-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OYwbpcewjBWu59EbUuqG1Mk1PlNTxM6yWS1GoRm6smx0QBiH9L006a1/OWs8LquA WAGjrrHj8T+A06r+hd3H+A== 0001047469-99-031363.txt : 19990813 0001047469-99-031363.hdr.sgml : 19990813 ACCESSION NUMBER: 0001047469-99-031363 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990729 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ISONICS CORP CENTRAL INDEX KEY: 0001023966 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 770338561 STATE OF INCORPORATION: CA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-12531 FILM NUMBER: 99685370 BUSINESS ADDRESS: STREET 1: 20 GREAT OAKS BLVD STREET 2: SUITE 220 CITY: SAN JOSE STATE: CA ZIP: 95119 BUSINESS PHONE: 4082600155 MAIL ADDRESS: STREET 1: 20 GREAT OAKS BLVD STREET 2: SUITE 220 CITY: SAN JOSE STATE: CA ZIP: 95119 8-K 1 FORM 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT: JULY 29, 1999 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 -------------------------------------------- Address of principal executive offices 303-279-7900 ------------ Telephone number, including Area code Not applicable -------------- Former name or former address if changed since last report ITEM 5 - OTHER EVENTS GENERAL. On July 29, 1999, Isonics Corporation completed a private placement financing to accredited investors and conversion of debt valued in total at $2.7 million. Isonics issued 1,830,000 units, each unit (a "Unit") consisting of one share of preferred stock and one warrant. The $2,250,000 cash proceeds will be used for repayment of debt, working capital, and to finance the continued growth of operations including the continued development and commercialization of Silicon-28 wafers for the semiconductor industry. Of the 1,830,000 Units, 330,000 Units were issued in payment of certain corporate obligations. The investors were primarily institutions, but also included several individual accredited investors and two officers of the Company. The Preferred Stock issued as part of the unit may be converted to common shares of Isonics stock at a fixed conversion price of $1.50 per share. Each warrant issued in the placement allows the investor to purchase a share of Isonics stock for $3.75 through July 29, 2002. Isonics is an advanced materials and technology company which develops and commercializes products based on enriched stable isotopes. Stable isotopes can be thought of as ultra-ultra pure materials. This high degree of purification provides enhanced performance properties compared to normal materials. Stable isotopes have commercial uses in several areas, including energy; research, medical diagnostics, and drug development; product tagging and stewardship; semiconductors; lasers; and optical materials. Except for historical information contained herein, this document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks and uncertainties that may cause the Company's actual results or outcomes to be materially different from those anticipated and discussed herein. Further, the Company operates in industries where securities values may be volatile and may be influenced by regulatory and other factors beyond the Company's control. Other important factors that the Company believes might cause such differences are discussed in the risk factors detailed in the Company's 10-KSB for the year ended April 30, 1998 filed with the Securities and Exchange Commission, which include the Company's cash flow difficulties, dependence on significant customers, and rapid development of technology, among other risks. In assessing forward-looking statements contained herein, readers are urged to carefully read all cautionary statements contained in the Company's filings with the Securities and Exchange Commission. INFORMATION REQUIRED BY ITEM 701 OF REGULATION S-B. (a) SECURITIES SOLD. The sale of securities described in the preceding paragraphs occurred on July 29, 1999. The securities sold include: 1,830,000 shares of restricted Series A Convertible Preferred Stock, created by filing an amended certificate of determination of preferences and rights (the "Certificate of Determination") with the California Secretary of State; and 1,830,000 restricted warrants to purchase shares of restricted common stock issued on a warrant-for-share basis with the Series A Convertible Preferred Stock; and 500,000 restricted warrants issued as a fee pursuant to an investment banking agreement (b) UNDERWRITERS AND OTHER PURCHASERS. (i) No underwriters, agents, or placement agents participated in the private placement. (ii) 1,500,000 Units (each Unit consisting of one share of Series A Convertible Preferred Stock and one warrant) were sold to accredited investors for cash; and (iii) 330,000 Units were issued to accredited investors in settlement of debt obligations; and (iv) 500,000 warrants were issued to a single accredited investor as compensation pursuant to an investment banking agreement. (c) The Units were sold for a purchase price of $1.50 per Unit. The Units described in (b)(ii) above were sold for cash; the Units described in (b)(iii) above were issued in satisfaction of debt obligations. (d) The transactions were exempt from registration under the Securities Act of 1933, as amended by reason of Sections 4(2) and 4(6) of the Securities Act of 1933, and Rule 506 of Regulation D thereunder. (e) Terms of conversion or exercise are as follows: (i) The Series A Convertible Preferred Stock is convertible into shares of common stock on a share-for-share basis, subject to dilution adjustments. The Series A Convertible Preferred Stock is entitled to receive dividends on a share-for-share basis with the shares of common stock except in the case of a "Silicon Isotope Transaction" as defined in the Certificate of Determination, in which case the holders of Series A Convertible Preferred Stock have certain additional rights. The Series A Convertible Preferred Stock is entitled to a liquidation preference of $1.50 per share. (ii) The warrants are each exercisable to purchase a single share of common stock (subject to dilution adjustment) for a purchase price of $3.75 per share through the expiration date, July 29, 2002. (iii) The Company also entered into a registration rights agreement relating to the shares of common stock underlying the Series A Convertible Preferred Stock and the warrants, by which (subject to certain conditions) the Company is required to register the underlying common stock on the request of the holders of 30% or more of the "registrable securities." The Company is not obligated to obtain effectiveness for more than two such registration statements during the term of the registration rights agreement, which expires upon the unanimous consent of the holders and the Company. (f) The Company intends to use the cash proceeds from the sale of the Units for repayment of debt, working capital, and to finance the continued growth of operations including the continued development and commercialization of Silicon-28 wafers for the semiconductor industry. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial statements of businesses acquired. NOT APPLICABLE. (b) Pro forma financial statements. NOT APPLICABLE. (c) Exhibits: 1. Certificate of Determination of Preferences and Rights of the Series A Preferred Stock 2. Form of Subscription Agreement 3. Form of Warrant 4. Investment Banking Agreement 5. Form of Registration Rights Agreement 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 11th day of August 1999. ISONICS CORPORATION By: /s/ James E. Alexander --------------------------- James E. Alexander President and Chief Executive Officer and Director EX-1 2 EXHIBIT 1 AMENDED AND RESTATED CERTIFICATE OF DETERMINATION OF PREFERENCES AND RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK OF ISONICS CORPORATION * * * * The undersigned, James E. Alexander and Brantley J. Halstead, certify that: 1. They are the duly acting President and Secretary, respectively, of ISONICS CORPORATION, a corporation organized and existing under the Corporations Code of the State of California (the "Corporation"). 2. That, pursuant to authority conferred upon the Board of Directors by the Articles of Incorporation of the Corporation, and pursuant to the provisions of Section 401 of Title 1 of the Corporations Code of the State of California, said Board of Directors, pursuant to an action by unanimous consent dated July 26, 1999, adopted a resolution mending and restating the rights, preferences, privileges and restrictions of, and the number of shares comprising, the Corporation's Series A Convertible Preferred Stock, which resolution is as follows: RESOLVED, that a series of Preferred Stock in Isonics Corporation, a California corporation (the "Corporation"), having the rights, preferences, privileges and restrictions, and the number of shares constituting such series and the designation of such series, set forth below be, and it hereby is, authorized by the Board of Directors of the Corporation pursuant to authority given by the Corporation's Articles of Incorporation. 1. NUMBER AND DESIGNATION. This series shall consist of 1,850,000 shares of Preferred Stock of the Corporation and shall be designated the Series A Convertible Preferred Stock ("Series A Stock"). The number of authorized shares of Series A Stock may be reduced to the extent any shares are not issued and outstanding by further resolution duly adopted by the Board of Directors of the Corporation and by filing amendments to the Certificate of Determination pursuant to the provisions of the Corporations Code of the State of California stating that such reduction has been so authorized, but the number of authorized shares of this Series shall not be increased except pursuant to majority vote of the Series A Holders. None of the shares of Series A Stock has been issued. 2. DIVIDENDS. When and as any dividend or distribution is declared or paid by the Corporation on Common Stock, whether payable in cash, property, securities or rights to acquire securities, the Series A Holders will be entitled to participate with the holders of Common Stock in such dividend or distribution as set forth in this Section 2. At the time such dividend or distribution is payable to the holders of Common Stock, the Corporation will pay to each Series A Holder such holder's share of such dividend or distribution 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 holder's Series A Stock. 3. VOTING RIGHTS. A. The Series A Holders shall be entitled to notice of any shareholders' meeting and to vote as a single class with the Common Stock upon any matter submitted for approval by the holders of Common Stock on the following basis: the Series A Holders shall have that number of votes equal to the number of shares of Common Stock into which such Series A Stock is then convertible. B. In addition to any other rights provided by law, so long as any Series A Stock is outstanding, the Corporation, without first obtaining the affirmative vote or written consent of the holders of not less than a majority of such outstanding shares of Series A Stock, will not: (i) amend or repeal any provision of, or add any provision to, the Corporation's Articles of Incorporation or By-Laws if such action would alter adversely the liquidation preferences of, or the rights or restrictions provided for the benefit of, any Series A Stock; (ii) authorize or issue shares of any class or series of stock not expressly authorized herein having any preference or priority as to dividends, voting or liquidation or other rights superior to any such preference or priority of the Series A Stock, or authorize or issue shares of stock of any class or any bonds, debentures, notes or other obligations convertible into or exchangeable for, or having option rights to purchase, any shares of stock of the Corporation having any preference or priority as to dividends, voting or liquidation or other rights superior to any such preference or priority of the Series A Stock; (iii) reclassify any class or series of stock junior to the Series A Stock into stock senior to the Series A Stock with respect to any preference or priority; (iv) issue any class(es) or series of equity security(ies) which (a) is (are) convertible directly or indirectly into Common Stock at a rate related to the market price of the Common Stock or other such variable basis (other than normal anti-dilution provisions) or (b), in any transaction or series of transactions over a 12 month period, constitute(s) 15% or more of the outstanding Common Stock of the Corporation, assuming conversion or exercise in full of any Convertible Securities included in such securities; (v) elect to windup, dissolve or liquidate the Corporation or revoke any such election; or (vi) sell or otherwise dispose of (including without limitation through lease, mortgage, licensing, joint venture, exchange, transfer or similar arrangements) all or a significant portion of the Silicon Isotope Business. 