NEITHER THIS NOTE NOR THE SECURITIES INTO WHICH THIS NOTE IS CONVERTIBLE HAVE
BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY,
MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM,
OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
No. ___ U.S. Original Issue Date: March 20, 2002
Holder:
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Address:
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SERIES 2002A 4% CONVERTIBLE NOTE DUE MARCH 1, 2003
THIS Note is one of a duly authorized issue of Notes of ISONICS
CORPORATION, a California corporation, having a principal place of business at
0000 XxXxxxxx Xxxxxx, Xxxxxx, Xxxxxxxx 00000 (the "COMPANY"), designated as its
Series 2002A 4% Convertible Notes, due March 1, 2003 (the "NOTES"), in an
aggregate principal amount of up to One Million and 00/100 Dollars
($1,000,000.00). This Note is acquired by the Holder (as defined herein)
pursuant to the terms of that certain Financing Agreement dated as of the
Original Issue Date (as defined herein), between the Company and the Holder, as
amended, modified or supplemented from time to time in accordance with its terms
("FINANCING AGREEMENT").
FOR VALUE RECEIVED, the Company promises to pay to the Holder or registered
assigns, the principal sum of ___________________ and 00/100 Dollars
($___________.00), on or before March 1, 2003 (the "MATURITY DATE") and to pay
interest to the Holder on the principal sum at the rate of 4% per annum, which
interest shall be due and payable on the earlier of the Conversion Date (with
respect to the principal amount converted) or the Maturity Date. Interest shall
accrue daily commencing on the Original Issue Date (as defined in Section 6)
until payment in full of the principal sum, together with all accrued and unpaid
interest and other amounts which may become due hereunder, has been made.
Interest shall be calculated on the basis of a 360-day year and for the actual
number of days elapsed. Interest hereunder will be paid to the person in whose
name this Note (or one or more predecessor Notes) is registered on the records
of the Company regarding registration and transfers of the Notes (the "NOTE
REGISTER"). All overdue, accrued and unpaid interest and other amounts due
hereunder shall bear interest at the rate of 18% per annum from the day such
interest is due hereunder through and including the date of payment. The
principal of, and interest on, this Note are payable in such coin or currency of
the United States of America as at the time of payment is legal tender for
payment of public and private debts, at the address of the Holder last appearing
on the Note Register, except that the Company may, at the Company's option and
at any time, pay the principal amount due (but not the interest due) in shares
of the Company's Common Stock (as defined in Section 6) calculated based upon
the Conversion Price (as defined below). The Company shall provide the
1
Holder notice of its intention to pay amounts hereunder in cash or shares not
less than five (5) Trading Days (as defined in Section 6) prior to the Maturity
Date. Except as otherwise provided herein, if at any time the Company pays less
than the total amount of interest then accrued on account of the Note, such
payment shall be distributed ratably among the Holders based upon the aggregate
principal amount of Notes held by each Holder.
Notwithstanding anything to the contrary contained herein, the Company may
not prepay any portion of this Note by issuing shares of its Common Stock unless
(i) upon issuance such shares will be legally and validly issued, fully-paid,
and non-assessable; and (ii) such shares are registered for resale pursuant to
an effective Registration Statement (as defined in Section 6) and (iii) such
shares are listed or quoted for trading on an "Authorized Market" (as defined in
Section 6). Notwithstanding anything to the contrary contained herein, the
Company may not prepay any portion of this Note by issuing shares of its Common
Stock if the issuance of such shares would result in a violation of Section
4(a)(ii).
This Note is subject to the following additional provisions:
SECTION 1. The Notes are issuable in denominations of Fifty Thousand
Dollars ($50,000.00). The Notes are exchangeable for an equal aggregate
principal amount of Notes of different authorized denominations, as requested by
the Holder surrendering the same but shall not be issuable in denominations of
less than integral multiples of Fifty Thousand Dollars ($50,000) unless such
amount represents the full principal balance of Notes outstanding to such
Holder. No service charge will be made for such registration of transfer or
exchange.
SECTION 2.
(a) This Note may not be sold, transferred, assigned, hypothecated or
divided into two or more Notes of smaller denominations, nor may any Underlying
Shares be transferred, sold, assigned or hypothecated except in accordance with
this Section. The Holder, by acceptance hereof, agrees to give written notice to
the Company before transferring this Note or transferring any Underlying Shares;
such notice will describe briefly the any proposed transfer and will give the
Company the name, address, and tax identification number of the proposed
transferee, and will further provide the Company with an opinion of the Holder's
counsel that such transfer can be accomplished in accordance with federal and
applicable state securities laws (unless such transaction is permitted by the
plan of distribution in an effective Registration Statement). Promptly upon
receiving such written notice, the Company shall present copies thereof to the
Company's counsel.
