UZBEKISTAN, AND THE REPUBLIC OF GEORGIA
MAY BE DISRUPTED BECAUSE OF A VOLATILE POLITICAL AND ECONOMIC CLIMATE BEYOND OUR
CONTROL, WHICH COULD ADVERSELY AFFECT OUR SUPPLY OF RAW MATERIALS.
Operations in Russia, the Republic of Uzbekistan, and the Republic of
Georgia entail risks. The former republics of the Soviet Union including
Uzbekistan and Georgia are experiencing political, social and economic change as
they obtain independence from the former central government in Moscow. Some of
the republics, including Russia, Uzbekistan and Georgia, are attempting to
transition from a central-controlled economy toward a market-based economy.
These changes have involved, in some cases, armed conflict and the risk of
continued instability has increased since the terrorist attacks on the United
States of September 11, 2001. Although Uzbekistan borders Afghanistan, the
conflict in Afghanistan has not impacted our supply of isotopes. Political or
economic instability in these republics may continue or worsen. The price,
availability, quality, quantity, ability to export and supply of stable and
radioactive isotopes could be directly affected by political, economic and
military conditions in Russia, Uzbekistan and Georgia.
We are dependent on suppliers from Russia, Uzbekistan, and Georgia for
approximately 90% of our stable isotopes and 90% of our radioisotopes.
Accordingly, our operations could be materially adversely affected if
hostilities in Russia, Uzbekistan, or Georgia should occur, if trade between
Russia, Uzbekistan and/or Georgia and the United States were interrupted or
ceased, if political conditions in Russia, Uzbekistan or Georgia disrupt
transportation or processing of our goods, if laws or government policies
concerning foreign business operations in Russia, Uzbekistan or Georgia change
substantially, or if tariffs are introduced. SEE "MANAGEMENT'S DISCUSSION AND
ANALYSIS" AND "BUSINESS."
BECAUSE WE DEPEND UPON FEW CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES,
OUR BUSINESS MAY BE MATERIALLY AND ADVERSELY AFFECTED IF WE LOSE ANY ONE OF
THESE CUSTOMERS
Three customers (Perkin Elmer Life Sciences, Eastern Isotopes, and Reviss
Ltd.) accounted for approximately 24%, 19% and 5%, respectively, of net revenues
for the nine months ended January 31, 2002. Two customers (Perkin Elmer Life
Sciences and Reviss Ltd.) accounted for approximately 38% and 11%, respectively,
of the German segment's revenue for the nine months ended January 31, 2002. Five
customers (Perkin Elmer Life Sciences, Eastern Isotopes, Reviss Ltd.,
Commisariat and IPL) accounted for approximately 16%, 9%, 7%, 5% and 4%,
respectively of net revenues for the year ended April 30, 2001. Two customers
(Perkin Elmer Life Sciences and Reviss Ltd.) accounted for approximately 24% and
11%, respectively of the German segment's net revenues for the year ended
April 30, 2001. While our goal is to diversify our customer base, we expect to
continue to depend upon a relatively small number of customers for a significant
percentage of our revenues for the foreseeable future. Significant reductions in
sales to any of our large customers have had, and may in the future have, a
material adverse effect on us by reducing our revenues and our gross margins.
Present or future customers could terminate their purchasing patterns with us or
significantly change, reduce or delay the amount of isotope or other products
ordered from us. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS" AND "BUSINESS."
28
<Page>
IF DEMAND FOR OUR PRODUCT GROWS SUDDENLY, WE MAY LACK THE RESOURCES TO MEET
DEMAND OR WE MAY BE REQUIRED TO INCREASE OUR CAPITAL SPENDING SIGNIFICANTLY
We have experienced, and may again experience, periods of rapid growth that
place a significant strain on our financial and managerial resources. Through
our marketing efforts we have increased the number and type of products we offer
to our customers in our effort to replace the cash flow reduction that occurred
as a result of the sale of our depleted zinc operations, and we are continuing
to look for new products to offer. Through our research and development efforts
we are also attempting to develop additional products and lines of business. Our
ability to manage growth effectively, particularly given our increasing scope of
operations, will require us to continue to implement and improve our management,
operational and financial information systems, and will require us to develop
the management skills of our personnel and to train, motivate and manage our
employees. Our failure to effectively manage growth could increase our costs of
operations and reduce our margins and liquidity, which could have a material
adverse effect on our business, financial condition and results of operations.
SEE "BUSINESS."
BECAUSE WE ARE DEPENDENT UPON OUR KEY PERSONNEL FOR OUR FUTURE SUCCESS, IF WE
FAIL TO RETAIN OR ATTRACT KEY PERSONNEL, OUR BUSINESS WILL BE ADVERSELY AFFECTED
Our future success will depend in significant part upon the continued
service of our key technical, sales and senior management personnel, including
James E. Alexander, our President and Chief Executive Officer; Boris
Rubizhevsky, our Senior Vice President, Isotope Production and Supply; Daniel
Grady, Vice President, Life Sciences, Stephen Burden, Vice President,
Semiconductor Materials, and Hans Walitzki, Vice President, Advanced Wafer
Technology. We have obtained $1,000,000 of key man life insurance on the lives
of Mr. Alexander and Mr. Rubizhevsky. Currently neither Mr. Alexander nor Mr.
Rubizhevsky are covered by employment agreements and the compensation committee
has not yet determined if they will issue new contracts. Mr. Grady and Mr.
Burden are covered by employment agreements with an indefinite term that
provides at-will employment, terminable at any time by either party. Mr.
Walitzki is covered by an employment agreement through November 2006.
We believe that our future success will also depend upon our ability to
attract and retain other qualified personnel for our operations. The failure to
attract or retain such persons could materially adversely affect our business,
financial condition and results of operations. SEE "MANAGEMENT."
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH WOULD REDUCE OUR
COMPETITIVE ADVANTAGE
We rely primarily on a combination of patents and patent applications,
trade secrets, confidentiality procedures, and contractual provisions to protect
our technology. Despite our efforts to protect our technology, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
technology and products is difficult. In addition, the laws of many countries do
not protect our rights to information, materials and intellectual property that
we regard as proprietary, and that are protected under the laws of the United
States. We may not be able to protect our proprietary interests, or our
competitors may independently develop similar technology or intellectual
property. If either one of these situations occurs, we may lose existing
customers and our business may suffer. SEE "BUSINESS."
29
<Page>
The validity of any of the patents licensed to us, or that may in the
future be owned by us, may not be upheld if challenged by others in litigation.
Further, our products or technologies, even if covered by our patents, may
infringe upon patents owned by others. We could incur substantial costs in
defending suits brought against us, or any of our licensors, for infringement,
in suits by us against others for infringement, or in suits contesting the
validity of a patent. Any such proceeding may be protracted. In any suit
contesting the validity of a patent, the patent being contested would be
entitled to a presumption of validity and the contesting party would be required
to demonstrate invalidity of such patent by clear and convincing evidence. If
the outcome of any such litigation were adverse to our interests, our liquidity
and business operations would be materially adversely affected.
WE FACE TECHNOLOGICAL CHANGE AND INTENSE COMPETITION BOTH DOMESTICALLY AND
INTERNATIONALLY WHICH MAY ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS
PROFITABLY
Although we do not believe that any entity produces a complete range of
stable enriched isotopes for commercial sale, many of our competitors have
significantly greater funding than do we and may be able to develop products
which are competitive with our products. SEE "BUSINESS."
Further, it is possible that future technological developments may occur.
The market for our isotope products is characterized by rapidly evolving
technology and continuing process development. Our future success will depend
upon our ability to develop and market isotope products that meet changing
customer and technological needs on a cost effective and timely basis.
Specifically, the failure by Eagle-Picher to provide us with silicon-28 has
hindered, and may continue to hinder, our research and development activities,
which then negatively affects our ability to remain competitive. If we fail to
remain competitive by anticipating the needs of our customers and our customers
contract with other suppliers, our revenues and resulting cash flow could be
materially and adversely affected.
WE COULD BE SUBJECT TO ENVIRONMENTAL REGULATION BY FEDERAL, STATE AND LOCAL
AGENCIES, INCLUDING LAWS THAT IMPOSE LIABILITY WITHOUT FAULT, WHICH COULD
PRODUCE WORKING CAPITAL SHORTAGES AND LESSEN SHAREHOLDERS' EQUITY.