4. PREFERENCE UPON LIQUIDATION. A. Upon any liquidation, dissolution or winding up of the Corporation, each Series A Holder will be entitled to be paid, before any distribution or payment is made upon any Junior Securities of the Corporation, an amount in cash equal to the aggregate Liquidation Value (as defined in Section 7C below) of all shares of Series A Stock held by such holder, plus accrued dividends, if any; thereafter, each Series A Holder will participate in any distribution or payment on a pro rata basis with all Junior Securities as if the Series A Stock had been converted into Common Stock. B. The reorganization, consolidation or the merger of the Corporation into or with any other corporation(s) or other entity(ies) ("Reorganization"), the sale, lease, licensing, exchange or other transfer by the Corporation of all or any significant part of its assets or the commencement by the Corporation of a voluntary case under the United States bankruptcy laws or any applicable bankruptcy, insolvency or similar law of any other country, or consent to the entry of an order for relief in an involuntary case under any such law or to the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or the making of an assignment for the benefit of its creditors, or an admission in writing of its inability to pay its debts generally as they become due, will be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 4; PROVIDED THAT, with the consent of the Series A Holders acting by a majority vote (the "Reorganization Consent"), a Reorganization of the Corporation shall not be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 4 if (i) the principal agreement for such Reorganization shall expressly provide that the Series A Stock shall become preferred stock of such surviving entity with the equivalent rights to the rights set forth herein ("Surviving Entity Preferred Stock"), (ii) the holders of Junior Securities receive, in exchange for such Junior Securities, common stock or preferred stock in the surviving entity (whether or not the surviving entity is the Corporation) of such Reorganization, or common stock or preferred stock of another entity, which is junior as to dividends and upon liquidation, dissolution or winding up to the Series A Stock or Surviving Entity Preferred Stock, as applicable, and (iii) the Series A Holders shall be entitled to receive at the option of each Series A Holder (A) either the Surviving Entity Preferred Stock or (B) the kind and amount of shares or other securities or property which they would have been entitled to receive had they converted their shares of Series A Stock into shares of Common Stock of the Corporation as of the record date for the determination of holders of Common Stock entitled to cast their votes for or against or to express any dissent to such Reorganization. After any such Reorganization and Reorganization Consent, the rights of such holders of Surviving Entity Preferred Stock with respect to the adjustment of the Conversion Price shall be appropriately continued and preserved in order to afford, as nearly as possible, protection against dilution of the conversion rights and privileges comparable to those conferred herein. 5. CONVERSION INTO CONVERSION STOCK; SILICON ISOTOPE TRANSACTION. A. CONVERSION. (i) At any time prior to the Redemption Date (as defined in Section 6 B below), any Series A Holder may convert all or any portion of such holder's shares of Series A Stock into a number of shares of the Conversion Stock computed by multiplying the number of shares to be converted by $1.50 and dividing the result by the Conversion Price then in effect. For purposes of this Section, "Conversion Stock" means the Common Stock. (ii) Each conversion of Series A Stock will be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Series A Stock to be converted have been surrendered at the principal office of the Corporation. At such time as such conversion has been effected, the rights of the holder of such Series A Stock as such holder will cease and the person or persons in whose name or names any certificate or certificates for shares of Conversion Stock are to be issued upon such conversion will be deemed to have become the holder or holders of record of the shares of Conversion Stock represented thereby. (iii) As soon as possible after a conversion has been effected, the Corporation will deliver to the converting holder: (a) a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; and (b) a certificate representing any shares of Series A Stock which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. (iv) If any fractional share of Conversion Stock would be issuable upon any conversion, the Corporation will pay the holder of the Conversion Stock the fair market value of such fractional share. (v) The issuance of certificates for shares of Conversion Stock upon conversion of Series A Stock will be made without charge. (vi) The Corporation will not close its books against the transfer of Series A Stock or of Conversion Stock issued or issuable upon conversion of Series A Stock in any manner which interferes with the conversion of Series A Stock. B. CONVERSION PRICE. The initial Conversion Price for the Series A Stock will be $1.50. In order to prevent dilution of the conversion rights granted under this Section, the Conversion Price will be subject to adjustment from time to time pursuant to this Section 5. C. SUBDIVISION OR COMBINATION OF COMMON STOCK; DISSOLUTION. (i) If the Corporation at any time subdivides (by any stock split, stock dividend or otherwise) its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision will be proportionately reduced, and if the Corporation at any time combines (by reverse stock split or otherwise) its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination will be proportionately increased. (ii) In the event of a judicial or non-judicial dissolution of the Corporation, the conversion rights and privileges of the Series A Holders shall terminate on a date, as fixed by the Board of Directors of the Corporation, not more than 45 days and not less than 30 days before the date of such dissolution. The reference to shares of Common Stock herein shall be deemed to include shares of any class into which said shares of Common Stock may be changed. D. OTHER ADJUSTMENTS. (i) GENERAL. In any case to which Section 5C hereof is not applicable, where the Corporation shall issue or sell shares of its Common Stock after the Original Issue Date for a consideration per share less than the Conversion Price in effect pursuant to the terms of the Series A Stock at the time of issuance or sale of such additional shares (the "Lower Exercise Price"), then the Conversion Price in effect hereunder shall simultaneously with such issuance or sale be reduced to the Lower Exercise Price. (ii) CONVERTIBLE SECURITIES. (a) In case the Corporation shall issue or sell any securities convertible into Common Stock of the Corporation ("Convertible Securities") after the Original Issue Date, there shall be determined the price per share for which Common Stock is issuable upon the conversion or exchange thereof, such determination to be made by dividing (1) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (2) the maximum number of shares of Common Stock of the Corporation issuable upon the conversion or exchange of all of such Convertible Securities. (b) If the price per share so determined shall be less than the applicable Conversion Price, then such issue or sale shall be deemed to be an issue or sale for cash (as of the date of issue or sale of such Convertible Securities) of such maximum number of shares of Common Stock at the price per share so determined, provided that, if such Convertible Securities shall by their terms provide for an increase or increases or decrease or decreases with the passage of time, in the amount of additional consideration, if any, to the Corporation, or in the rate of exchange, upon the conversion or exchange thereof, the adjusted Conversion Price shall, forthwith upon any such increase or decrease becoming effective, be readjusted to reflect the same, and provided further, that upon the expiration of such rights of conversion or exchange of such Convertible Securities, if any thereof shall not have been exercised, the adjusted Conversion Price shall forthwith be readjusted and thereafter be the price which it would have been had an adjustment been made on the basis that the only shares of Common Stock so issued or sold were issued or sold upon the conversion or exchange of such Convertible Securities, and that they were issued or sold for the consideration actually received by the Corporation upon such conversion or exchange, plus the consideration, if any, actually received by the Corporation for the issue or sale of all of such Convertible Securities which shall have been converted or exchanged. (iii) RIGHTS AND OPTIONS. (a) In case the Corporation shall grant any rights or options to subscribe for, purchase or otherwise acquire Common Stock (other than pursuant to an incentive plan for employees adopted by a majority of the stockholders of the Corporation providing for the issuance of options to purchase no more than an aggregate of 500,000 shares of Common Stock at a price of no less than 85% of fair market value), there shall be determined the price per share for which Common Stock is issuable upon the exercise of such rights or options, such determination to be made by dividing (1) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon the exercise of such rights or options, by (2) the maximum number of shares of Common Stock of the Corporation issuable upon the exercise of such rights or options. (b) If the price per share so determined shall be less than the applicable Conversion Price, then the granting of such rights or options shall be deemed to be an issue or sale for cash (as of the date of the granting of such rights or options) of such maximum number of shares of Common Stock at the price per share so determined, provided that, if such rights or options shall by their terms provide for an increase or increases or decrease or decreases, with the passage of time, in the amount of additional consideration payable to the Corporation upon the exercise thereof, the adjusted Conversion Price shall, forthwith upon any such increase or decrease becoming effective, be readjusted to reflect the same, and provided, further, that upon the expiration of such rights or options, if any thereof shall not have been exercised, the adjusted Conversion Price shall forthwith be readjusted and thereafter