(i) If in the opinion of such counsel the proposed transfer may be effected
without registration or qualification (under any federal or state
securities laws), the Company, as promptly as practicable, shall notify the
Holder of such opinion, whereupon the Holder shall be entitled to transfer
this Note or to dispose of Underlying Shares received upon the previous
conversion of this Note, all in accordance with the terms of the notice
delivered by the Holder to the Company; provided that an appropriate legend
may be endorsed on this Note or the certificates for such Underlying Shares
respecting restrictions upon transfer thereof necessary or advisable in the
opinion of counsel and satisfactory to the Company to prevent further
transfers which would be in violation of Section 5 of the Securities Act
and applicable state securities laws; and provided further that the
prospective transferee or purchaser shall execute such documents and make
such representations, warranties, and agreements as may be required solely
to comply with the
2
exemptions relied upon by the Company for the transfer or disposition of
the Note or Underlying Shares.
(ii) If in the opinion of the counsel referred to in this Section 2, the
proposed transfer or disposition of this Note or such Underlying Shares
described in the written notice given pursuant to this Section 2 may not be
effected without registration or qualification of this Note or such
Underlying Shares the Company shall promptly give written notice thereof to
the Holder, and the Holder will limit its activities in respect to such as,
in the opinion of such counsel, are permitted by law.
(b) Prior to transfer of this Note in compliance with this Section 2,
the Company and any agent of the Company may treat the person in whose name this
Note is duly registered on the Note Register as the owner hereof for the purpose
of receiving payment as herein provided and for all other purposes, whether or
not this Note is overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.
SECTION 3. EVENTS OF DEFAULT.
"EVENT OF DEFAULT" wherever used herein, means any one of the
following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):
(i) any default in the payment of the principal of, interest on
or liquidated damages, or other obligations on conversion in respect of,
this Note, free of any claim of subordination, as and when the same shall
become due and payable, (whether on an Interest Payment Date, Conversion
Date or the Maturity Date or by acceleration or otherwise);
(ii) the Company shall fail to observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any
breach of, this Note, the Financing Agreement or the Registration Rights
Agreement (as defined in Section 6) and such failure or breach shall not
have been remedied within 10 days after the date on which notice of such
failure or breach shall have been given;
(iii) the Company shall commence a voluntary case under the
United States Bankruptcy Code or insolvency laws as now or hereafter in
effect or any successor thereto (the "BANKRUPTCY CODE"); or an involuntary
case is commenced against the Company under the Bankruptcy Code and the
petition is not controverted within 30 days, or is not dismissed within 60
days, after commencement of such involuntary case; or a "custodian" (as
defined in the Bankruptcy Code) is appointed for, or takes charge of, all
or any substantial part of the property of the Company or the Company
commences any other proceeding under any reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency or
liquidation or similar law of any jurisdiction whether now or hereafter in
effect relating to the Company or there is commenced against the Company
any such proceeding which remains undismissed for a period of 60 days; or
the Company is adjudicated insolvent or bankrupt; or any order of relief or
other order approving any such case or proceeding is entered; or the
Company suffers any appointment of any custodian or the like for it or any
substantial part of its property which continues undischarged or unstayed
for a period of 60 days; or the Company
3
makes a general assignment for the benefit of creditors; or the Company
shall fail to pay, or shall state that it is unable to pay its debts
generally as they become due;r the Company shall call a meeting of all of
its creditors with a view to arranging a composition or adjustment of its
debts; or the Company shall by any act or failure to act indicate its
consent to, approval of or acquiescence in any of the foregoing; or any
corporate or other action is taken by the Company for the purpose of
effecting any of the foregoing;
(iv) the Company shall default in any of its obligations under
any mortgage, credit agreement or other facility, indenture, agreement or
other instrument under which there may be issued, or by which there may be
secured or evidenced any indebtedness of the Company in an amount exceeding
two hundred thousand dollars ($200,000), whether such indebtedness now
exists or shall hereafter be created and such default shall result in such
indebtedness becoming or being declared due and payable prior to the date
on which it would otherwise become due and payable;
(v) the Common Stock shall fail to be listed or authorized for
quotation on an Authorized Market, or trading in an Authorized Market has
been suspended without the Common Stock having been relisted or having such
suspension lifted, as the case may be, within five (5) Trading Days;
(vi) the Company shall be a party to any Change of Control
Transaction (as defined in Section 6), shall agree to sell or dispose of
all or in excess of 49% of its assets (based on book value calculation as
reflected in the Company's most recent financial statements) in one or more
transactions (whether or not such sale would constitute a Change of Control
Transaction), or shall redeem more than a DE MINIMIS number of shares of
Common Stock or other equity securities of the Company (other than
redemptions of Underlying Shares);
(vii) an Event (as hereinafter defined) shall not have been cured
to the satisfaction of the Holder prior to the expiration of thirty (30)
days from the Event Date (as hereinafter defined) relating thereto (other
than as a result from a failure of a Registration Statement to be declared
effective by the Commission on or prior to the Effective Date (as defined
in the Registration Rights Agreement)); or
(viii) the Company shall fail for any reason to deliver Free
Trading Certificates (as defined in Section 6) to a Holder on or prior to
the fifth (5th) Trading Day after a Conversion Date, or the Company shall
provide notice to the Holder, including by way of public announcement, at
any time, of its intention not to comply with requests for conversions of
any Notes in accordance with the terms hereof.