We could become subject to a variety of federal, state, and local
environmental regulations relating to the use, storage, discharge and disposal
of hazardous chemicals used during the isotope product delivery and
manufacturing process, although we do not believe that there is any such
regulation directly applicable to our current operations. Regulations that
become applicable to our operations in the future could restrict our ability to
expand our facilities or could require us to acquire costly equipment or to
incur other significant expenses to comply with governmental regulations.
Historically, our costs of compliance with environmental regulations have not
been significant. In the quarter ended October 31, 2000, we recognized a
$270,000 expense to remediate the Golden, Colorado facility. The lease and this
liability were assumed by the buyers of IPRC effective February 1, 2001. SEE
"BUSINESS."
WE ARE CONTROLLED BY ONLY A FEW OFFICERS AND DIRECTORS AND, CONSEQUENTLY,
PURCHASERS OF OUR SHARES WILL HAVE VERY LITTLE ABILITY TO ELECT OR CONTROL OUR
MANAGEMENT
Even if all outstanding warrants and stock options are exercised and
convertible securities are exchanged for common stock, our directors and
officers will beneficially own 29.2% of the outstanding shares of common stock
as of February 28, 2002, and, accordingly, may have the ability to elect a
majority of the directors of Isonics and otherwise control the company. As a
result, such persons, acting together, will have the ability to substantially
influence all matters submitted to stockholders for approval, including the
election and removal of directors and any merger, consolidation or sale of
substantially all of our assets, and to control our management and affairs. Such
concentration of ownership may have the effect of delaying, deferring or
preventing a change in control, impeding a merger, consolidation or takeover or
other business combination involving us or discouraging a potential acquirer
from making a tender offer or otherwise attempting to obtain control of our
business, even if such a transaction would be
30
<Page>
beneficial to other stockholders. SEE "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT."
WE RISK EXPOSING OURSELVES TO AN ABOVE-POLICY LIMIT PRODUCT LIABILITY CLAIM,
WHICH COULD ADVERSELY AFFECT OUR WORKING CAPITAL, SHAREHOLDERS' EQUITY AND
PROFITABILITY
The use of our radioisotopes in radiopharmaceuticals and in clinical trials
may expose us to potential product liability risks that are inherent in the
testing, manufacture, marketing, and sale of human diagnostic and therapeutic
products. We currently have product liability insurance; however, there is a
risk that our insurance would not cover completely or would fail to cover a
claim, in which case we may not have the financial resources to satisfy such
claims, and the payment of claims would require us to use funds that are
otherwise needed to conduct our business and make our products. SEE "BUSINESS."
OUR COMMON STOCK IS VULNERABLE TO PRICING AND PURCHASING ACTIONS THAT ARE BEYOND
OUR CONTROL AND, THEREFORE, PERSONS ACQUIRING OUR SHARES OR WARRANTS MAY BE
UNABLE TO RESELL THEIR SHARES OR WARRANTS AT A PROFIT AS A RESULT OF THIS
VOLATILITY
The trading price of our securities has been subject to wide fluctuations
in response to quarter-to-quarter variations in our operating results, our
announcements of technological innovations or new products by us or our
competitors, and other events and factors. The securities markets themselves
have from time to time and recently experienced significant price and volume
fluctuations that may be unrelated to the operating performance of particular
companies. Announcements of delays in our testing and development schedules,
technological innovations or new products by us or our competitors and
developments or disputes concerning patents or proprietary rights could have a
significant and adverse impact on such market prices. Regulatory developments in
the United States and foreign countries, public concern as to the safety of
products containing radioactive compounds, economic and other external factors,
all affect the market price of our securities. IN ADDITION, THE REALIZATION OF
ANY OF THE RISKS DESCRIBED IN THESE "RISK FACTORS" COULD HAVE A SIGNIFICANT AND
ADVERSE IMPACT ON SUCH MARKET PRICES. SEE "MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS."
SEC PENNY STOCK REGULATIONS MAY LIMIT THE ABILITY TO TRADE OUR SECURITIES ON THE
NASDAQ SMALL CAP MARKET
Although our common stock is currently quoted on the Nasdaq SmallCap Stock
Market, our common stock has in the past been subject to additional disclosure
requirements for penny stocks mandated by the Securities Enforcement Remedies
and Penny Stock Reform Act of 1990. The SEC Regulations generally define a penny
stock to be an equity security that has a market price of less than $5.00 per
share. We have, at times in the past, been included within the SEC Rule 3a-51
definition of a penny stock. When our common stock is considered to be a "penny
stock", trading is covered by Rule 15g-9 promulgated under the Securities
Exchange Act of 1934, for non-Nasdaq and non-national securities exchange listed
securities.
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Under this rule, broker-dealers who recommend such securities to persons
other than established customers and accredited investors must make a special
written disclosure to, and suitability determination for, the purchaser and
receive the purchaser's written agreement to a transaction prior to sale. The
regulations on penny stocks limit the ability of broker-dealers to sell our
common stock and thus the ability of purchasers of our common stock to sell
their securities in the secondary market. To the extent we are able to maintain
our listing on the Nasdaq SmallCap Stock Market, we will not be subject to these
penny stock rules. Reasons for being unable to maintain our listing on the
Nasdaq SmallCap Stock Market include:
- the inability to maintain a bid price for our common stock of
$1.00 for the requisite period of time and
- the inability to maintain either the minimum Stockholders'
equity, market capitalization or net income along with the
required number of market makers and shareholders necessary
for listing.
We currently satisfy all requirements for continued listing on the Nasdaq
SmallCap Market, although the volatility of our stock prices and our financial
condition may result in our failing to meet Nasdaq's requirements at some future
date. The time required for meeting these thresholds is contingent on any action
(or inaction) by Nasdaq with respect to our listing. SEE "MARKET FOR COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS."
FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE
Our stock price may decline by future sales of our shares or the perception
that such sales may occur. As of February 28, 2002, approximately 5,930,859
shares of common stock held by existing stockholders constitute "restricted
shares" as defined in Rule 144 under the Securities Act. The restricted shares
may only be sold if they are registered under the Securities Act, or sold under
Rule 144, or another exemption from registration under the Securities Act.
Approximately 85% of the restricted shares of our common stock are either
eligible for sale pursuant to Rule 144 or have been registered under the
Securities Act for resale by the holders. We are unable to estimate the amount,
timing, or nature of future sales of outstanding common stock. Sales of
substantial amounts of our common stock in the public market may cause the
stock's market price to decline. SEE "SHARES AVAILABLE FOR FUTURE SALE."
OUTSTANDING SERIES A PREFERRED STOCK, OPTIONS AND WARRANTS MAY MAKE IT DIFFICULT
FOR US TO OBTAIN ADDITIONAL CAPITAL ON REASONABLE TERMS
As of February 28, 2002, we had outstanding preferred stock convertible
into, and options and warrants to purchase, an aggregate of 8,373,140 shares of
common stock. As long as these shares of Series A convertible preferred stock
remain outstanding and the options and warrants remain unexercised, the terms
under which we could obtain additional capital may be adversely affected because
any new investors will perceive that these lower priced securities offer a risk
of substantial potential dilution. Depending on the market price for our common
stock as reported by Nasdaq and other sources, new investors frequently prefer
to negotiate prices that are at or below the conversion price or exercise price
of existing securities. SEE "ISONICS' CAPITAL STOCK."
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<Page>
PROVISIONS IN OUR CHARTER DOCUMENTS COULD PREVENT OR DELAY A CHANGE IN CONTROL,
WHICH COULD DELAY OR PREVENT A TAKEOVER
Our Articles of Incorporation authorize the issuance of "blank check"
preferred stock with such designations, rights, and preferences, as may be
determined by our Board of Directors. Accordingly, the Board of Directors may,
without shareholder approval, issue shares of preferred stock with dividend,
liquidation, conversion, voting, or other rights that could adversely affect the
voting power or other rights of the holders of our common stock. Preferred stock
could also be issued to discourage, delay, or prevent a change in our control,
although we do not currently intend to issue any additional series of our
preferred stock. See "ISONICS' CAPITAL STOCK."
PROVISIONS IN OUR BYLAWS PROVIDE FOR INDEMNIFICATION OF OFFICERS AND DIRECTORS
TO THE FULL EXTENT PERMITTED BY CALIFORNIA LAW, WHICH COULD REQUIRE US TO DIRECT
FUNDS AWAY FROM OUR BUSINESS AND PRODUCTS
Our Bylaws provide for indemnification of officers and directors to the
full extent permitted by California law, our state of incorporation. We may be
required to pay judgments, fines, and expenses incurred by an officer or
director, including reasonable attorneys' fees, as a result of actions or
proceedings in which such officers and directors are involved by reason of being
or having been an officer or director. Funds paid in satisfaction of judgments,
fines and expenses may be funds we need for the operation of our business and
the development of our products, thereby affecting our ability to attain
profitability. This could cause our stock price to drop.