be the price which it would have been had an adjustment been made on the basis that the only shares of Common Stock so issued or sold were those issued or sold upon the exercise of such rights or options and that they were issued or sold for the consideration actually received by the Corporation upon such exercise, plus the consideration, if any, actually received by the Corporation for the granting of all such rights or options, whether or not exercised. E. SILICON ISOTOPE TRANSACTION. In the event that on or before January 1, 2001 the Corporation sells or otherwise disposes of (including, without limitation, through lease, mortgage, joint venture, exchange, transfer or similar arrangements), or enters into a contract to sell or dispose of, all or a significant portion of the Silicon Isotope Business (a "Silicon Isotope Transaction"), the Corporation shall cause to be delivered to each Series A Holder, concurrently with the consummation of the Silicon Isotope Transaction, its pro rata share of the Exchange Interests and Transaction Cash Proceeds (as defined in Section 7C below). The Corporation shall not effect any Silicon Isotope Transaction unless prior to or simultaneous with the consummation thereof, the Silicon Isotope Successor Entity shall (i) deliver to each Series A Holder such holder's pro rata share of the Exchange Interests and Transaction Cash Proceeds; (ii) enter into a Registration Rights Agreement on terms substantially similar to that entered into between the Corporation and the Series A Holders, dated as of the Original Issue Date and (iii) provide the holders of Exchange Interests with equivalent rights to the rights set forth herein. F. CERTAIN EVENTS. If any event occurs of the type contemplated by the provisions of this Section 5 but not expressly provided for by such provisions, then the Board of Directors of the Corporation will make (i) an appropriate adjustment in the Conversion Price so as to protect the rights of the Series A Holders; provided that no such adjustment will increase the Conversion Price as otherwise determined pursuant to this Section 5 or decrease the number of shares of Conversion Stock issuable upon conversion of each share of Series A Stock and (ii) an appropriate adjustment in the terms of the Silicon Isotope Transaction so as to protect the rights of the Series A Holders. G. NOTICES. (i) Immediately upon any adjustment of the Conversion Price, the Corporation will send written notice thereof to all Series A Holders. (ii) The Corporation will send written notice to all Series A Holders at least 20 days prior to the date (a) on which the Corporation closes its books or takes a record (1) with respect to any dividend or distribution upon Common Stock, (2) with respect to any PRO RATA subscription offer to holders of Common Stock, (3) for determining rights to vote on or approve any matter or (b) proposes to take any action on which the Series A Holders are entitled to vote pursuant to Section 3B or Section 4B. (iii) In addition to the notice required under paragraph (ii) above, the Corporation will send written notice (the "Exchange Notice") to all Series A Holders at least 30 days prior to the date of any proposed Silicon Isotope Transaction setting forth in reasonable detail the material terms of the Silicon Isotope Transaction and the capitalization, financial condition, business plan and other material facts of the Silicon Isotope Successor Entity. (iv) All notices and other communications from the Corporation to a Series A Holder shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Corporation in writing by such holder, or, until an address is so furnished, to and at the address of the last holder who has so furnished an address to the Corporation. H. CONVERTED OR REDEEMED SHARES. Any shares of Series A Stock which are converted pursuant to this Section 5 or redeemed pursuant to Section 6 will be canceled and will not be reissued, sold or transferred. I. INSUFFICIENT AUTHORIZED SHARES. In the event at the time any Series A Holder requests conversion of any of such shares and the Corporation does not have a sufficient (for other events) number of shares of Common Stock authorized and unreserved to provide for conversion of all outstanding shares of Series A Stock, the Corporation shall give at least 10 days prior written notice of such requested conversion to all other Series A Holders in order to enable such other holders to request conversion of their respective shares. In the event that Series A Holders request conversion of shares or Series A Stock into a greater number of shares of Common Stock than the Corporation then has authorized and unreserved (for other events), the Corporation shall issue all of its authorized and unreserved (for other events) shares of Common Stock to such holders PRO RATA in accordance with the number of shares of Series A Stock of which each holder has requested conversion. The unconverted balance of the shares of Series A Stock will remain as shares of Series A Stock until the Corporation has authorized a sufficient number of additional shares of Common Stock to provide for conversion of all shares of Series A Stock then outstanding. In the event at the time any Series A Holder requests conversion of any of such shares and the Corporation does not have a sufficient number of shares of Common Stock authorized and reserved to provide for conversion of all outstanding shares of Series A Stock, the Corporation will promptly reserve such number of shares of authorized Common Stock as are sufficient to provide for conversion of all outstanding shares of Series A Stock, but if the Corporation does not have a sufficient number of shares of Common Stock authorized and unreserved (for other events) to reserve such number of shares, the Corporation will promptly reserve the authorized and unreserved (for other events) Common Stock and provide for such meetings to be held, and approvals to be solicited, as are necessary to authorize and reserve a sufficient number of shares of Common Stock to provide for conversion of all outstanding shares of Series A Stock. 6. OPTIONAL REDEMPTION. A. After the Redemption Trigger Date (as defined in Section 7C below) all or any part of the Series A Stock may be redeemed by the Corporation at its election at any time and from time to time, in the manner prescribed in this Section 6, provided that (i) in any redemption under this Section 6A the Corporation shall redeem no less than all outstanding shares of Series A Stock and (ii) the Corporation may not make any redemption unless and until the Corporation has registered under the Securities Act of 1933, as amended, either the issuance of the shares of Common Stock issuable on conversion of the Series A Stock or the resale of such shares by the holders thereof. B. Before making any redemption, the Corporation shall mail by certified or registered mail, return receipt requested, to each record holder of any Series A Stock at the address shown on the Corporation's records, a written notice (a "Redemption Notice") stating: (i) the number of shares of Series A Stock held of record by such holder which the Corporation proposes to redeem; (ii) the date (herein called the "Redemption Date") on which the Corporation proposes to pay the Redemption Price for the shares to be redeemed; (iii) the Redemption Price which under this Section 6 is to be paid for each share to be redeemed; (iv) the place at which the shares to be redeemed may be surrendered in exchange for the Redemption Price for such shares; and (v) the then current Conversion Price. Upon the mailing of a Redemption, the Corporation shall become obligated to redeem the Series A Stock specified in such notice on the date specified in such notice as the Redemption Date. Each Redemption Notice shall be mailed at least 30 days before the Redemption Date, provided that if the Corporation fails to pay the Redemption Price on such date (for a reason other than a holders' failure to deposit Series A Stock certificates pursuant to Section 6D below), the Redemption Date shall be the date on which the Corporation actually pays the Redemption Price. C. The number of shares of Series A Stock to be redeemed from each holder thereof in repurchases under Section 6A shall be determined by multiplying the total number of shares of Series A Stock to be redeemed by a fraction, the numerator of which shall be the total number of shares of Series A Stock held by such holder and the denominator of which shall be the total number of shares of Series A Stock outstanding. D. (i) For each share of Series A Stock which shall be redeemed by the Corporation at any time under Section 6A, the Corporation shall be obligated to pay to the holder of such share an amount in cash (herein called the "Redemption Price" for such share) equal to the Liquidation Value of such share. The Corporation shall be obligated to pay on any Redemption Date on which the Corporation shall be required to redeem any Series A Stock both the Redemption Price for each share and all dividends which shall have been declared on each share to and including the Redemption Date and which shall not previously have been paid. Such payments which the Corporation shall be obligated to make on any Redemption Date shall be deemed to become "due" for all purposes of this Section 6 regardless of whether the Corporation shall be able to legally permitted to make such payments on such Redemption Date. (ii) Each holder of Series A Stock shall be entitled to receive on or at any time after any Redemption Date the full Redemption Price, plus declared but unpaid dividends, for each share of Series A Stock held by such holder which the Corporation shall be obligated to redeem on such Redemption Date upon surrender by such holder at the Corporation's principal office of the certificate representing such share duly endorsed in blank or accompanied by an appropriate form of assignment duly endorsed in blank. After the payment by the Corporation in cash of the full Redemption Price for any Series A Stock, plus accrued unpaid dividends, all rights of the holder of such stock shall (whether or not the certificate representing such stock shall have been surrendered for cancellation) cease and terminate with respect to such stock. 7. MISCELLANEOUS. A. REGISTRATION OF TRANSFER. The Corporation will keep at its principal office a register for the registration of Series A Stock. Upon the surrender of any certificate representing Series A Stock at such place, the Corporation will, at the request of the record holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of shares represented by the surrendered certificate. Each such new certificate will be registered in such name and will represent such number of shares as is requested by the holder of the surrendered certificate and will be substantially identical in form to the surrendered certificate. B. REPLACEMENT. Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder will be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing one or more shares of Series A Stock, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation, the Corporation will (at its expense) execute and deliver in lieu of such certificate a new certificate representing the number of shares represented by such lost, stolen, destroyed or mutilated certificate. C. DEFINITIONS. For purposes hereof: "APPLICABLE PERCENTAGE" shall mean the percentage that results from multiplying 25% by a fraction, the numerator of which is the number of shares of Series A Stock issued on, or within 30 days of, the date this Certificate is filed with the Secretary of State of the State of California and the denominator of which is 1,850,000. "COMMON STOCK" means the Common Stock of the Corporation, no par value per share, and includes all stock of any class or classes (however designated) of the Company, authorized upon the Original Issue Date or thereafter, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency). "CONVERSION PRICE" and "CONVERSION STOCK" shall have the meaning set forth in Sections 5B and 5A(i), respectively. "CORPORATION" shall have the meaning set forth in the first paragraph of this Certificate of Determination. "EXCHANGE INTERESTS" shall mean equity interests (whether in the form of stock, limited liability company interests, partnership interests, a percentage of profits and losses, or otherwise) entitling the holders thereof to the Applicable Percentage of the profits, votes and distributions of the Silicon Isotope Successor Entity and having substantially similar terms, preferences and other rights as the Series A Stock. "JUNIOR SECURITIES" means the Common Stock and any equity securities of any kind (but not including any debt securities convertible into equity securities) which the Corporation or any Subsidiary at any time issues or is authorized to issue other than the Series A Stock unless the terms of such security explicitly state that such security shall be senior to or on a par with the Series A Stock. "LIQUIDATION VALUE" of any share of Series A Stock as of any particular date will be $1.50. "ORIGINAL ISSUE DATE" means the date the Series A Stock is first issued. "PERSON" and "PERSON" means an individual, a partnership, a corporation, a limited liability company, a trust, a joint venture, an unincorporated organization and a government or any department or agency thereof. "REDEMPTION TRIGGER DATE" shall mean 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 proportionately adjusted for stock splits, stock dividends, reverse stock splits and any other subdivision or combination of the Common Stock. "SERIES A HOLDER" shall mean a registered holder of Series A Stock. "SERIES A STOCK" shall have the meaning set forth in Section 1. "SILICON ISOTOPE BUSINESS" shall mean all the assets and business of the Corporation relating to the development, production, use or sale of isotopes of silicon metal and related products, including without limitation all related patents, know-how, procedures, business plans, customer lists and other intellectual property. "SILICON ISOTOPE SUCCESSOR ENTITY" shall mean the Person or other entity that will conduct the Silicon Isotope Business upon the consummation of the Silicon Isotope Transaction. "SUBSIDIARY" means any corporation of which the shares of stock having a majority of the general voting power in electing the board of directors are, at the time as of which any determination is being made, owned by the Corporation either directly or indirectly through Subsidiaries. "TRANSACTION CASH PROCEEDS" shall mean the Applicable Percentage of the cash paid or payable in connection with a Silicone Isotope Transaction D. AMENDMENT AND WAIVER. No amendment, modification or waiver will be binding or effective with respect to any provision hereof without the prior approval of a majority of the outstanding Shares of Series A Stock; provided notwithstanding Section 3.B above that no such action will change or affect (a) the Conversion Price of the Series A Stock or the number of shares or the class of stock into which the Series A Stock is convertible, (b) the Liquidation Value of the Series A Stock, or (c) the amount of cash, securities or other property receivable or to be received by the Series A Holders. E. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. When any accounting determination or calculation is required to be made, such determination or calculation (unless otherwise provided) will be made in accordance with generally accepted accounting principles, consistently applied, except that if because of a change in generally accepted accounting principles the Corporation would have to alter a previously utilized accounting method or policy in order to remain in compliance with generally accepted accounting principles, such determination or calculation will continue to be made in accordance with the Corporation's previous accounting methods and policies unless the Corporation has obtained the prior written consent of the holders of a majority of the Series A Stock then outstanding. 3. The number of authorized shares of Preferred Stock of the Corporation is 10,000,000, and the number of shares of Series A Stock, none of which has been issued, is 1,850,000. IN WITNESS WHEREOF, the undersigned officers of the Corporation have executed this Amended and Restated Certificate this _____ day of July, 1999. ISONICS CORPORATION By: ------------------------------- James E. Alexander, President By: ------------------------------- Brantley J. Halstead, Secretary VERIFICATION The undersigned, James E. Alexander and Brantley J. Halstead, the President and Secretary, respectively, of Isonics Corporation, each declares under penalty of perjury that the matters set out in the foregoing Amended and Restated Certificate are true of his own knowledge. Executed at Golden, Colorado, on this _____ day of July, 1999. ----------------------------- James E. Alexander ----------------------------- Brantley J. Halstead EX-2 3 EXHIBIT 2 ISONICS CORPORATION Exhibit 2 to Form 8-K reporting an event of July 29, 1999 Form of Subscription Agreement FOR SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANTS SUBSCRIPTION AGREEMENT (the "AGREEMENT") dated as of July 29, 1999 among ISONICS CORPORATION, a California corporation ("COMPANY"), and the persons who execute this agreement as investors (the "INVESTORS"). WHEREAS, the Company desires to sell to the Investors, and the Investors desire to purchase, up to 1,500,000 shares of the Company's Series A Convertible Preferred Stock, no par value (the "SERIES A PREFERRED STOCK"), having the terms set forth in the Amended and Restated Certificate of Determination of Preferences and Rights of Series A Convertible Preferred Stock attached hereto as EXHIBIT 1 (the "CERTIFICATE") and 1,500,000 three year warrants, each exercisable to purchase one share of the Company's Common Stock, no par value, in substantially the form attached hereto as EXHIBIT 2 (the "WARRANTS"); and WHEREAS, in connection with the completion of the offering of the Series A Preferred Stock to the Investors as described in the previous paragraph, the Company has obtained agreement from five creditors of the Company described on Exhibit 6A to convert $425,000 into Units on the terms stated in this Subscription Agreement; and WHEREAS, in connection with the completion of the offering of the Series A Preferred Stock to the Investors, the Company has obtained an agreement from Isoserve to convert disputed contractual obligations into shares of the Series A Preferred Stock as described on Exhibit 6B on the terms stated in this Subscription Agreement; and WHEREAS, in connection with the completion of the offering of the Series A Preferred Stock to the Investors, the Company has obtained an agreement from two creditors to extend the maturity on certain payment obligations as described on Exhibit 6C. NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties agree as follows: 1. PURCHASE AND SALE OF STOCK. 1.1. SALE AND ISSUANCE OF PURCHASED SECURITIES. The Company shall sell to the Investors and the Investors shall purchase from the Company, up to 1,500,000 units, each consisting of one share of Series A Preferred Stock and one Warrant, at a price of $1.50 per unit, or a total of up to 1,500,000 shares of Series A Preferred Stock (the "PURCHASED SHARES") and up to 1,500,000 Warrants (the "PURCHASED WARRANTS"), for an aggregate purchase price of up to $2,250,000. The Purchased Shares and Purchased Warrants are referred to herein collectively as the "PURCHASED SECURITIES". The number of Purchased Shares and Purchased Warrants to be purchased by each Investor from the Company is set forth opposite the name of such Investor on the signature page hereof, subject to acceptance, in whole or in part, by the Company. 1.2. CLOSING. The purchase and sale of the Purchased Shares hereunder shall take place at a closing (the "FIRST CLOSING"; the date on which the First Closing occurs is hereinafter referred to as the "FIRST CLOSING DATE"); provided that at least $2,000,000 of Purchased Shares are purchased. If less than all Purchased Shares are sold at the First Closing, the purchase and sale of additional Purchased Shares hereunder shall take place at one or more additional closings within 10 days after the First Closing (each an "ADDITIONAL CLOSING", and with the First Closing, a "CLOSING"). Each Closing shall take place concurrently with the execution and delivery of this Agreement by the Investors purchasing Purchased Shares at such Closing. At each Closing: (a) the Investors purchasing Purchased Shares at such Closing shall deliver to the Company or its designees by wire transfer, cashier's check or certified checks from a bank acceptable to the Company, or such other method of payment as the Company shall approve, an amount equal to the purchase price of the portion of the Purchased Securities, as set forth opposite its name on the signature pages hereof; (b) the Company shall issue and deliver to each Investor purchasing Purchased Shares at such Closing (i) a certificate or certificates for its portion of the Purchased Shares and (ii) warrants for the portion of the Purchased Warrants to be issued by the Company and purchased by such Investor, as set forth opposite such Investor's name on the signature pages hereof; (c) the Company and such Investors shall execute and deliver a Registration Rights Agreement in the form attached as Exhibit 8 with respect to the Underlying Shares (as hereafter defined); (d) at the First Closing only, the Company shall (i) execute and deliver an investment banking agreement with Adam Smith & Company, Inc. in the form attached as Exhibit 9 providing for compensation of 500,000 warrants in the same form as the Purchased Warrants (the "INVESTMENT BANKING WARRANTS") and (ii) deliver to the Investors purchasing Shares at such Closing copies of the agreements described on EXHIBIT 6; and 2 (e) the Company shall deliver to the Investors an Opinion of Counsel with respect to the matters set forth on EXHIBIT 4. All certificates shall have all necessary stock transfer tax stamps (purchased at the expense of the Company) affixed. The parties agree that for purposes of allocating the price paid for the Purchased Securities, the Purchased Warrants have a nominal value. The Company acknowledges the materiality of the agreements described on EXHIBIT 6 To the investment made hereunder by the Investors and covenants that it will close each transaction covered by such agreements as promptly as practicable after the First Closing. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to the Investors as follows: 2.1. CORPORATE ORGANIZATION; AUTHORITY; DUE AUTHORIZATION. (a) The Company (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (ii) has the corporate power and authority to own or lease its properties as and in the places where such business is now conducted and to carry on its business as now conducted and (iii) is duly qualified and in good standing as a foreign corporation authorized to do business in every jurisdiction where the failure to so qualify, individually or in the aggregate, would have a material adverse effect on the operations, prospects, assets, liabilities, financial condition or business of the Company (a "COMPANY MATERIAL ADVERSE EFFECT"). (b) The Company (i) has the requisite corporate power and authority to execute, deliver and perform this Agreement and the other agreements contemplated hereby to which it is a party and to incur the obligations herein and therein and (ii) has been authorized by all necessary corporate action to execute, deliver and perform this Agreement and the other agreements contemplated hereby to which it is a party and to consummate the transactions contemplated hereby and thereby (the "CONTEMPLATED TRANSACTIONS"). This Agreement and each of the other agreements contemplated hereby to which the Company is a party is a valid and binding obligation of the Company enforceable in accordance with its terms. 