SECTION 4. CONVERSION.
(a) (i) This Note shall be convertible into shares of Common Stock
(subject to the limitation set forth in Section 4(a)(ii)) at the option of
the Holder in whole or in part at any time and from time to time commencing
ninety-one (91) days after the Original Issue Date and prior to the close
of business on the Maturity Date. The number of shares of Common Stock
issuable upon a conversion hereunder shall be determined by dividing the
outstanding principal amount of this Note to be converted by the Conversion
Price, each as subject to adjustment as provided hereunder. The Holder
shall effect
4
conversions by surrendering the Notes (or such portions thereof) to be
converted, together with the form of conversion notice attached hereto as
EXHIBIT A (the "CONVERSION NOTICE") to the Company. Each Conversion Notice
shall specify the principal amount of Notes to be converted and the date on
which such conversion is to be effected, which date may not be prior to the
date of such Conversion Notice is deemed to have been delivered pursuant to
Section 4(h) (the "CONVERSION DATE"). If no Conversion Date is specified in
a Conversion Notice, the Conversion Date shall be the date that the
Conversion Notice is deemed delivered pursuant to Section 4(h). Subject to
Section 4(b) hereof, each Conversion Notice, once given, shall be
irrevocable. If the Holder is converting less than all of the principal
amount represented by the Note(s) tendered by the Holder with the
Conversion Notice, or if a conversion hereunder cannot be effected in full
for any reason, the Company shall honor such conversion to the extent
permissible hereunder and shall promptly deliver to such Holder (in the
manner and within the time set forth in Section 4(b)) a new Note for such
principal amount as has not been converted.
(ii) CERTAIN CONVERSION RESTRICTIONS. The Holder agrees not to
convert Notes to the extent such conversion would result in the Holder
beneficially owning (as determined in accordance with Section 13(d) of the
Exchange Act and the rules thereunder) in excess of 4.999% of the then
issued and outstanding shares of Common Stock, including shares issuable
upon conversion of the Notes held by such Holder after application of this
Section. The Holder shall have the sole authority and obligation to
determine whether the restriction contained in this Section applies and to
the extent the Holder determines that the restriction contained in this
Section applies, the determination of which portion of the principal amount
of such Notes is convertible shall be in the sole discretion of the Holder.
The provisions of this Section may be waived by a Holder (but only as to
itself and not to any other Holder) upon not less than 65 days prior notice
to the Company. Other Holders shall be unaffected by any such waiver.
(b) (i) Not later than five (5) Trading Days after the Conversion
Date, the Company will deliver to the Holder a Free Trading Certificate or
certificates free of restrictive legends, trading restrictions or stop
transfer orders representing the number of shares of the Common Stock being
acquired upon the conversion of Notes, (ii) Notes in a principal amount
equal to the principal amount of Notes not converted, and (iii) a corporate
check in the amount of all accrued and unpaid interest, together with all
other amounts then due and payable in accordance with the terms hereof, in
respect of Notes tendered for conversion; PROVIDED, HOWEVER, that the
Company shall not be obligated to issue certificates evidencing the shares
of the Common Stock issuable upon conversion of the principal amount of
Notes until Notes are either delivered for conversion to the Company or any
transfer agent for the Notes or the Common Stock, or the Holder notifies
the Company that such Note has been lost, stolen or destroyed and complies
with Section 9 hereof (in which case the Company shall issue a replacement
Note in like principal amount). The Company shall, upon request of the
Holder, use its best efforts to deliver any certificate or certificates
required to be delivered by the Company under this Section electronically
through the Depository Trust Corporation or another established clearing
corporation performing similar functions. If in the case of any Conversion
Notice such Free Trading Certificate or certificates, are not delivered to
or as directed by the applicable Holder by the fifth Trading Day after a
Conversion Date, the Holder shall be entitled by written notice to the
Company at any time on or before its receipt of such certificate or
certificates thereafter, to rescind such conversion, in which event the
Company shall immediately return the Notes tendered for conversion.