FORWARD-LOOKING STATEMENTS MAY PROVE TO BE INACCURATE
In our effort to make the information in this report more meaningful, this
report contains both historical and forward-looking statements. All statements
other than statements of historical fact are forward-looking statements within
the meanings of Section 27A of the Securities Act of 1933, and Section 21E of
the Securities Exchange Act of 1934. Forward-looking statements in this report
are not based on historical facts, but rather reflect the current expectations
of our management concerning future results and events.
The forward-looking statements generally can be identified by the use of
terms such as "believe," "expect," "anticipate," "intend," "plan," "foresee,"
"likely," "will" or other similar words or phrases. Furthermore, statements that
describe our objectives, plans, or goals are, or may be, forward-looking
statements.
Forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of Isonics to be different from any future results, performance and
achievements expressed or implied by these statements.
These factors are not necessarily all of the important factors that could
cause actual results to differ materially from those expressed in the
forward-looking statements in this prospectus. Other unknown or unpredictable
factors also could have material adverse effects on the future results of
Isonics.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
(a) AND (b) IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of all the Directors and
Executive Officers of Isonics, and the positions held by each such person as of
February 28, 2002. The directors each serve until their successors are duly
elected and qualified; officers are appointed by, and serve at the pleasure of,
the Board of Directors.
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
James E. Alexander 53 President, Chief Executive Officer, Treasurer, and Chairman
of the Board
Boris Rubizhevsky 51 Senior Vice President, Vice Chairman and Director
Daniel J. Grady 47 Vice President, Life Sciences, Manager of Chemotrade.
Stephen J. Burden 53 Vice President, Semiconductor Materials
John V. Sakys 33 Vice President, Chief Financial Officer and Secretary
Hans Walitzki 46 Vice President, Advanced Wafer Technology
Lindsay A. Gardner (1)(2) 50 Director
Richard Parker (1)(2) 58 Director
Larry J. Wells (1)(2) 59 Director
</Table>
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Each of the directors holds office until the next annual meeting
of shareholders and until his or her successor is elected and qualified or until
his or her earlier death, resignation, or removal. Each officer serves at the
discretion of the Board.
JAMES E. ALEXANDER is our co-founder. He has served as our President, Chief
Executive Officer and as a director since our inception. Mr. Alexander has
worked full-time for Isonics since January 1994. From June 1972 to December
1993, he worked in a variety of technology positions at General Electric
Corporation in the aircraft engine and nuclear power divisions, most recently as
Manager of Technology Programs. Mr. Alexander received his Bachelors degree in
Metallurgical Engineering from the University of Cincinnati and performed
graduate work in materials science there. He earned a Masters degree in Business
Administration from Santa Clara University.
BORIS RUBIZHEVSKY is a co-founder of Isonics and has been Senior Vice
President and a director since our inception. Mr. Rubizhevsky became Vice
Chairman in March 1997 and has worked exclusively for Isonics during this time.
From November 1986 through December 1994, he owned and operated SAR Marketing, a
consulting firm providing business advice and services to large multinational
corporations. From June 1977 to May 1986, Mr. Rubizhevsky worked at General
Electric Corporation as Business
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Development Manager in various international locations. He received his
Bachelors degree in Engineering from Stevens Institute of Technology.
DR. DANIEL J. GRADY joined us as Vice President, Life Sciences in 1995 and
became manager of our Chemotrade subsidiary in January 2002. From March 1994
through September 1995, Dr. Grady was Vice President of Research and Development
at Sopha Medical Systems, a medical diagnostic imaging equipment manufacturer.
From April 1991 until March 1994, he served as Marketing Manager, Nuclear Energy
for General Electric Corporation. From May 1988 through March 1991, Dr. Grady
served as Software Engineer Manager, Nuclear Medicine for General Electric in
England. From October 1984 through May 1988, he served as Clinical Applications
Manager for General Electric Nuclear Medicine. Between June 1981 and
October 1984, he served as Engineering Analysis Section Head for TRW. Dr. Grady
received his Bachelors and Masters degrees and Ph.D. in Nuclear Engineering from
the University of Michigan.
DR. STEPHEN J. BURDEN joined us in January 1997 as Director of Research &
Development. He was promoted to Vice President, Semiconductor Materials
effective January 1, 1999. From 1993 to 1997, Dr. Burden was Director of Product
Development at SP3, Inc., a manufacturer of diamond-coated tools. From 1984 to
1993, he was Manager of Advanced Materials R&D at GTE Valenite, a subsidiary of
GTE Corporation, a manufacturer of cutting tools. From 1974 to 1984, Dr. Burden
was employed by General Electric Corporation in various capacities. Dr. Burden
received his Ph.D. and Masters of Science degrees in Materials Science and
Engineering from Drexel University, and his Bachelors degree in Science
Engineering from Northwestern University. Dr. Burden also has an MBA from the
University of Michigan.
JOHN SAKYS joined us in May 2001 as Controller. He was promoted to Vice
President, Chief Financial Officer effective September 3, 2001. From
September 2000 to April 2001 Mr. Sakys was controller of AuraServ
Communications. From July 1998 to September 2000 Mr. Sakys was Director of
Financial Reporting for Media One, Inc. From December 1994 to July 1998 Mr.
Sakys was an audit manager at Ernst and Young LLP. From September 1990 to
December 1994 Mr. Sakys was employed at Arthur Andersen LLP in various
capacities. Mr. Sakys received his Bachelors degree in Business Economics with
an emphasis in accounting from the University of California at Santa Barbara and
is a Certified Public Accountant.
DR. HANS WALITZKI joined us in November 2001 as Vice President, Advanced
Wafer Technology. He was employed as a vice president, chief technology
officer, and Chairman of the Board of Directors of Silicon Evolution, Inc.
(of Vancouver, Washington) from its formation in February 1999 until November
2001. Silicon Evolution filed a petition for relief under chapter 7
(liquidation) of the United States Bankruptcy Code in December 2001. Before
that (from March 1982 until February 1999), Dr. Walitzki was employed at
Wacker Siltronic Corporation in Portland, Oregon and its parent Wacker
Siltronic AG in Germany. Dr. Walitzki received his Masters degree in Physics
from Bonn University, Germany in 1980 and he received his Ph.D. in Physics
from Bonn University in 1982.
LINDSAY A. GARDNER was elected a director in September 1993. Ms. Gardner is
currently Director, Corporate Development and Strategic Planning for Menasha
Corporation. From 1991 to 2001, Ms. Gardner was President of LG Associates, a
U.S.-based management consulting firm providing strategic planning and materials
management expertise to foreign company affiliates of U.S. companies in
developing countries. During her tenure at LG Associates, Ms. Gardner resided in
Moscow, Russia from September 1991 to January 1994, and Beijing, China from
January 1994 to April 2000. She currently resides in Appleton, Wisconsin. From
1977 to 1991, Ms. Gardner worked for General Electric Corporation in a variety
of management and functional positions including international marketing,
quality assurance and supply chain management. Ms. Gardner received a Bachelors
degree in International Economics from The George Washington University Elliott
School of International Affairs and earned a Masters of Business Administration
from the University of Louisville.
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RICHARD PARKER has served as a director since August 1998. Mr. Parker is
presently Vice-President of Distribution Sales for Cypress Semiconductor and has
held that position since December 1997. Previously, Mr. Parker was Director of
Sales for Cypress from April 1984 to December 1997. Prior to joining Cypress, he
held various sales and marketing management positions at Fairchild Semiconductor
from 1973 to 1984. He received a Bachelors degree in Education from the
University of North Dakota.
LARRY J. WELLS was elected a director of Isonics in January 2000. Since
1989, Mr. Wells has been a general partner of SVP Management Company, the
management company for Sundance Venture Partners, L.P., a venture capital fund.
From 1983 to 1989, Mr. Wells served as Vice President of Citicorp Venture
Capital. He left Citicorp to become Senior Vice President of Inco Venture
Capital. Mr. Wells is also a director of Cellegy Pharmaceuticals, Identix, Inc.,
as well as several privately held companies. Mr. Wells received his Bachelors
degree in Economics and earned a masters degree in Business Administration from
Stanford University. Mr. Wells was previously a director of Isonics from
September 1996 through December 1998.