2.2. CAPITALIZATION. Immediately prior to the First Closing, the authorized capital of the Company consisted of (i) 20,000,000 shares of Common Stock, no par value (the "COMMON STOCK"), of which 6,215,612 shares of Common Stock are outstanding, and (ii) 10,000,000 shares of Preferred Stock, no par value, of which no shares are outstanding. Immediately after the First Closing and the closing of the transactions described on EXHIBIT 6, the number of shares Series A Preferred Stock Outstanding will be as set forth on EXHIBIT 7. The Certificate has been duly filed with and recorded by the Secretary of State of the State of California. All outstanding shares were issued in compliance with all applicable Federal and 3 state securities laws. Except as contemplated by this Agreement or as set forth in the disclosure letter delivered to the Investors prior to the execution of this Agreement (the "COMPANY DISCLOSURE LETTER", which letter is referenced in Exhibit 10), there are (i) no outstanding subscriptions, warrants, options, conversion privileges or other rights or agreements to purchase or otherwise acquire or issue any shares of capital stock of the Company (or shares reserved for such purpose), (ii) no preemptive rights or rights of first refusal with respect to the issuance of additional shares of capital stock of the Company, including the Purchased Securities and the shares of Common Stock which the Purchased Warrants and Investment Banking Warrants are exercisable to purchase and for which the Purchased Shares are convertible into, and (iii) no commitments or understandings (oral or written) of the Company to issue any shares, warrants, options or other rights. To the best of the Company's knowledge, except as set forth in the Company Disclosure Letter, none of the shares of Common Stock are subject to any shareholders' agreement, voting trust agreement or similar arrangement or understanding. Except as set forth in the Company Disclosure Letter, the Company has no outstanding bonds, debentures, notes or other obligations the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with the stockholders of the Company on any matter. 2.3. VALIDITY OF PURCHASED SHARES. The issuance of the Purchased Shares has been duly authorized, and when issued, sold and delivered in accordance with the terms and for the consideration expressed herein, the Purchased Shares shall be validly issued, fully paid and non-assessable. 2.4. COMMON STOCK ISSUABLE UPON CONVERSION OF PURCHASED SHARES AND EXERCISE OF PURCHASED WARRANTS AND INVESTMENT BANKING WARRANTS. The issuance of the shares of Common Stock (the "UNDERLYING SHARES") issuable upon conversion of the Purchased Shares or upon exercise of the Purchased Warrants has been duly authorized and the Underlying Shares have been, and at all times prior to such conversion or exercise will have been, duly reserved for issuance upon such conversion or exercise and, when so issued, will be validly issued, fully paid and non-assessable. 2.5. PRIVATE OFFERING. Neither the Company nor anyone acting on its behalf has within the last 12 months issued, sold or offered any security of the Company to any person or organization under circumstances that would cause the issuance and sale of the Purchased Securities, as contemplated by this Agreement, or the issuance of the Investment Banking Warrants to be subject to the registration requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT"). The Company agrees that neither the Company nor anyone acting on its behalf will offer the Purchased Securities or Investment Banking Warrants or any part thereof or any similar securities for issuance or sale to, or solicit any offer to acquire any of the same from, anyone so as to make the issuance and sale of the Purchased Securities or the issuance of the Investment Banking Warrants subject to the registration requirements of Section 5 of the Securities Act. 2.6. BROKERS AND FINDERS. The Company has not retained any investment banker, broker or finder in connection with the Contemplated Transactions. 4 2.7. SUBSIDIARIES. (a) Except as set forth in the Company Disclosure Letter, the Company has no Subsidiaries and does not otherwise directly or indirectly control any other business entity. As used in this Agreement, "SUBSIDIARY" means any corporation or other organization, whether incorporated or unincorporated, of which the Company directly or indirectly owns or controls at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions with respect to such corporation or other organization, or any organization of which the Company is a general partner or any limited liability company of which the Company is a manager. (b) Each Subsidiary of the Company (each, a "COMPANY SUBSIDIARY" and collectively, "COMPANY SUBSIDIARIES") is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its properties and to carry on its business as it is now being conducted, and is duly qualified to do business and is in good standing in each jurisdiction in which the ownership of its property or the conduct of its business requires such qualification, except for jurisdictions in which such failure to be so qualified or to be in good standing would not, individually or in the aggregate, have a Company Material Adverse Effect. The copies of the Certificates of Incorporation and Bylaws of the Company and the Company Subsidiaries previously made available to the Purchaser are true and correct. (c) Except as set forth in the Company Disclosure Letter, the Company owns directly or indirectly all of the outstanding shares of capital stock (or other ownership interests having by their terms ordinary voting power to elect a majority of directors or others performing similar functions with respect to such Company Subsidiary) of each of the Company Subsidiaries. Each of the outstanding shares of capital stock of each of the Company Subsidiaries is duly authorized, validly issued, fully paid and nonassessable, and is owned, directly or indirectly, by the Company. Except as set forth in the Company Disclosure Letter, each of the outstanding shares of capital stock of each Company Subsidiary is owned, directly or indirectly, by the Company free and clear of all liens, pledges, security interests, claims or other encumbrances other than liens imposed by local law which are not material. There are no irrevocable proxies, voting agreements or similar obligations with respect to such capital stock of the Company Subsidiaries, and no equity securities or other interests of any of the Company Subsidiaries are or may become required to be issued or purchased by reason of any options, warrants, rights to subscribe to, puts, calls, reservation of shares or commitments of any character whatsoever relating to, or securities or rights convertible into or exchangeable for, shares of any capital stock of any Company Subsidiary, and there are no contracts, commitments, understandings or arrangements by which any Company Subsidiary is bound to issue additional shares of its capital stock, or options, warrants or rights to purchase or acquire any additional shares of its capital stock or securities convertible into or exchangeable for such shares. The Company Disclosure Letter sets forth the following information for each Company Subsidiary, if applicable: (i) its name and jurisdiction of incorporation or organization; (ii) its authorized 5 capital stock or share capital; (iii) the number of issued and outstanding shares of capital tock or share capital, and (iv) the percentage of such shares owned by the Company. 2.8. OTHER INTEREST. Except as set forth in the Company Disclosure Letter, except for interests in the Company Subsidiaries, neither the Company nor any Company Subsidiary owns directly or indirectly any interest or investment (whether equity or debt) in any corporation, partnership, joint venture, business, trust or entity. 2.9. USE OF PROCEEDS. The Company will use the proceeds from the sale of the Purchased Securities as set forth on EXHIBIT 5 attached hereto. 2.10. NO CONFLICT; REQUIRED FILINGS AND CONSENTS. (a) The execution and delivery of this Agreement by the Company do not, and the consummation by the Company of the transactions contemplated hereby will not, (i) conflict with or violate the Certificate of Incorporation or By-Laws or equivalent organizational documents of (x) the Company or (y) any Company Subsidiary, (ii) conflict with or violate any law, rule, regulation, order, judgment or decree applicable to the Company or any Company Subsidiary or by which any property or asset of the Company or any Company Subsidiary is bound or affected, or (iii) except as set forth in the Company Disclosure Letter, result in any breach of or constitute a default (or an event which with notice or lapse of time or both would become a default) under, result in the loss of a material benefit under, or give to others any right of purchase or sale, or any right of termination, amendment, acceleration, increased payments or cancellation of, or result in the creation of a lien or other encumbrance on any property or asset of the Company or any Company Subsidiary pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or any Company Subsidiary is a party or by which the Company or any Company Subsidiary or any property or asset of the Company or any Company Subsidiary is bound or affected, except, in the case of clauses (i)(y), (ii) and (iii), for any such conflicts, violations, breaches, defaults or other occurrences which would not prevent or delay consummation of any of the Contemplated Transactions in any material respect, or otherwise prevent the Company from performing its obligations under this Agreement in any material respect, and would not, individually or in the aggregate, have a Company Material Adverse Effect. The execution and delivery of this Agreement by the Company do not, and the consummation by the Company of the Contemplated Transactions will not, result in any material breach of or constitute a material default (or an event which with notice or lapse of time or both would become a material default) under, result in the loss of a material benefit under, or give to others any right of purchase or sale, or any right of termination amendment, acceleration, increased payments or cancellation of, or result in the creation of a lien or other encumbrance on any property or asset of the Company or any Company Subsidiary pursuant to, any Company Material Contract (as hereafter defined). (b) The execution and delivery of this Agreement by the Company do not, and the performance of this Agreement and the consummation by the Company of the transactions contemplated hereby will not, require any consent, approval, 6 authorization or permit of, or filing with or notification to, any governmental or regulatory authority, domestic or foreign (each a "GOVERNMENTAL ENTITY") except for applicable requirements, if any, of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") or any state securities or "blue sky" laws ("BLUE SKY LAWS"). 