5
(ii) If the Company fails to deliver to the Holder such
certificate or certificates pursuant to this Section prior to the third
Trading Day after a Conversion Date, the Company shall pay to such Holder,
in cash and as liquidated damages and not as a penalty, an amount equal to
0.5% of the principal amount of the Note to be converted..
(iii) Intentionally omitted.
(iv) In the event a Holder shall elect to convert a Note or part
thereof, the Company may not refuse conversion based on any claim that such
Holder or any one associated or affiliated with such Holder has been
engaged in any violation of law, or for any other reason, unless, an
injunction from a court, or notice, restraining and or enjoining conversion
of all or part of said Note shall have been sought and obtained and the
Company posts a surety bond for the benefit of such Holder in the amount of
130% of the amount of the Note, which is subject to the injunction, which
bond shall remain in effect until the completion of litigation of the
dispute and the proceeds of which shall be payable to such Holder to the
extent Holder obtains judgment.
(c) (i) The conversion price (the "CONVERSION PRICE") in effect shall
be $1.00, or as adjusted as hereinafter provided.
(ii) If the Company, at any time while any Notes are outstanding,
(a) shall pay a stock dividend or otherwise make a distribution or
distributions on shares of its Common Stock or any other equity or equity
equivalent securities payable in shares of the Common Stock, (b) subdivide
outstanding shares of the Common Stock into a larger number of shares, (c)
combine outstanding shares of the Common Stock into a smaller number of
shares, or (d) issue by reclassification of shares of the Common Stock any
shares of capital stock of the Company, the Initial Conversion Price shall
be multiplied by a fraction of which the numerator shall be the number of
shares of the Common Stock (excluding treasury shares, if any) outstanding
before such event and of which the denominator shall be the number of
shares of the Common Stock outstanding after such event. Any adjustment
made pursuant to this Section 4(c)(ii) shall become effective immediately
after the record date for the determination of stockholders entitled to
receive such dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision,
combination or re-classification.
(iii) If the Company, at any time while any Notes are
outstanding, shall issue rights or warrants to all holders of the Common
Stock (and not to Holders of Notes) entitling them to subscribe for or
purchase shares of the Common Stock at a price per share less than the
Conversion Price, the Conversion Price shall be multiplied by a fraction,
of which
the denominator shall be the number of shares of the Common Stock
(excluding treasury shares, if any) outstanding on the date of issuance of
such rights or warrants plus the number of additional shares of the Common
Stock offered for subscription or purchase, and
the numerator shall be the number of shares of the Common Stock (excluding
treasury shares, if any) outstanding on the date of issuance of such rights
or warrants plus the
6
number of shares which the aggregate offering price of the total number of
shares so offered would purchase at the Conversion Price.
Such adjustment shall be made whenever such rights or warrants are issued,
and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants.
However, upon the expiration of any right or warrant to purchase shares of
the Common Stock the issuance of which resulted in an adjustment in the
Conversion Price pursuant to this Section 4(c)(iii), if any such right or
warrant shall expire and shall not have been exercised, the Conversion
Price shall immediately upon such expiration be recomputed and effective
immediately upon such expiration be increased to the price which it would
have been (but reflecting any other adjustments in the Conversion Price
made pursuant to the provisions of this Section 4 after the issuance of
such rights or warrants) had the adjustment of the Conversion Price made
upon the issuance of such rights or warrants been made on the basis of
offering for subscription or purchase only that number of shares of the
Common Stock actually purchased upon the exercise of such rights or
warrants actually exercised.