(c), (d), AND (e) There are no significant employees who are not also directors
or executive officers. There were and are no family relationships among the
officers, directors or any person chosen by Isonics to become a director or
officer. No arrangement exists between any of the above officers and directors
pursuant to which any one of those persons was elected to such office or
position. None of our directors is also a director of another company which has
a class of securities registered under Section 12 of the Securities Exchange Act
of 1934, or which is subject to the reporting requirements of Section 15(d) of
that act.
(f) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Based on information submitted by the directors and executive officers,
none of the directors or executive officers are involved in, or have been
involved in, legal proceedings during the past five years that are material to
an evaluation of the ability or integrity of any director or executive officer.
(g) PROMOTERS AND CONTROL PERSONS.
Not applicable.
(h) SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
SECTION 16(a) DISCLOSURE
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires Isonics' directors, executive officers and persons who own more than
ten percent of a registered class of Isonics' equity securities, to file with
the SEC initial reports of ownership and reports of changes in ownership of
common stock and other equity securities of Isonics. Officers, directors and
greater than ten percent shareholders are required by SEC regulation to furnish
Isonics with copies of all Section 16(a) forms they file.
To our knowledge, based upon a review of the copies of such reports
furnished to us and based upon written representations that no other reports
were required, all Section 16(a) filing requirements applicable to Isonics'
officers, directors and greater than ten percent beneficial owners were complied
with exception (or in addition) to the following during the fiscal year ended
April 30, 2001 and subsequently:
1. Mr. Alexander filed a From 4 for September 2001 on a timely basis. However,
the SEC refused to accept Mr. Alexander's filing and notified Mr. Alexander
almost one month later. Mr. Alexander immediately complied with the SEC's
request to file a new form. Although Mr. Alexander has requested the SEC to
honor the original filing date, the SEC has not yet acted on this request.
If the SEC does not grant Mr. Alexander's request, his September 2001
Form 4 may be considered a late
36
<Page>
filing despite his actually filing the Form within the prescribed time
period.
2. Mr. Wells filed Form 4s on December 14, 2001 reporting transactions that
took place in November 2001, and June, July, August and September 2000.
3. Dr. Cuttriss and his affiliate, Metallurgy International, Inc., jointly
filed a Form 3 in February 2000. Dr. Cuttriss became subject to the Section
16(a) reporting requirements when he became an executive officer of Isonics
in May 1998. A joint filing of two Form 4s was also made in February 2000
reporting transactions that occurred in July 1999 and September 1999, which
Dr. Cuttriss amended in May 2000. Dr. Cuttriss and Metallurgy International
are no longer affiliates of Isonics effective February 1, 2001.
4. Mr. Herbert Hegener filed Forms 4 in August 2000 reporting sales that took
place in May, June and July of 2000.
5. Eagle-Picher Technologies, LLC became subject to the Section 16(a)
reporting requirements when it became a greater than 10% beneficial owner
in December 1999. Eagle-Picher filed a Form 3 in March 2000. Eagle-Picher
attempted to exercise warrants in March 2000 but, to our knowledge has not
yet filed a Form 4 reporting the attempted exercise. Eagle-Picher has also
not yet filed an amendment to its Schedule 13D reporting this attempted
exercise. In February 2001 we cancelled the shares (subsequent to canceling
the warrant) and we have notified Eagle-Picher of the cancellation. To the
knowledge of Isonics, Eagle-Picher has not filed any report with the
Securities and Exchange Commission regarding the cancellation of the
shares.
6. Mr. Alexander filed a Form 4 after July 10, 2000, reporting a transfer of
536,000 shares in June 2000. Mr. Alexander transferred 500,000 of these
shares to his wife who continues to own these shares.
SHORT-SWING LIABILITY
On behalf of Metallurgy International, Inc., an affiliate of Dr. Cuttriss,
but without authorization from Dr. Cuttriss or Isonics, a broker-dealer sold and
purchased shares of Isonics common stock in July and September 1999,
respectively. With authorization from Dr. Cuttriss and Isonics, Metallurgy
International, Inc. sold additional shares in February and March 2000. As a
result, Isonics raised the concern that Dr. Cuttriss may have obtained a
short-swing profit. Subsequently, Isonics received an opinion of counsel in
which counsel opined that "a court would likely not impose liability on [Dr.]
Cuttriss for the unauthorized July 1999 and September 1999 transactions under
Section 16(b) of the Securities Exchange Act of 1934." Dr. Cuttriss and his
affiliate, Metallurgy International, Inc., jointly filed two Form 4s in
February 2000 reporting these transactions. Dr. Cuttriss amended these forms in
May 2000. Effective February 1, 2001, Dr. Cuttriss and Metallurgy are no longer
affiliates of Isonics and, therefore, are no longer subject to the reporting
requirements of Section 16(a).
ITEM 10. EXECUTIVE COMPENSATION
(a) AND (b) SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation awarded,
paid to, or earned by the chief executive officer and the other principal
officers of Isonics for the three years ended April 30, 1999, 2000, and 2001. No
other executive officer earned salary and bonus compensation exceeding $100,000
during any of those years. This includes all compensation paid to each by
Isonics and any subsidiary.
37
<Page>
<Table>
<Caption>
ANNUAL COMPENSATION LONG-TERM
------------------- COMPENSATION AWARDS
-------------------
AWARDS PAYOUT
------ ------
SECURITIES
($) UNDERLYING
NAME AND FISCAL ($) ($) ($) RESTRICTED OPTIONS & LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OTHER(a) AWARDS SARS (#) COMPENSATION
- ------------------ ---- ------- ------- -------- ------ -------- ------------
James E. 1999 200,000 50,000 35,016(f) 0 25,000(o) 0 0
Alexander 2000 212,000 172,549(d) 39,280(g) 0 0 0 0
President & 2001 240,000 0 6,704(h) 0 0 0 0
CEO
Boris 1999 184,100 45,000 25,404(f) 0 22,500(p) 0 0
Rubizhevsky 2000 191,000 147,670(e) 28,185(i) 0 0 0 0
Senior Vice 2001 216,000 0 14,280(j) 0 0 0 0
President
Stephen J. 1999 0 0 0 0 121,458(r) 0 0
Burden, 2000 125,000 0 23,452 0 0 0 0
Vice President (b) 2001 125,000 0 9,750(m) 0 0 0 0
Daniel J. Grady 1999 127,188 16,000 0 0 15,625(q) 0 0
Vice President 2000 125,000 10,271 23,833(k) 0 0 0 0
2001 143,208 0 13,320(l) 0 0 0 0
Brantley J. 1999 22,182 0 0 0 116,000(s) 0 0
Halstead, 2000 102,000 16,000 3,870 0 25,000(t) 0 0
Vice President (c) 2001 122,000 24,000 12,330(n) 0 0 0 0
</Table>
(a) Excludes other compensation, the aggregate amount of which does not exceed
the lesser of $50,000 or 10% of such named Executive Officers' annual
compensation.
(b) Dr. Burden became an officer of Isonics effective January 1999.
(c) Mr. Halstead became an officer of Isonics in February 1999, upon his
joining Isonics as Chief Financial Officer. Mr. Halstead was promoted to
Vice President, Finance in January 2000. Mr. Halstead resigned effective
May 1, 2001.
(d) Mr. Alexander's amount includes $133,451 for forgiveness of a loan owed to
Isonics, and $39,098 to pay applicable payroll taxes on a stock bonus
granted in January 1999. Please see "CORPORATE LOANS TO OFFICERS."
(e) Mr. Rubizhevsky's amount includes $113,598 for forgiveness of a loan owed
to Isonics, and $29,072 to pay applicable taxes on stock bonus granted in
January 1999, and a $5,000 additional cash bonus. Please see "CORPORATE
LOANS TO OFFICERS."
(f) Mr. Alexander's amounts represent $35,016 for interest and taxes payable as
a result of a loan in fiscal year 1999. Mr. Rubizhevsky's amounts represent
$25,404 for interest and taxes payable as a result of a loan in fiscal year
1999.
(g) Mr. Alexander's amount includes $26,543 for accrued vacation that was paid
in December 1999, $9,487 car allowance, and $3,250 employer matching
contribution to Isonics' 401k plan.
(h) Mr. Alexander's amount includes $1,704 car allowance and $5,000 employer
matching contribution to Isonic's 401k plan.
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(i) Mr. Rubizhevsky's amount includes $15,005 for accrued vacation that was
paid in December 1999, $9,000 car allowance, and $4,180 employer matching
contribution to Isonics' 401k plan.