2.11. COMPLIANCE. Except as set forth in the Company Disclosure Letter neither the Company nor any Company Subsidiary is in conflict with, or in default or violation of (i) any law, rule, regulation, order, judgment or decree applicable to the Company or any Company Subsidiary ("LEGAL REQUIREMENT") or by which any property or asset of the Company or any Company Subsidiary is bound or affected, or (ii) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or any Company Subsidiary is a party or by which the Company or any Company Subsidiary or any property or asset of the Company or any Company Subsidiary is bound or affected, in each case except for any such conflicts, defaults or violations that would not, individually or in the aggregate, have a Company Material Adverse Effect. Neither the Company nor any Company Subsidiary has received any notice or other communication from any Governmental Body regarding any actual or possible violation of, or failure to comply with, any Legal Requirement. The Company and the Company Subsidiaries have obtained all licenses, permits, and other authorizations and have taken all actions required by applicable law or governmental regulations in connection with their business as now conducted, where the failure to obtain any such item or to take any such action would have, individually or in the aggregate, a Company Material Adverse Effect. None of the Company, any Company Subsidiary or, to the knowledge of Company, any director, officer, agent, employee or other person acting on behalf of any of the foregoing has used any corporate funds for unlawful contributions, payments, gifts or entertainment or for the payment of other unlawful expenses relating to political activity, or made any direct or indirect unlawful payments to governmental or regulatory officials or others. For purposes of this Agreement "GOVERNMENTAL BODY" shall mean any: (a) nation, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; or (c) governmental or quasi-governmental authority of any nature (including any governmental division, department, agency, commission, instrumentality, official, organization, unit, body or entity and any court or other tribunal). 2.12. SEC DOCUMENTS. (a) The Company has filed all forms, reports and documents required to be filed by it with the Securities and Exchange Commission (the "SEC") since its formation (collectively, together with the 1999 Form 10-KSB defined below, the "COMPANY REPORTS"). As of their respective dates, the Company Reports filed prior to the date hereof (i) complied as to form in all material respects with the applicable requirements of the Securities Act, the Exchange Act, and the rules and regulations thereunder and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. The representation in clause (ii) of the preceding sentence shall not apply to any misstatement or omission in any Company Report filed prior to the date of this 7 Agreement which was superseded by a subsequent Company Report filed prior to the date of this Agreement. The Company has provided to the Investors a draft of the Form 10-KSB for its fiscal year ended April 30, 1999 which will be filed with the SEC on or before August 13, 1999 and which is not expected to be materially different from that provided to the Investors (except to the extent amended to reflect the transactions contemplated hereby) (the "1999 10-KSB"). When filed with the SEC, the 1999 Form 10-KSB (i) will comply as to form in all material respects with the applicable requirements of the Securities Act, the Exchange Act, and the rules and regulations thereunder and (ii) will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. No Company Subsidiary is required to file any report, form or other document with the SEC. Except as set forth in the Company Disclosure Letter neither the Company nor any Company Subsidiary is a party or is subject to any note, bond, mortgage, indenture, contract, lease, license, agreement, understanding, instrument, bid or proposal that is required to be described in or filed as an exhibit to any Company Report that is not described in or filed as an exhibit to such Company Report as required by the Securities Act or the Exchange Act, as the case may be. No event has occurred prior to the date hereof as a consequence of which the Company would be required to file a Current Report on Form 8-K pursuant to the requirements of the Exchange Act as to which such a report has not been timely filed with the SEC. Any reports, statements and registration statements and amendments thereto (including, without limitation, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as amended) filed by the Company with the SEC after the date hereof shall be provided to the Purchaser no later than the date of such filing. (b) Each of the consolidated balance sheets of Company included in or incorporated by reference into the Company Reports (including the related notes and schedules) fairly presents the consolidated financial position of the Company and the Company Subsidiaries as of its date, and each of the consolidated statements of income, retained earnings and cash flows of Company included in or incorporated by reference into the Company Reports (including any related notes and schedules) fairly presents the results of operations, retained earnings or cash flows, as the case may be, of the Company and the Company Subsidiaries for the periods set forth therein (subject, in the case of unaudited statements, to normal year-end audit adjustments which would not be material in amount or effect), in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except as may be noted therein. Neither the Company nor any of the Company Subsidiaries has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on, or reserved against in, a balance sheet of the Company or in the notes thereto, prepared in accordance with generally accepted accounting principles consistently applied, except for (i) liabilities or obligations that were so reserved on, or reflected in (including the notes to), the consolidated balance sheet of the Company as of April 30, 1999; (ii) liabilities or obligations arising in the ordinary course of business since April 30, 1999 and (iii) liabilities or obligations which would not, individually or in the aggregate, have a Company Material Adverse Effect. 2.13. LITIGATION. Except as set forth in the Company Disclosure Letter 8 there are no claims, actions, suits, investigations, inquiries or proceedings pending against the Company or the Company Subsidiaries or, to the knowledge of the Company, threatened against the Company or the Company Subsidiaries, or any officer, director, employee or agent thereof in his or her capacity as such, at law or in equity, or before or by any court, tribunal, arbitrator, mediator or any federal or state commission, board, bureau, agency or instrumentality, that, individually or in the aggregate, are reasonably likely to have a Company Material Adverse Effect. 2.14. ABSENCE OF CERTAIN CHANGES. Except as specifically contemplated by this Agreement or set forth in the Company Disclosure Letter, since January 31, 1999, there has not been (i) any event, occurrence, fact, condition, change, development or effect ("EVENT") that would reasonably be expected to have a Company Material Adverse Effect; (ii) any declaration, payment or setting aside for payment of any dividend (except to Company or a Company Subsidiary wholly owned by Company) or other distribution or any redemption, purchase or other acquisition of any shares of capital stock or securities of Company or any Company Subsidiary; (iii) any return of any capital or other distribution of assets to stockholders of Company or any Company Subsidiary (except to Company or a Company Subsidiary wholly owned by Company); (iv) any acquisition (by merger, consolidation, acquisition of stock or assets or otherwise) of any person or business; (v) any other action or agreement or undertaking by Company or any Company Subsidiary that, if taken or done on or after the date hereof would reasonably be expected to have a Company Material Adverse Effect; or (vi) any material change in its accounting principles, practices or methods. Without limiting foregoing, since April 30, 1999, there has been no Company Material Adverse Effect affecting the Company's financial condition as of July 29, 1999 or results of operation through that date which would be reflected in its unaudited financial statements to be prepared for and through July 31, 1999. 2.15. TAXES. (a) Each of the Company and the Company Subsidiaries has filed all material tax returns and reports required to be filed by it, or requests for extensions to file such returns or reports have been timely filed and granted and have not expired, and all tax returns and reports are complete and accurate in all respects, except to the extent that such failures to file, have extensions granted that remain in effect or be complete and accurate in all respects, as applicable, individually or in the aggregate, would not have a Company Material Adverse Effect. The Company and each of the Company Subsidiaries has paid (or the Company has paid on its behalf) all taxes shown as due on such tax returns and reports. The most recent financial statements contained in the Company Reports reflect an adequate reserve for all taxes payable by the Company and the Company Subsidiaries for all taxable periods and portions thereof accrued through the date of such financial statements, and no deficiencies for any taxes have been proposed, asserted or assessed against the Company or any Company Subsidiary that are not adequately reserved for, except for inadequately reserved taxes and inadequately reserved deficiencies that would not, individually or in the aggregate, have a Company Material Adverse Effect. No requests for waivers of the time to assess any taxes against the Company or any Company Subsidiary have been granted or are pending, except for requests with respect to such taxes that have been adequately reserved for in the most recent financial statements contained in 9 the Company Reports, or, to the extent not adequately reserved, the assessment of which would not, individually or in the aggregate, have a Company Material Adverse Effect. (b) As used in this Section 2.15, "taxes" shall include all Federal, state, local and foreign income, franchise, property, sales, use, excise and other taxes, including obligations for withholding taxes from payments due or made to any other person and any interest, penalties or additions to tax. 2.16. EMPLOYEE BENEFIT PLANS. Except as would not, individually or in the aggregate, have a Company Material Adverse Effect, (i) all employee benefit plans or programs maintained for the benefit of the current or former employees or directors of the Company or any Company Subsidiary that are sponsored, maintained or contributed to by the Company or any Company Subsidiary, or with respect to which the Company or any Company Subsidiary has any liability, including without limitation any such plan that is an "employee benefit plan" as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), are in compliance with all applicable requirements of law, including ERISA and the Code, and (ii) neither the Company nor any Company Subsidiary has any liabilities or obligations with respect to any such employee benefit plans or programs, whether accrued, contingent or otherwise, nor to the knowledge of the Company are any such liabilities or obligations expected to be incurred. The execution of, and performance of the transactions contemplated in, this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any benefit plan, policy, arrangement or agreement or any trust or loan that will or may result in any payment (whether of severance pay, bonus, golden parachute or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any employee. The only severance agreements or severance policies applicable to the Company or the Company Subsidiaries are the agreements and policies specifically referred to in the Company Disclosure Letter. 