(iv) If the Company, as applicable with respect to Common Stock
Equivalents (as defined below), at any time while this Note is outstanding,
shall issue shares of Common Stock or rights, warrants, options or other
securities or debt that is convertible into or exchangeable for shares of
Common Stock ("COMMON STOCK EQUIVALENTS") entitling any Person to acquire
shares of Common Stock at a price per share less than the Conversion Price,
then the Conversion Price shall be multiplied by a fraction,
the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of shares of Common
Stock or such Common Stock Equivalents plus the number of shares of
Common Stock which the offering price for such shares of Common Stock
or Common Stock Equivalents would purchase at the Conversion Price,
and
the denominator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to such issuance plus the
number of shares of Common Stock so issued or issuable,
provided, that for purposes hereof, all shares of Common Stock that are
issuable upon exercise or exchange of Common Stock Equivalents shall be
deemed outstanding immediately after the issuance of such Common Stock
Equivalents. Such adjustment shall be made whenever such shares of Common
Stock or Common Stock Equivalents are issued.
(v) If the Company, at any time while Notes are outstanding,
shall distribute to all holders of the Common Stock (and not to Holders of
Notes) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security, then in each such case the Initial
Conversion Price at which Notes shall thereafter be convertible shall be
determined by multiplying the Initial Conversion Price in effect
immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which
the denominator shall be the Per Share Market Value of the Common
Stock determined as of the record date mentioned above, and
the numerator shall be such Per Share Market Value of the Common Stock
on such record date less the then fair market value at such record
date of the portion of such assets
7
or evidence of indebtedness so distributed applicable to one
outstanding share of the Common Stock as determined by the Board of
Directors in good faith; PROVIDED, HOWEVER, that in the event of a
distribution exceeding ten percent (10%) of the net assets of the
Company, such fair market value shall be determined by a nationally
recognized or major regional investment banking firm or firm of
independent certified public accountants of recognized standing (which
may be the firm that regularly examines the financial statements of
the Company) (an "APPRAISER") selected in good faith by the holders of
a majority in interest of Notes then outstanding; and PROVIDED,
FURTHER, that the Company, after receipt of the determination by such
Appraiser shall have the right to select an additional Appraiser, in
good faith, in which case the fair market value shall be equal to the
average of the determinations by each such Appraiser.
In either case the adjustments shall be described in a statement provided
to the holders of Notes of the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to one
share of the Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the
record date mentioned above.
(vi) In case of any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property, the Holder of this Note shall have
the right thereafter to, at its option, convert the then outstanding
principal amount only into the shares of stock and other securities, cash
and property receivable upon or deemed to be held by holders of the Common
Stock following such reclassification or share exchange, and the Holders of
the Notes shall be entitled upon such event to receive such amount of
securities, cash or property as the shares of the Common Stock of the
Company into which the then outstanding principal amount could have been
converted immediately prior to such reclassification or share exchange
would have been entitled. The terms of any such reclassification or share
exchange shall include such terms so as to continue to give to the Holder
the right to receive the securities, cash or property set forth in this
Section 4(c)(vi) upon any conversion following such event. This provision
shall similarly apply to successive reclassifications or share exchanges.
(vii) If:
A. the Company shall declare a dividend (or any other
distribution) on its Common Stock; or
B. the Company shall declare a special nonrecurring cash
dividend on or a redemption of its Common Stock; or
C. the Company shall authorize the granting to all holders of
the Common Stock rights or warrants to subscribe for or purchase any
shares of capital stock of any class or of any rights; or
D. the approval of any stockholders of the Company shall be
required in connection with any reclassification of the Common Stock
of the Company, any consolidation or merger to which the Company is a
party, any sale or transfer of all or substantially all of the assets
of the Company, of any compulsory share of exchange whereby the Common
Stock is converted into other securities, cash or property; or
8
E. the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the Company;
then the Company shall cause to be filed at each office or agency
maintained for the purpose of conversion of the Notes, and shall cause to
be mailed to the Holders of Notes at their last addresses as they shall
appear upon the stock books of the Company, at least 30 calendar days prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of
such dividend, distribution, redemption, rights or warrants, or if a record
is not to be taken, the date as of which the holders of the Common Stock of
record to be entitled to such dividend, distributions, redemption, rights
or warrants are to be determined or (y) the date on which such
reclassification, consolidation, merger, sale, transfer or share exchange
is expected to become effective or close, and the date as of which it is
expected that holders of the Common Stock of record shall be entitled to
exchange their shares of the Common Stock for securities, cash or other
property deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange; PROVIDED, HOWEVER, that the failure to
mail such notice or any defect therein or in the mailing thereof shall not
affect the validity of the corporate action required to be specified in
such notice. Holders are entitled to convert Notes during the 30-day period
commencing the date of such notice to the effective date of the event
triggering such notice.