(j) Mr. Rubizhevsky's amount includes $9,000 car allowance and $5,280 employer
matching contribution to Isonic's 401k plan.
(k) Dr. Grady's amount includes $12,020 for accrued vacation that was paid in
December 1999, $9,000 car allowance, and $2,813 employer matching
contribution to the Isonics' 401k plan.
(l) Dr. Grady's amount includes $9,000 car allowance and $4,320 employer
matching contribution to Isonics 401k plan.
(m) Dr. Burden's amount includes $6,000 car allowance and $3,750 employer
matching contribution to Isonics 401k plan.
(n) Mr. Halstead's amount includes $9,000 car allowance and $3,330 employer
matching contribution to Isonics 401k plan.
(o) Options to purchase 25,000 shares of common stock were granted in April
1999, as consideration for delaying salary in March and April 1999, and are
currently exercisable at $1.4375 per share and expire April 26, 2004.
(p) Options to purchase 22,500 shares of common stock were granted in April
1999, as consideration for delaying salary in March and April 1999, and are
currently exercisable at $1.4375 per share and expire April 26, 2004.
(q) Options to purchase 15,625 shares of common stock were granted in April
1999, as consideration for delaying salary in March and April 1999, and are
currently exercisable at $1.4375 per share and expire April 26, 2004.
(r) Options to purchase 100,000 shares of common stock were granted in
January 1999 as consideration for Dr. Burden's promotion to vice president
in January 1999, with an exercise price of $1.10 per share (of which 80,000
have vested as of February 28, 2002, and continue to vest at a rate of 5%,
or 5,000, per quarter). Options to purchase 21,458 shares of common stock
were granted in April 1999 as consideration for delaying salary in March
and April 1999, and are currently exercisable at $1.4375 per share and
expire April 26, 2004.
(s) Options to purchase 100,000 shares of common stock were granted in February
1999, as consideration for Mr. Halstead joining the Company as Chief
Financial Officer, with an exercise price of $2.5625 per share. As a result
of Mr. Halstead's resignation, his unexercised options expired July 31,
2001.
(t) Options to purchase 25,000 shares of common stock were granted in January
2000, as consideration for Mr. Halstead's promotion to Vice President in
January 2000. As a result of Mr. Halstead's resignation, his unexercised
options expired July 31, 2001.
In October 1996, we adopted an employee benefit plan under Internal Revenue
Code Section 401(k). The 401(k) plan is a profit sharing plan under which both
employees and Isonics are entitled to contribute a portion of compensation and
earnings, respectively, to investment funds to supplement employee retirement
benefits. On November 1, 1999, the Isonics Corporation 401(k) plan was merged
with the IPRC 401(k) plan and Isonics has continued that plan.
We do not have written plans to pay bonuses or deferred compensation to our
employees except those expressly stated in the following sections.
We have adopted medical, dental, and life insurance plans for our employees
and their dependents at our cost. In some cases, we also provide discretionary
disability and other insurance plans for the benefit of our employees.
(c) Options/SAR Grants in Last Fiscal Year
(i) STOCK OPTIONS AND OPTION PLANS
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We grant options to executive officers, employees, and consultants under
the following plans (collectively the "Plans"):
(A) 1996 STOCK OPTION PLAN. Although this plan has been terminated, there
are options outstanding.
(B) 1996 EXECUTIVES' EQUITY INCENTIVE PLAN. The Executives' Plan
authorized the grant of options to purchase 2,000,000 stock options.
The options granted may be either incentive stock options, if they
meet the requirements of Section 422 of the Internal Revenue Code, or
non-qualified stock options.
(C) 1996 EQUITY INCENTIVE PLAN. The Employees' Plan authorized the grant
of options to purchase 1,000,000 stock options. The options granted
may be either incentive stock options, if they meet the requirements
of Section 422 of the Internal Revenue Code, or non-qualified stock
options.
(D) 1998 EMPLOYEE STOCK PURCHASE PLAN. The Stock Purchase Plan authorized
employee purchase of up to 200,000 shares of Isonics common stock.
As of February 28, 2002, options to purchase a total of 863,125 shares,
101,458 shares, and 358,769 shares respectively, were outstanding under the
Executives' Plan, Employees' Plan, and 1996 Stock Option Plan, and options to
purchase 839,417, 839,362, and 0 shares, respectively, remained available for
grant.
Except for the Director's Plan, we have not adopted any other stock option
or stock appreciation rights plan. SEE "COMPENSATION OF DIRECTORS."
(ii) Option Grants
There were no options granted to executive officers named in the
compensation table during the fiscal year ended April 30, 2001. We did not grant
any stock appreciation rights to any person during fiscal year 2001 or
subsequently. We granted stock options to executives during fiscal 2002 as
follows:
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------------
Number of Options Exercise Price Term
- ----------------------------------------------------------------------------------------------------------------
James E. Alexander 100,000 $1.17 November 12, 2006
- ----------------------------------------------------------------------------------------------------------------
Boris Rubizhevsky 100,000 $1.17 November 12, 2006
- ----------------------------------------------------------------------------------------------------------------
Daniel J. Grady 100,000 $1.06 November 12, 2011
- ----------------------------------------------------------------------------------------------------------------
Stephen J. Burden 100,000 $1.06 November 12, 2011
- ----------------------------------------------------------------------------------------------------------------
Hans Walitzki 200,000 $1.01 December 1, 2006
- ----------------------------------------------------------------------------------------------------------------
John Sakys 100,000 $1.69 May 22, 2011
- ----------------------------------------------------------------------------------------------------------------
</Table>
In November 2001 we granted Hans Walitzki 200,000 shares of restricted
common stock which vests in different increments over five years.
In January 2002 we granted Daniel Grady 25,000 shares of restricted common
stock which vested immediately.
(d) AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES
Mr. Halstead exercised 16,000 stock options for cash in October 2000. These
stock options were granted in April 1999, and approved by the board of directors
in October 1999. No other officer exercised employee stock options during the
fiscal year ended April 30, 2001, or subsequently.
The following table sets forth information regarding the year-end value of
options being held by the Chief Executive Officer and the other such named
officers and persons on April 30, 2001.
40
<Page>
<Table>
<Caption>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS/STOCK
SHARES OPTIONS/STOCK APPRECIATION APPRECIATION RIGHTS AT APRIL
NAME AND ACQUIRED ON VALUE RIGHTS AT APRIL 30, 2001 30, 2001 EXERCISABLE/
PRINCIPAL POSITION EXERCISE (#) REALIZED EXERCISABLE/UNEXERCISABLE UNEXERCISABLE
- ------------------ ------------ -------- ------------- -------------
James E. Alexander 0 0 25,000/0 $ 0/$0
President & CEO
Boris Rubizhevsky 0 0 22,500/0 $ 0/$0
Senior Vice President (a)
Daniel J. Grady 0 0 222,965/0 $ 174,423/$0
Vice President
Stephen J. Burden 0 0 167,167/25,720 $27,200/$4,800
Vice President
Brantley J. Halstead 16,000 $16,000 90,000/35,000 $ 0/$0
Vice President (b)
</Table>
(a) Does not include 33,333 warrants obtained in a private transaction
completed in July 1999 or the additional 2,123 warrants obtained under
anti-dilution provisions in January 2001.
(b) Mr. Halstead resigned effective May 1, 2001. As a result, the 90,000
outstanding stock options held by Mr. Halstead expired July 31, 2001.
(e) LONG TERM INCENTIVE COMPENSATION PLANS, AND DEFINED BENEFIT AND ACTUARIAL
PLANS
Isonics has no long term incentive compensation plans, defined benefit
plans, or actuarial plans.
(f) COMPENSATION OF DIRECTORS
In January 2000, we agreed to compensate non-employee directors $2,000 for
attending Board of Directors' meetings in person, and $500 for attending Board
of Directors' meetings telephonically beginning January 1, 2000. Previously we
had not compensated our directors for their service as such.
The 1998 Directors' Plan authorized each person serving as a member of the
Board who is not an employee of Isonics to receive options to purchase 20,000
shares of Isonics common stock when such person accepts his position as a
Director and to receive an additional option to purchase 10,000 shares when such
person is re-elected as a Director provided such person is not an Isonics
employee. The exercise price for the options is the Fair Market Value (as
defined in the Executives' Plan) on the date such person becomes a director and
the options are exercisable for five years from such date. The options granted
under the Directors' plan vest immediately upon the date of the grant. In the
event a Director resigns or is not re-elected to the Board, failure to exercise
the options in three months results in the options' termination prior to the
expiration of their term. Although the Directors adopted the plan in 1998, the
Board formalized the plan by resolution in January 2000.