2.17. LABOR MATTERS. Neither the Company nor any of the Company Subsidiaries has any material obligations, contingent or otherwise, under any employment, severance or consulting agreement, any collective bargaining agreement or any other contract with a labor union or other labor or employee group. To the knowledge of Company, as of the date of this Agreement, there are no negotiations, demands or proposals which are presently pending or overtly threatened by or on behalf of any labor union with respect to the unionizing of employees of Company or any Company Subsidiary. There is no labor strike, labor dispute, work slowdown, stoppage or lockout actually pending, or to the knowledge of the Company, threatened against or affecting the Company or any Company Subsidiary, except as would not, individually or in the aggregate, have a Company Material Adverse Effect. There is no unfair labor practice or labor arbitration proceeding pending or, to the knowledge of the Company, threatened against the Company or its Subsidiaries relating to their business, except for any such proceeding which would not have a Company Material Adverse Effect. 2.18. CONTRACTS. Except as set forth in the Company Reports or the Company Disclosure Letter or in Exhibit 6, neither the Company nor any Company Subsidiary is 10 a party or is subject to, and their property and assets are not bound or affected by, any of the following (each, a "COMPANY MATERIAL CONTRACT"): (a) any agreement or understanding with an affiliate of the Company or of a Company Subsidiary; (b) any contract relating to the acquisition, transfer, use, development, sharing or license of any technology or any Proprietary Asset (as hereafter defined); (c) any single note, bond, mortgage, indenture, contract, lease, license, agreement, understanding, instrument, bid or proposal pursuant to which the financial obligation of the Company or a Company Subsidiary thereunder or applicable to the assets or properties of the Company or a Company Subsidiary subject thereto could exceed $10,000 after the First Closing Date; (d) any single contract, bid or offer to which the Company or a Company Subsidiary is a party or by which the Company or a Company Subsidiary is bound to provide services to third parties which provides for recurring monthly revenues to the Company or a Company Subsidiary in excess of $10,000; (e) any contract creating or involving any agency relationship, distribution arrangement or franchise relationship; (f) any contract which includes any exclusivity restrictions applicable to the Company or a Company Subsidiary or imposes any restriction on the Company's right or ability (A) to compete with any person, (B) to acquire any product or other asset or any services from any other person, to sell any product or other asset to or perform any services for any other person or to transact business or deal in any other manner with any other person, or (C) develop or distribute any technology; (g) any contract relating to the acquisition, issuance or transfer of any securities, except as contemplated hereunder; (h) any contract involving or incorporating any guaranty, any pledge, any performance or completion bond, any indemnity or any surety arrangement; (i) any contract creating or relating to any partnership or joint venture or any sharing of revenues, profits, losses, costs or liabilities; (j) any contract constituting or relating to a Government Contract (as hereafter defined) or Government Bid (as hereafter defined); (k) any contract that was entered into outside the ordinary course of business or was inconsistent with the Company's or a Company Subsidiary's past practices; 11 (l) any other Company Contract that has a term of more than 120 days and that may not be terminated by the Company (without penalty) within 120 days after the delivery of a termination notice by the Company; or (m) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation that is material to the ownership or operation of any of the Company or a Company Subsidiary. The Company has made available to the Investors true and accurate copies of the Company Material Contracts. Except as set forth in the Company Disclosure Letter all such Company Material Contracts, including without limitation the agreements described on EXHIBIT 6, are or will be valid and binding and are or will be in full force and effect and enforceable in accordance with their respective terms. Except as set forth in the Company Disclosure Letter no consent of any person is needed in order that each such Company Material Contract shall continue in full force and effect in accordance with its terms without penalty, acceleration or rights of early termination by reason of the consummation of the transactions contemplated by this Agreement, except for consents the absence of which, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect. Neither the Company nor any Company Subsidiary is in violation or breach of or default under any such Company Material Contract, nor to the Company's knowledge is any other party to any such Company Material Contract in violation or breach of or default under any such Company Material Contract, in each case where such violation or breach would give rise to a right of termination or modification. For purposes of this Agreement "GOVERNMENT BID" shall mean any quotation, bid or proposal submitted to any Governmental Body or any proposed prime contractor or higher-tier subcontractor of any Governmental Body. For purposes of this Agreement "GOVERNMENT CONTRACT" shall mean any prime contract, subcontract, letter contract, purchase order or delivery order executed or submitted to or on behalf of any Governmental Body or any prime contractor or higher-tier subcontractor, or under which any Governmental Body or any such prime contractor or subcontractor otherwise has or may acquire any right or interest. 2.19. ENVIRONMENTAL MATTERS. As of the date of this Agreement, (i) the Company and the Company Subsidiaries are in compliance with all applicable Environmental Laws (as hereinafter defined), (ii) there is no civil, criminal or administrative judgment, action, suit, demand, claim, hearing, notice of violation, investigation, proceeding, notice or demand letter pending or, to the knowledge of the Company, threatened against the Company, a Company Subsidiary or any of their respective properties pursuant to Environmental Laws, and (iii) there are no past or present Events which, reasonably may be expected to prevent compliance with, or which have given rise to or will give rise to liability on the part of the Company or a Company Subsidiary under, Environmental Laws, except, in each case, for any deviations from the foregoing which, individually or in the aggregate, do not and would not reasonably be expected to have a Company Material Adverse Effect. The Company has provided or made available to the Investors prior to the date of this Agreement true, accurate and complete copies of all environmental reports in the possession of the Company or a Company 12 Subsidiary relating to any of their respective past or present properties. As used herein, the term "ENVIRONMENTAL LAWS" shall mean laws relating to pollution, waste control, the generation, presence or disposal of asbestos, hazardous or toxic wastes or substances, the protection of the environment, environmental activity or public health and safety. 2.20. PROPRIETARY ASSETS. (a) For purposes of this Agreement "PROPRIETARY ASSETS" shall mean any: (i) patent, patent application, trademark (whether registered or unregistered), trademark application, trade name, fictitious business name, service mark (whether registered or unregistered), service mark application, copyright (whether registered or unregistered), copyright application, maskwork, maskwork application, trade secret, know-how, customer list, franchise, system, computer software, computer program, invention, design, blueprint, engineering drawing, proprietary product, technology, proprietary right or other intellectual property right or intangible asset; or (ii) right to use or exploit any of the foregoing. (b) The Company Disclosure Letter sets forth, with respect to each Proprietary Asset of the Company or a Company Subsidiary registered with any Governmental Body or for which an application has been filed with any Governmental Body, (i) a brief description of such Proprietary Asset and (ii) the names of the jurisdictions covered by the applicable registration or application. The Company Disclosure Letter identifies and provides a brief description of all other Proprietary Assets owned by the Company or a Company Subsidiary, and identifies and provides a brief description of each Proprietary Asset licensed to the Company or a Company Subsidiary by any person (except for any Proprietary Asset that is licensed to the Company or a Subsidiary under any third party software license generally available to the public at a cost of less than $10,000), and identifies the license agreement under which such Proprietary Asset is being licensed to the Company or a Company Subsidiary. Except as set forth in the Company Disclosure Letter, the Company or a Company Subsidiary: has good, valid and marketable title to all of the Proprietary Assets identified in the Company Disclosure Letter, free and clear, of all liens and other encumbrances; has a valid right to use all Proprietary Assets identified in the Company Disclosure Letter; and is not obligated to make any payment to any person for the use of any Proprietary Asset. Except as set forth in the Company Disclosure Letter, neither the Company nor any Company Subsidiary has developed jointly with any other person any Proprietary Asset with respect to which such other person has any rights. (c) The Company and the Company Subsidiaries have taken all measures and precautions necessary to protect and maintain the confidentiality and secrecy of all Proprietary Assets of the Company and the Company Subsidiaries (except Proprietary Assets whose value would be unimpaired by public disclosure) and otherwise to maintain and protect the value of all Proprietary Assets of the Company and the Company Subsidiaries. Except as set forth in the Company Disclosure Letter, the Company and the Company Subsidiaries have not (other than pursuant to license agreements identified in the Company Disclosure Letter) disclosed or delivered to any person, or permitted the disclosure or delivery to any person of, (i) the source code, or any portion or aspect of the source code, of any Proprietary Asset, or (ii) the object code, or any portion or aspect of the object code, of any Proprietary Asset of the Company or a Company Subsidiary. 