(viii) All calculations under this Section 4 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(ix) Whenever the Conversion Price is adjusted pursuant to
Section 4(c)(i) - (v), the Company shall promptly mail to each Holder of
Notes, a notice setting forth the Initial Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.
(x) Notwithstanding anything to the contrary herein, in no event
shall the Conversion Price be adjusted for (i) issuances of shares upon
exercise of any warrants, options or convertible securities outstanding as
of the date hereof; (ii) issuances of shares upon conversion of any Notes
or exercise of the Warrants (as defined in the Financing Agreement); or
(iii) issuances of options (or shares upon the exercise thereof), stock
bonuses, or shares pursuant to the Company's 1996 Stock Option Plan, 1996
Executives Equity Incentive Plan, 1996 Equity Incentive Plan, the 1998
Employee Stock Purchase Plan, or the Directors' Plan.
(d) If at any time conditions shall arise by reason of action taken
by the Company which in the opinion of the Board of Directors are not
adequately covered by the other provisions hereof and which might
materially and adversely affect the rights of the Holders (different than
or distinguished from the effect generally on rights of holders of any
class of the Company's capital stock) or if at any time any such conditions
are expected to arise by reason of any action contemplated by the Company,
the Company shall mail a written notice briefly describing the action
contemplated and the material adverse effects of such action on the rights
of the Holders at least 30 calendar days prior to the effective date of
such action, and an Appraiser selected by the Holders of majority in
interest of the Notes shall give its opinion as to the adjustment, if any
(not inconsistent with the standards established in this Section 4), of the
Conversion Price (including, if necessary, any adjustment as to the
securities into which Notes may thereafter be convertible) and any
distribution which is or would be required to preserve without diluting the
rights of the Holders; PROVIDED, HOWEVER, that the Company, after receipt
of
9
the determination by such Appraiser, shall have the right to select an
additional Appraiser, in good faith, in which case the adjustment shall be
equal to the average of the adjustments recommended by each such Appraiser.
The Board of Directors shall make the adjustment recommended forthwith upon
the receipt of such opinion or opinions or the taking of any such action
contemplated, as the case may be; PROVIDED, HOWEVER, that no such
adjustment of the Conversion Price shall be made which in the opinion of
the Appraiser(s) giving the aforesaid opinion or opinions would result in
an increase of the Conversion Price to more than the Conversion Price then
in effect.
(e) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued shares of the Common Stock
solely for the purpose of issuance upon conversion of the Notes and payment
of interest on the Notes, each as herein provided, free from preemptive
rights or any other actual contingent purchase rights of persons other than
the Holders, not less than such number of shares of the Common Stock as
shall (subject to any additional requirements of the Company as to
reservation of such shares set forth in the Financing Agreement) be
issuable (taking into account the adjustments and restrictions of Section
4(c)) upon the conversion of the outstanding principal amount of the Notes
and payment of interest hereunder. The Company covenants that all shares of
the Common Stock that shall be so issuable shall, upon issue, be duly and
validly authorized, issued and fully paid, nonassessable and, if the
Registration Statement has been declared effective under the Securities
Act, freely tradeable.
(f) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of the Common
Stock, but may if otherwise permitted, make a cash payment in respect of
any final fraction of a share based on the Per Share Market Value at such
time. If the Company elects not, or is unable, to make such a cash payment,
the holder shall be entitled to receive, in lieu of the final fraction of a
share, one whole share of Common Stock.
(g) The issuance of certificates for shares of the Common Stock on
conversion of the Notes shall be made without charge to the Holders thereof
for any documentary stamp or similar taxes that may be payable in respect
of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such Notes so
converted and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(h) Any and all notices or other communications or deliveries to be
provided by the Holders of the Notes hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service or sent by certified or registered mail, postage prepaid, addressed
to the Company, at 0000 XxXxxxxx Xxxxxx, Xxxxxx, Xxxxxxxx 00000 (facsimile
number (303-279-7300), attention Xxxxx X. Xxxxxxxxx, President, or such
other address or facsimile number as the Company may specify for such
purposes by notice to the Holders delivered in accordance with this
Section. Any and all notices or other communications or deliveries to be
provided by the Company hereunder shall be in
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writing and delivered personally, by facsimile, sent by a nationally
recognized overnight courier service or sent by certified or registered
mail, postage prepaid, addressed to the Holder at the facsimile telephone
number or address of such Holder appearing on the books of the Company, or
if no such facsimile telephone number or address appears, at the principal
place of business of the holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of
(i) the date of transmission, if such notice or communication is delivered
via facsimile at the facsimile telephone number specified in this Section
prior to 5:00 p.m. (New York City time), (ii) the date after the date of
transmission, if such notice or communication is delivered via facsimile at
the facsimile telephone number specified in this Section later than 5:00
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York
City time) on such date, (iii) four days after deposit in the United States
mails, (iv) the Business Day following the date of mailing, if send by
nationally recognized overnight courier service, or (v) upon actual receipt
by the party to whom such notice is required to be given.