41
<Page>
Under the Directors' Plan the following individuals have been granted
options through February 28, 2002:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------------------
NAME SHARES UNDER OPTION EXERCISE PRICE EXPIRATION
- --------------------------------------------------------------------------------------------------------------
Lindsay Gardner 20,000 $ 2.375 May 21, 2003
- --------------------------------------------------------------------------------------------------------------
10,000 $1.1875 October 5, 2003
- --------------------------------------------------------------------------------------------------------------
10,000 $ 6.250 April 26, 2005
- --------------------------------------------------------------------------------------------------------------
10,000 $2.1875 October 10, 2005
- --------------------------------------------------------------------------------------------------------------
10,000 $ 1.06 November 12, 2006
- --------------------------------------------------------------------------------------------------------------
Richard Parker 20,000 $ 1.656 August 17, 2003
- --------------------------------------------------------------------------------------------------------------
10,000 $1.1875 October 5, 2003
- --------------------------------------------------------------------------------------------------------------
10,000 $ 6.250 April 26, 2005
- --------------------------------------------------------------------------------------------------------------
10,000 $2.1875 October 10, 2005
- --------------------------------------------------------------------------------------------------------------
10,000 $ 1.06 November 12, 2006
- --------------------------------------------------------------------------------------------------------------
Larry Wells 20,000 $7.3125 January 29, 2005
- --------------------------------------------------------------------------------------------------------------
10,000 $ 6.250 April 26, 2005
- -------------------------------------------------------------------------------------------------------------
10,000 $2.1875 October 10, 2005
- -------------------------------------------------------------------------------------------------------------
10,000 $ 1.06 November 12, 2006
- -------------------------------------------------------------------------------------------------------------
</Table>
We do not have any other arrangements pursuant to which we compensate the
Directors for acting in their capacities as such.
(g) EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
AGREEMENTS
In September 1997, we entered into employment agreements with James E.
Alexander and Boris Rubizhevsky. The agreements had a term of four years and
provide for annual salaries of $200,000 and $180,000, respectively, although
either Isonics or the individuals may terminate these agreements prematurely in
their discretion. By resolution of the Board of the Directors made on
January 30, 2000, both Mr. Alexander and Mr. Rubizhevsky received salary
increases commencing February 1, 2000, equal to 20% of their current salary,
$240,000, and $216,000, respectively. The salary increases were granted in
recognition of their performance for Isonics and the fact that neither
Mr. Alexander nor Mr. Rubizhevsky had received salary increases in approximately
two and one-half years. Under the agreements, each officer is entitled to
receive incentive compensation up to 50% of the officer's annual salary, as we
approve, pursuant to such executive compensation plan as we may approve. The
agreements provide that upon a termination of employment other than for cause
(as defined in the agreements), the officer is entitled to severance
compensation of eighteen (18) months of his salary, paid at the same time as
salary payments, 25% of the officer's annual prevailing salary, paid upon
termination, and in addition all outstanding stock options held by the officer
will be accelerated and will become exercisable in full and our right of
repurchase will terminate with respect to such shares. The agreements provide
for similar accelerated vesting of outstanding stock options upon a change in
control of Isonics. These contracts expired in September 2001, and the
compensation committee has not yet determined whether to offer new contracts to
these officers.
We have also entered into employment agreements with Dr. Daniel J. Grady,
Dr. Stephen J. Burden, Dr. Hans Walitzki, and Mr. John Sakys. The agreements
have an indefinite term (except for the agreement with Dr. Walitzki which
expires November 2006) and provide for at-will employment, terminable at any
time by either party. The agreements provide for a rate of annual compensation,
which we will review annually. Under each agreement, Dr. Grady, Dr. Burden, Dr.
Walitzki, and Mr. Sakys are entitled to participate in our standard plans and
policies. The agreements also include confidentiality and invention assignment
provisions. Dr. Cuttriss and Isonics agreed to a cancellation of his previous
employment agreement (which extended through September 2003) in connection with
our sale of IPRC to a management group that included him.
42
<Page>
At the end of the fiscal year ended April 30, 2001, Mr. Herbert Hegener was
covered by an employment agreement extending through December 2001. This
agreement expired in accordance with its terms.
(h) REPORT ON REPRICING OF OPTIONS/SARS
We did not reprice any options or stock appreciation rights during the
fiscal year ended April 30, 2001, or subsequently.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth information regarding the ownership of the
our common stock as of February 28, 2002 by: (i) each director or nominee for
director; (ii) each of the executive officers named in the Summary Compensation
Table; (iii) all executive officers and directors of the Company as a group; and
(iv) all those known by us to be beneficial owners of more than five percent of
our common stock.
<Table>
<Caption>
BENEFICIAL OWNERSHIP
BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF TOTAL
- ---------------- ---------------- ----------------
James E. Alexander (1) 2,035,167 18.6%
Boris Rubizhevsky (2) 1,754,311 16.0%
Stephen J. Burden (3) 390,998 3.5%
Daniel J. Grady (4) 370,886 3.3%
Hans Walitzki(5) 400,000 3.6%
Lindsay Gardner (6) 309,761 2.9%
Richard Parker (7) 60,000 0.6%
Larry Wells (8) 177,241 1.6%
John Sakys (9) 100,000 0.9%
All executive officers and directors as a group (9 persons). The 5,598,364 45.7%
address for all of the above directors and executives officers is:
5906 McIntyre Street, Golden, CO 80403
Richard and Ana Grossman, Orin Hirschman, Adam Smith Capital 2,518,901 18.9%
Management, Adam Smith Investment Partners, LP, Diamond
Capital Management Inc., Adam Smith Investments, Ltd., Adam
Smith & Company, Inc.,(10)
Anfel Trading (11) 754,429 6.7%
</Table>
(1) Includes: (i) 125,000 shares of common stock underlying stock options of
which 45,000 are vested as of February 28, 2002 and which are currently
exercisable; (ii) 45,455 shares of common stock held in the name of The
James & Carol Alexander Family Foundation; (iii) 500,000 shares held by
wife Carol; (iv) 29,000 shares held by son Jonathan Alexander.
(2) Includes: (i) 1,524,372 shares of common stock held jointly with wife
Nancy Eiden Rubizhevsky; (ii) 122,500 shares of common stock underlying
stock options of which 42,500 are vested as of February 28, 2002 and which
are currently exercisable; (iii) 42,106 shares of common stock underlying
42,106 warrants to purchase common stock of Isonics; (iv) 33,333 shares of
common stock held by wife Nancy Eiden Rubizhevsky; (v) 16,000 shares of
common stock held by son Zachary Rubizhevsky; and (vi) 16,000 shares of
common stock held by son Ryan Rubizhevsky.
(3) Includes 292,887 shares of common stock underlying stock options of which
192,880 are vested as of February 28, 2002 and which are currently
exercisable.
43
<Page>
(4) Includes 322,965 shares of common stock underlying stock options of which
242,965 are vested as of February 28, 2002, and which are currently
exercisable.
(5) Includes (i) 200,000 shares of common stock of which no shares are vested
as of February 28, 2002, and (ii) 200,000 shares of common stock
underlying stock options of which 40,000 are vested as of February 28,
2002 and which are currently exercisable.
(6) Includes 60,000 shares of common stock underlying stock options that are
currently exercisable.
(7) Includes 60,000 shares of common stock underlying stock options that are
currently exercisable.
(8) Includes: (i) 50,000 shares of common stock underlying stock options that
are currently exercisable; (ii) 77,241 shares owned by Daystar Partners,
L.P. of which an affiliate owned by Mr. Wells, and in which Mr. Wells owns
a 9.9% equity interest; and (iii) 50,000 shares of common stock underlying
50,000 warrants owned of record and beneficially by Wells Investment Group
in which Mr. Wells controls a 100% equity interest.
(9) Includes 100,000 shares of common stock underlying stock options of which
25,000 are vested as of February 28, 2002 and which are currently
exercisable.
(10)Based on a Schedule 13D filed by the reporting persons on or about
February 8, 2002, this beneficial ownership includes shares issuable
either upon conversion of Series A Preferred Stock or upon exercise of
common stock purchase warrants (expiring July 29, 2002) as follows:
Richard Grossman: 54,969 shares as joint tenant with Ana Grossman, and
indirect beneficial ownership of 2,463,932 shares by virtue of rights to
acquire all such shares;
Orin Hirschman, 54,969 shares, and indirect beneficial ownership of
2,463,932 shares by virtue of rights to acquire all such shares
Adam Smith Investments, Ltd., a British Virgin Island corporation
("ASI"), 311,491 shares directly
Diamond Capital Management Inc. ("DCM"), 311,491 shares indirectly, by
virtue of being the investment manager of ASI
Adam Smith & Company, Inc. ("ASC"), 631,641 shares directly
Adam Smith Investment Partners, L.P. ("ASIP"), 1,520,800 shares
directly
Adam Smith Capital Management LLC ("ASCM"), 1,520,800 shares
indirectly by virtue of being the sole general partner of ASIP.
The business addresses of Richard and Ana Grossman and the principal executive
offices of ASC, ASCM, ASIP and DCM are located at 259 Oakford Street, West
Hempstead, NY 11552 and as described below for Orin Hirschman.
The business addresses of Orin Hirschman are located at 1231 East 10th Street,
Brooklyn, NY 11230.
The principal executive offices of Adam Smith Investments, Ltd. are c/o
Insinger Fund Administration (BVI) Limited, Tropic Isle Building, P.O. Box
438, Road Town, Tortola, British Virgin Islands.
(11)Includes 421,095 shares of common stock underlying 421,095 warrants. The
principal executive offices of Anfel Trading Ltd. are c/o M. Andre Zolty,
24 Route De Malagnou, 1208 Geneva, Switzerland. Andre Zolty is the
principal and controlling shareholder of Anfel Trading Ltd. and may be
deemed to beneficially own these shares.
The Series A Stock consisted of 1,830,000 shares issued with a liquidation
preference of $1.50 per share and a right to convert the shares based on a one
for one basis. As of February 28, 2002, 866,334 shares of Series A Stock have
elected to convert into common stock. The conversion right of the preferred
stock is currently 1.49 shares of common stock for each share of Series A Stock.
The Series A Stock is entitled to dividends or distributions equal to the amount
of the dividend or distribution per share of common stock payable at such time
multiplied by the number of shares of common stock then obtainable upon
conversion of such Series A Stock. The Redemption Trigger Date for the Series A
Stock shall be the business day immediately following the thirtieth consecutive
trading day that the average closing price during such trading days (or, if no
closing price is reported, the average of the bid and ask prices) of the shares
of common stock was above $8.00 per share (which minimum price shall be
proportionally adjusted for stock splits, stock dividends, reverse stock splits
and any other subdivision or combination of the common stock). After the
Redemption Date, Isonics may redeem all or any part of the Series A Stock at its
election at any time and
44
<Page>
from time to time. The Series A Stock is convertible into common stock at the
option of the holder until and unless Isonics chooses to redeem such shares on
the basis of one share of common stock per share of Series A Stock and, until
converted, each share of Series A Stock is entitled to one vote at any meeting
of Isonics' shareholders.
We know of no plans or arrangement that will result in a change of
control at Isonics.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
We provide the following information regarding transactions among officers,
directors and significant shareholders of Isonics during the most recent two
fiscal years and during the subsequent fiscal year.
CONSULTING AGREEMENT WITH WELLS INVESTMENT GROUP, INC.
Larry Wells, one of our directors, owns and controls Wells Investment
Group, Inc., a privately-held corporation that provides financial consulting and
other similar services to others. In October 2001 we entered into a consulting
agreement with Wells Investment Group pursuant to which:
- Wells Investment Group agreed to provide consulting services to Isonics,
including performing due diligence, in connection with possible third party
investment.
- We paid Wells Investment Group $15,000 and issued to it warrants to
purchase 50,000 shares of our common stock for $1.50 per share exercisable
through October 14, 2004.
The disinterested directors approved this agreement on behalf of Isonics.
SALE OF INTERNATIONAL PROCESS RESEARCH CORPORATION
Effective February 1, 2001, we sold IPRC to a limited liability company,
Interpro Zinc LLC, in a management buy-out. Robert H. Cuttriss, Ph.D. (formerly
an executive officer of Isonics) is the manager of Interpro Zinc LLC and a 25%
owner. James E. Alexander (president, chief executive officer, and a director of
Isonics) and Boris I. Rubizhevsky (senior vice president and a director of
Isonics) are also 25% owners of Interpro Zinc LLC and participated in the
purchase of IPRC. Mr. Alexander and Mr. Rubizhevsky advised our board that they
do not intend to participate actively in Interpro Zinc's activities.
CORPORATE LOANS TO OFFICERS
In the past, Isonics has from time-to-time made loans to Messrs. Alexander
and Rubizhevsky. In each case, the loans have been interest-bearing and have
been repaid. The following table sets forth some information regarding these
loans through April 30, 2001. Isonics has not made any loans to any officers
subsequently.
<Table>
<Caption>
JAMES E. ALEXANDER BORIS RUBIZHEVSKY
PRESIDENT & CEO SENIOR VICE PRESIDENT
--------------- ---------------------
Balance as of April 30, 1999 $236,360.38 $ 223,325.22
FY 2000 Borrowings (a) 7,690.49 7,221.34
FY 2000 Repayments (a) 244,050.87(b) 230,546.56(c)
---------- ----------
Balance as of April 30, 2000 $ 0.00 $ 0.00
FY 2001 Borrowings (a) 100,000.00 100,000.00
FY 2001 Repayments (a) 100,000.00 (d) 100,000.00(d)
Balance as of April 30, 2001 $ 0.00 $ 0.00
</Table>
45
<Page>
(a) Includes interest accrued and paid. Amounts are aggregated.
(b) In October 1999 Mr. Alexander applied $74,038.54 of a bonus awarded to him
to the repayment of this indebtedness. In February 2000, Mr. Alexander
surrendered 30,437 shares of Isonics common stock in satisfaction of the
remaining $165,000 principal and $10,012.33 interest.
(c) In October 1999 Mr. Rubizhevsky applied $60,534.23 of a bonus awarded to
him to the repayment of this indebtedness. In February 2000, Mr.
Rubizhevsky surrendered 30,437 shares of Isonics common stock in
satisfaction of the remaining $165,000 principal and $10,012.33 interest.
(d) The loans were made to the officers in March ($50,000 each) and April
($50,000 each), 2001, and were repaid, with interest at 6.6% per annum, on
April 30, 2001.
CORPORATE LOANS FROM OFFICERS AND EMPLOYEES
During the fiscal year ended April 30, 2000, Isonics' officers, directors
and employees loaned Isonics funds. No loans were made to Isonics during the
year ended April 30, 2001. The following schedule summarizes these borrowing and
repayments for the year ended April 30, 2001.
<Table>
<Caption>
NAME AND BALANCE AS OF FY 2000 FY 2000 BALANCE AS OF
PRINCIPAL POSITION MAY 1, 1999 BORROWINGS (a) REPAYMENTS (a) APRIL 30, 2000
- ------------------ ----------- ----------- ----------- --------------
Boris Rubizhevsky $44,290.20 $ 8,858.04 $53,148.24 $0.00
Senior Vice President (b)..........
Stephen J. Burden $ 0.00 $57,500.00 $57,500.00 $0.00
Vice President (c).................
</Table>
(a) Includes interest accrued and paid through April 30, 2000. Amounts are
aggregated.
(b) Mr. Rubizhevsky's note to Isonics was converted into 66,666 shares of
common stock underlying 33,333 shares of Series A convertible preferred
Stock and 33,333 warrants issued in connection with a second private
placement of Series A convertible preferred stock and warrants to purchase
Isonics common stock on July 30, 1999.
(c) Dr. Burden's note to Isonics was converted into 66,666 shares of common
stock underlying 33,333 shares of Series A convertible preferred Stock and
33,333 warrants issued in connection with the second private placement on
July 30, 1999.
As of April 30, 2001 we owe approximately $114,000 to the former
owners of Chemotrade resulting from contingent consideration payable to the
sellers based on the 2001 earnings of Chemotrade. Included in the $114,000 is
approximately $57,000 payable to Mr. Hegener.
On March 4, 2002 we entered into an agreement with Stephen Burden,
Vice President of Semiconductor Materials and Products whereby he loaned us
$75,000. The loan is due March 31, 2002 or earlier upon the closing of
financing of at least $1,000,000 and incurs interest at a rate of 12% per
annum.