SECTION 5. PREPAYMENT.
(a) The Company shall have the right to prepay this Note and all
accrued but unpaid interest thereon prior to the Maturity Date provided
that, if the prepayment is accomplished in cash, the Company shall issue to
the Holder a warrant to purchase one (1) share of Common Stock at an
exercise price of $1.00 for each $1.00 principal amount so prepaid, and the
warrant will be in the form attached to the Financing Agreement.
(b) (i) The Company shall give at least five (5) business days, but
not more than ten (10) business days, written notice of any intention to
prepay this Note prior to the Maturity Date to the Holder which n otice
shall specify the "Prepayment Date.".
(ii) With respect to any Note for which a Notice of Conversion is
submitted to the Company prior to the Prepayment Date, the Notice of
Conversion shall take precedence and such Note shall be converted in
accordance with the terms hereof. Furthermore, in the event such prepayment
is not timely made, the Notice of Prepayment shall be null and void, and
any rights of the Company to thereafter prepay this Note shall be subject
to the deposit of the amount to be paid in escrow, with an attorney
designated by the Holder, not later than two business days after delivery
of any Notice.
SECTION 6. DEFINITIONS. For the purposes hereof, the following terms shall
have the following meanings:
"Authorized Market" means the OTC Bulletin Board, the Nasdaq SmallCap
Stock Market ("NASDAQ"), the American Stock Exchange, Nasdaq National
Market or The New York Stock Exchange.
"BUSINESS DAY" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government
action to close.
"CHANGE OF CONTROL TRANSACTION" means the occurrence of any of (i) an
acquisition after the date hereof by an individual or legal entity or
"group" (as described in Rule 13d-5(b)(1) promulgated under the Exchange
Act) of in excess of 49% of the voting securities of the Company coupled
with a replacement of more than one-half of
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the members of the Company's board of directors which is not approved by
those individuals who are members of the board of directors on the date
hereof in one or a series of related transactions, or (ii) the merger of
the Company with or into another entity, consolidation or sale of all or
substantially all of the assets of the Company in one or a series of
related transactions, unless following such transaction, the holders of the
Company's securities continue to hold at least 40% of such securities
following such transaction. The execution by the Company of an agreement to
which the Company is a party or by which it is bound providing for any of
the events set forth above in (i) or (ii) does not constitute the
occurrence of the event until after the event in fact occurs.
"COMMON STOCK" means the Company's common stock, no par value per
share, and stock of any other class into which such shares may hereafter
have been reclassified or changed.
"FREE TRADING CERTIFICATES" SHALL MEAN CERTIFICATES REPRESENTING
SHARES OF COMMON STOCK WHICH ARE ELIGIBLE FOR SALE PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT.
"ORIGINAL ISSUE DATE" shall mean the date of the first issuance of any
Notes regardless of the number of transfers of any Note and regardless of
the number of instruments which may be issued to evidence such Note.
"PERSON" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated March 20, 2002, between the Company and the initial
Holders of the Notes.
"REGISTRATION STATEMENT" means a registration statement meeting the
requirements set forth in the Registration Rights Agreement, covering among
other things the resale of the Underlying Shares and naming the Holder as a
"selling stockholder" thereunder.
"TRADING DAY" means (a) a day on which the Common Stock is traded on
the NASDAQ, or (b) if the Common Stock is not listed on the NASDAQ, a day
on which the Common Stock is traded in the over-the-counter market, as
reported by the OTC Bulletin Board, or (c) if the Common Stock is not
quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted
in the over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its
functions of reporting prices); PROVIDED, HOWEVER, that in the event that
the Common Stock is not listed or quoted as set forth in (a), (b) and (c)
hereof, then Trading Day shall mean any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions
in the State of New York are authorized or required by law or other
government action to close.
"UNDERLYING SHARES" means the number of shares of Common Stock into
which the Notes are convertible and any shares of Common Stock issuable in
payment of interest as provided under and in accordance with the terms
hereof and the Financing Agreement.