46
<Page>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits Pursuant to Item 601 of Regulation S-B:
<Table>
<Caption>
EXHIBIT
NUMBER TITLE
- ------ ------
1.01 Form of Underwriting Agreement. (1)
3.01 Registrant's Amended and Restated Articles of Incorporation. (1)
3.02 Registrant's Bylaws. (1)
3.03 Certificate of Determination of Preferences and Rights of the Series A preferred stock (see exhibit 10.18).
3.04 Certificate Of Determination Of Preferences And Rights Of Series B Convertible Preferred Stock (11)
3.05 Certificate of Amendment to Articles of Incorporation (13)
4.01 Specimen Common Stock Certificate. (1)
4.02 Form of Representatives' warrant Agreement. (1)
4.03 Form of warrant Agreement between the Registrant and Continental Stock Transfer & Trust Company, Monroe Parker
Securities. (1)
4.04 Specimen Class A warrant Certificate. (1)
4.05 Form of warrant Agreement between the Registrant and Continental Stock Transfer & Trust Company. (8)
4.06 Specimen Class B warrant Certificate (see exhibit 10.27).
4.07 Specimen Class C warrant Certificate (see exhibit 10.27).
4.08 Amendment No. 1 to warrant Agreement between the Registrant and Continental Stock Transfer & Trust Company. (7)
5.01 not applicable
10.01 Registrant's 1996 Stock Option Plan. (1)(2)
10.02 Form of Employment Agreement between the Registrant and certain officers of the Registrant. (1)(2)
10.03 Registrant's 1996 Executives Equity Incentive Plan. (1)(2)
10.04 Registrant's 1996 Equity Incentive Plan. (1)(2)
10.05 Memorandum of Agreement between Electrochemical Plant, AO Techsnabexport, Co., Ltd. and Registrant. (1)
10.06 Option Agreement between the Registrant and Yale University. (1)
10.07 Office Lease Agreement between Paulsen Properties and the Registrant dated as of January 1, 1996, as amended. (1)
10.08 Letter from Yale University to Registrant dated February 10, 1996. (1)
10.09 Form of Indemnity Agreement entered into by Registrant with each of its directors and investors. (2)
10.10 Stock Purchase Agreement, dated as of April 30, 1998, among Isonics Corporation, a California corporation,
Metallurgy International, Inc., a Nevada corporation, and International Process Research Corporation, a Colorado
corporation. (3)
10.10.1 Escrow Agreement, dated as of May 15, 1998, among Isonics Corporation, a California corporation, Metallurgy
International, Inc., a Nevada corporation, Robert H. Cuttriss (as Agent), and Colorado Business Bank, as Escrow
Agent. (3)
10.11 Registration Rights Agreement dated as of September 27, 1996 by and between Registrant and certain investors. (1)
10.12 Employment Agreement between the Registrant and James E. Alexander (1)(2)
10.13 Employment Agreement between the Registrant and Boris Rubizhevsky. (1)(2)
10.14 Security Agreement dated March 31, 1995 between Isonics and Isoserve, Inc. (1)
10.15
10.16 February 1997 Agreement between the Registrant, Electrochemical Plant and AO Techsnabexport, Co., Ltd. (1)
10.17 Letter from Yale University to Registrant dated January 28, 1997. (1)
10.18 Certificate of Determination of Preferences and Rights of the Series A preferred stock. (4)
10.19 Form of Subscription Agreement. (4)
10.20 Form of warrant. (4)
</Table>
47
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER TITLE
- ------ -----
10.21 Investment Banking Agreement. (4)
10.22 Form of Registration Rights Agreement. (4)
10.23 Asset Purchase Agreement dated December 1, 1999 between the Registrant and Eagle-Picher Technologies, LLC. (5)
10.24 Registration Rights Agreement dated December 1, 1999 between the Registrant and Eagle-Picher Technologies, LLC. (5)
10.25 Warrant Agreement dated December 1, 1999 between the Registrant and Eagle-Picher Technologies, LLC. (5)
10.26 Supply Agreement between the Registrant and Eagle-Picher Technologies, LLC. (6)
10.27 Amended and Restated warrant Agreement effective as of January 15, 2001, between the Registrant and Continental
Stock Transfer and Trust Company, Inc. (8)
10.28 Stock Purchase Agreement dated February 1, 2001, by and between Isonics
Corporation and Interpro Zinc, LLC. (9) 10.29 Joint R&D Project Agreement, dated
April 21, 1999, by and between Silex Systems Limited and Isonics Corporation. (10)
10.30 Contribution to "Corporate Research - ECE/Baliga" fund dated December 30, 1999, from Isonics Corporation to North
Carolina State University. (10)
10.31 Sponsored Research Agreement, dated December 15, 1999, by and between Isonics Corporation and Southern Methodist
University. (10)
10.32 Stevenson-Wydler Cooperative Research and Development Agreement, dated November 9, 1999, by and between Ernest
Orlando Lawrence Berkeley National Laboratory and Isonics Corporation (with attached Project Letter Agreement). (10)
10.33 Memorandum of Agreement, dated July 1996, by and among Electrochemical Plant, AO Techsnabexport Co., Ltd. and A & R
Materials, Inc. (10)
10.34 Agreement between Isonics Corporation and Silicon Evolution, Inc. dated September 14, 2001 (12)
10.35 Technology License Agreement dated September 14, 2001, between Silicon Evolution, Inc. and Isonics Corporation (12)
10.36 Form of employment agreement to be entered into pursuant to the agreement between Isonics Corporation and Silicon
Evolution, Inc. dated September 14, 2001 (12)
10.37 Form of lease agreement to be entered into pursuant to the agreement between Isonics Corporation and Silicon
Evolution, Inc. dated September 14, 2001 (12)
10.38 Amended and Restated Warrant Agreement dated July 26, 2001. (11)
10.39 Consulting Agreement dated October 15, 2001, with Wells Investment Group (13)
21.1 List of subsidiaries.
23.10 not applicable
</Table>
* Filed herewith. All other documents have been previously filed.
(1) Incorporated herein by reference to exhibit filed with Isonics'
Registration Statement on Form SB-2 ("Registration Statement")
(Commission file No. 333-13289) in which this exhibit bears the same
number except exhibit 3.01, which was numbered 3.03 in that
registration statement.
(2) Items that are management contracts or compensatory plans or
arrangements required to be filed as exhibits pursuant to Item 13(a)
of Form 10-KSB.
(3) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531),
dated May 15 and filed May 27, 1998, and incorporated herein by
reference.
(4) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531),
dated July 29 and filed August 12, 1999, and incorporated herein by
reference.
(5) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531)
dated December 1, 1999, and filed December 10, 1999, and amendment
thereto filed February 10, 2000, and incorporated herein by
48
<Page>
reference.
(6) Confidential treatment obtained.
(7) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531)
dated August 17, 2000, and filed August 18, 2000, and incorporated
herein by reference.
(8) Filed with Isonics' registration statement on Form S-4 (File No.
333-37696) or the amendments thereto, and incorporated herein by
reference.
(9) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531)
dated February 1, 2001, and incorporated herein by reference.
(10) Filed with Isonics' annual report on Form 10-KSB (File No. 001-12531)
for the year ended April 30, 2001, and incorporated herein by
reference.
(11) Filed with Isonics' Form 8-A/12(g) filed on August 1, 2001.
(12) Filed with Amendment no. 2 to registration statement (File No.
333-56562) and incorporated herein by reference.
(13) Filed with Isonics' Form 8-K (File No. 001-12531) dated January 8,
2002 and incorporated herein by reference.
(b) Reports on Form 8-K.
During the fourth quarter of the fiscal year ended April 30,
2001, and subsequently, Isonics Corporation has filed current reports on Form
8-K, as follows:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------------------------
DATE OF REPORT ITEMS BRIEF DESCRIPTION
- --------------------------------------------------------------------------------------------------------------------
4/30/2001 5 Repayment of certain indebtedness
- --------------------------------------------------------------------------------------------------------------------
4/17/2001 5 Completion of exchange offer; Eagle-Picher update; loan to officers
- --------------------------------------------------------------------------------------------------------------------
2/1/2001 5 Sale of International Process Research Corporation to Interpro Zinc, LLC
- --------------------------------------------------------------------------------------------------------------------
7/27/2001 5 Change in terms of Class B warrants
- --------------------------------------------------------------------------------------------------------------------
1/8/2002 5, 7 Amendment to Articles of Incorporation; announcement of alliance with Silicon
Quest, Inc., and changes in securities (Item 701) disclosure
- --------------------------------------------------------------------------------------------------------------------
</Table>
49