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SECTION 7. Except as expressly provided herein, no provision of this Note
shall alter or impair the obligation of the Company, which is absolute and
unconditional, to pay the principal of, interest and liquidated damages (if any)
on, this Note at the time, place, and rate, and in the coin or currency, herein
prescribed. This Note is a direct obligation of the Company. This Note ranks
PARI PASSU with all other Notes now or hereafter issued under the terms set
forth herein.
SECTION 8. This Note shall not entitle the Holder to any of the rights of a
stockholder of the Company, including without limitation, the right to vote, to
receive dividends and other distributions, or to receive any notice of, or to
attend, meetings of stockholders or any other proceedings of the Company, unless
and to the extent converted into shares of Common Stock in accordance with the
terms hereof. As long as there are Notes outstanding, the Company shall not and
shall cause it subsidiaries not to, without the consent of the Holders, (i)
amend its certificate of incorporation, bylaws or other charter documents so as
to adversely affect any rights of the Holders; or (ii) repay, repurchase or
otherwise acquire shares of its Common Stock or other equity securities other
than as to the Underlying Shares to the extent permitted or required under the
Related Agreements (as defined in the Purchase Agreement).
SECTION 9. If this Note shall be mutilated, lost, stolen or destroyed, the
Company shall execute and deliver, in exchange and substitution for and upon
cancellation of a mutilated Note, or in lieu of or in substitution for a lost,
stolen or destroyed Note, a new Note for the principal amount of this Note so
mutilated, lost, stolen or destroyed but only upon receipt of evidence of such
loss, theft or destruction of such Note, and of the ownership hereof, and
indemnity, if requested, all reasonably satisfactory to the Company.
SECTION 10. This Note shall be governed by and construed in accordance with
the laws of the State of New York. Each of the parties consents to the exclusive
jurisdiction of the federal courts whose districts encompass any part of the
City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection, including
any objection based on FORUM NON COVENIENS, to the bringing of any such
proceeding in such jurisdictions. To the extent determined by such court, the
Company shall reimburse the Holder for any reasonable legal fees and
disbursements incurred by the Holder in enforcement of or protection of any of
its rights under any of this Note.
SECTION 11. Any waiver by the Company or the Holder of a breach of any
provision of this Note shall not operate as or be construed to be a waiver of
any other breach of such provision or of any breach of any other provision of
this Note. The failure of the Company or the Holder to insist upon strict
adherence to any term of this Note on one or more occasions shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Note. Any waiver must be
in writing.
SECTION 12. If any provision of this Note is invalid, illegal or
unenforceable, the balance of this Note shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances.
13
SECTION 13. Whenever any payment or other obligation hereunder shall be due
on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day (or, if such next succeeding Business Day falls in the
next calendar month, the preceding Business Day in the appropriate calendar
month).
SECTION 14. SECURITY. The obligation of the Company for payment of
principal, interest and all other sums hereunder, in the event of a default and
failure of the Company to perform hereunder, is secured solely by the pledge of
certain shares of the Company's Common Stock owned beneficially and of record by
the Persons specified on Schedule A hereto, (the "COLLATERAL SHARES") under the
terms and conditions of a Stock Pledge Agreement, by reference made a part of
the terms of this Note. The security interest of the Holder as to the Collateral
Shares is perfected by the delivery of such shares to Xxxxxxx & Xxxxxx, LLP, as
escrow agent pursuant to the terms of the Pledge Agreement.
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IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer duly authorized for such purpose, as of the date first
above indicated.
ISONICS CORPORATION
By:
-----------------------------
Xxxxx X. Xxxxxxxxx, President
Attest:
By:
------------------------------------
Xxxxxxx Xxxxxx, Assistant Secretary
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EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Note)
The undersigned hereby elects to convert Note No. [ ] into shares of Common
Stock, no par value (the "COMMON STOCK"), of ISONICS CORPORATION (the "COMPANY")
according to the conditions hereof, as of the date written below. If shares are
to be issued in the name of a person other than undersigned, the undersigned
will pay all transfer taxes payable with respect thereto and is delivering
herewith such certificates and opinions as reasonably requested by the Company
in accordance therewith, and such transfer may only be accomplished to the
extent permitted in Section 2 of this Note. No fee will be charged to the holder
for any conversion, except for such transfer taxes, if any.
Conversion calculations:
-------------------------
Date to Effect Conversion
Principal Amount of Notes to be Converted
--------
Number of shares of Common Stock to be Issued
Applicable Conversion Price
Signature
-------------------------------
Name
------------------------------------
Address
---------------------------------
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