13 (d) To the best of the knowledge of the Company, none of the Proprietary Assets of the Company or a Company Subsidiary infringes or conflicts with any Proprietary Asset owned or used by any other Person. The Company and the Company Subsidiaries are not infringing, misappropriating or making any unlawful use of, and the Company and the Company Subsidiaries have not at any time infringed, misappropriated or made any unlawful use of, or received any notice or other communication (in writing or otherwise) of any actual, alleged, possible or potential infringement, misappropriation or unlawful use of, any Proprietary Asset owned or used by any other Person. To the best of the knowledge of the Company, no other Person is infringing, misappropriating or making any unlawful use of, and no Proprietary Asset owned or used by any other person infringes or conflicts with, any Proprietary Asset of the Company or a Company Subsidiary. (e) Except as set forth in the Company Disclosure Letter, there has not been any claim by any customer or other person alleging that any Proprietary Asset of the Company or a Company Subsidiary (including each version thereof that has ever been licensed or otherwise made available by the Company or a Company Subsidiary to any person) does not conform in all material respects with any specification, documentation, performance standard, representation or statement made or provided by or on behalf of the Company or a Company Subsidiary, and, to the best of the knowledge of the Company, there is no basis for any such claim. (f) The Proprietary Assets of the Company and the Company Subsidiaries constitute all the Proprietary Assets necessary to enable the Company and the Company Subsidiaries to conduct their businesses in the manner in which such businesses have been and are being conducted. Except as set forth in the Company Disclosure Letter (i) the Company and the Company Subsidiaries have not licensed any of their Proprietary Assets to any person on an exclusive, semi-exclusive or royalty-free basis, and (ii) the Company and the Company Subsidiaries have not entered into any covenant not to compete or contract limiting their ability to exploit fully any of their Proprietary Assets or to transact business in any market or geographical area or with any person. 2.21. NO ADVERSE ACTIONS. Except as set forth in the Company Disclosure Letter there is no existing, pending or, to the knowledge of the Company, threatened termination, cancellation, limitation, modification or change in the business relationship of Company or any of the Company Subsidiaries, with any supplier, customer or other person except such as would not reasonably be expected, individually or in the aggregate, to have a Company Material Adverse Effect. 2.22. INSURANCE. The Company maintains with sound and reputable insurance companies all insurance customarily maintained by comparable companies. 2.23. DISCLOSURE. No representation or warranty of the Company herein and no information contained or referenced in the Company Reports or Company Disclosure Letter contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements contained herein or therein not 14 misleading. 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each Investor represents and warrants to the Company as follows: 3.1. AUTHORIZATION. When executed and delivered by such Investor, this Agreement will constitute the valid and binding obligation of such Investor. 3.2. BROKERS AND FINDERS. Such Investor has not retained any investment banker, broker or finder in connection with the Contemplated Transactions. 4. SECURITIES LAWS. 4.1. SECURITIES LAWS REPRESENTATIONS AND COVENANTS OF INVESTORS. (a) This Agreement is made with each Investor in reliance upon such Investor's representation to the Company, which by such Investor's execution of this Agreement such Investor hereby confirms, that the Purchased Securities to be received by such Investor will be acquired for investment for such Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof such that such Investors would constitute an "underwriter" under the Securities Act, and that such Investor has no present intention of selling, granting any participation in or otherwise distributing the Purchased Securities. By executing this Agreement, each Investor further represents that such Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person with respect to, any of the Purchased Securities. (b) Each Investor understands and acknowledges that the offering of the Purchased Securities pursuant to this Agreement will not be registered under the Securities Act or qualified under any Blue Sky Laws on the grounds that the offering and sale of the Purchased Securities are exempt from registration and qualification, respectively, under the Securities Act and the Blue Sky Laws, and that the Company's reliance upon such exemption is predicated upon such Investor's representations set forth in this Agreement. (c) Each Investor covenants that, unless the Purchased Shares, the Purchased Warrants, the Underlying Shares or any other shares of capital stock of the Company received in respect of the foregoing have been registered pursuant to the Registration Rights Agreement being entered into among the Company and the Investors, such Investor will not dispose of such securities unless and until such Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with an opinion of counsel reasonably satisfactory in form and substance to the Company to the effect that (x) such disposition will not require registration under the Securities Act and (y) appropriate action necessary for compliance with the Securities Act and any applicable state, local or foreign law has been taken; PROVIDED, HOWEVER, that an Investor may dispose of such securities without providing the opinion referred to above if the Company has been provided with adequate 15 assurance that such disposition is made in compliance with Rule 144 under the Securities Act (or any similar or analogous rule) and any applicable state, local or foreign law. (d) In connection with the investment representations made herein, each Investor represents that (i) such Investor is able to fend for itself in the Contemplated Transactions; (ii) such Investor has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of such Investor's prospective investment in the Purchased Securities; (iii) such Investor has the ability to bear the economic risks of such Investor's prospective investment and can afford the complete loss of such investment; (iv) such Investor has been furnished with and has had access to such information as is in the Company Disclosure Letter together with the opportunity to obtain such additional information as it requested to verify the accuracy of the information supplied; and (v) such Investor has had access to officers of the Company and an opportunity to ask questions of and receive answers from such officers and has had all questions that have been asked by such Investor satisfactorily answered by the Company. (e) Each Investor further represents by execution of this Agreement that such Investor qualifies as an "accredited investor" as such term is defined under Rule 501 promulgated under the Securities Act. Any Investor that is a corporation, a partnership, a trust or other business entity further represents by execution of this Agreement that it has not been organized for the purpose of purchasing the Purchased Securities. (f) By acceptance hereof, each Investor agrees that the Purchased Shares, the Purchased Warrants, the Underlying Shares and any shares of capital stock of the Company received in respect of the foregoing held by it may not be sold by such Investor without registration under the Securities Act or an exemption therefrom, and therefore such Investor may be required to hold such securities for an indeterminate period. 4.2. LEGENDS. All certificates for the Purchased Shares, Purchased Warrants and the shares of Common Stock issued upon conversion or exercise thereof, and each certificate representing any shares of capital stock of the Company received in respect of the foregoing, whether by reason of a stock split or share reclassification thereof, a stock dividend thereon or otherwise and each certificate for any such securities issued to subsequent transferees of any such certificate (unless otherwise permitted herein) shall bear the following legend: "THE SHARES REPRESENTED BY THIS CERTIFICATE [SECURITIES REPRESENTED BY THIS WARRANT] HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SHARES [WARRANTS] MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT." In addition, such certificates shall bear any legend that, in the opinion of the Company's counsel, is required pursuant to any state, local or foreign law governing the Purchased Shares, the 16 Purchased Warrants or the Underlying Shares. 5. ADDITIONAL COVENANTS OF THE COMPANY. 5.1. REPORTS, INFORMATION, SHARES. (a) The Company shall cooperate with each Investor in supplying such information as may be reasonably requested by such Investor to complete and file any information reporting forms presently or hereafter required by the SEC as a condition to the availability of an exemption, presently existing or hereafter adopted, from the Securities Act for the sale of any of the Purchased Shares, the Purchased Warrants, the Underlying Shares and shares of capital stock of the Company received in respect of the foregoing. (b) The Company shall deliver to each Investor, contemporaneously with delivery to other holders of Common Stock, a copy of each report of the Company delivered to holders of Common Stock. (c) The Company shall keep reserved for issuance a sufficient number of authorized but unissued shares of Common Stock so that the Purchased Warrants may be exercised to purchase, and the Purchased Shares may be converted into, Common Stock at any time. 5.2. EXPENSES; INDEMNIFICATION. (a) The Company agrees to pay on the First Closing Date (and in the event of Additional Closings on the date of each Additional Closing) and save the Investors harmless against liability for the payment of any stamp or similar taxes (including interest and penalties, if any) that may be determined to be payable in respect of the execution and delivery of this Agreement, the issue and sale of any Purchased Securities, the expense of preparing and issuing the Purchased Securities, the cost of delivering the Purchased Securities purchased by each Investor to such Investor's home office, insured to such Investor's satisfaction, and the costs and expenses incurred in the preparation of all certificates and letters on behalf of the Company and of the Company's performance and compliance with all agreements and conditions contained herein on its part to be performed or complied with. Each Investor shall be responsible for its out-of-pocket expenses arising in connection with the Contemplated Transactions, including, without limitation, fees and disbursements of counsel to the Investors and due diligence expenses of the Investors. (b) The Company hereby agrees and acknowledges that the Investors have been induced to enter into this Agreement and to purchase the Purchased Securities hereunder, in part, based upon the representations, warranties and covenants of the Company contained herein. The Company hereby agrees to pay, indemnify and hold harmless the Investors and any director, officer or employee of any Investor against all claims, losses and 17 damages resulting from any and all legal or administrative proceedings, including without limitation, reasonable attorneys' fees and expenses incurred in connection therewith (collectively, "LOSS"), resulting from a breach by the Company of any representation or warranty of the Company contained herein or the failure of the Company to perform any covenant made herein. (c) As soon as reasonably practicable after receipt by an Investor of notice of any Loss in respect of which the Company may be liable under this Section 5.2, the Investor shall give notice thereof to the Company. Each Investor may, at its option, claim indemnity under this Section 5.2 as soon as a claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as counsel for such Investor shall in good faith determine that such claim is not frivolous and that such Investor may be liable or otherwise incur a Loss as a result thereof and shall give notice of such determination to the Company. Each Investor shall permit the Company, at the Company's option and expense, to assume the defense of any such claim by counsel mutually and reasonably satisfactory to the Company and the Investors who are subject to such claim, and to settle or otherwise dispose of the same; PROVIDED, HOWEVER, that each Investor may at all times participate in such defense at such Investor's expense; and PROVIDED, FURTHER, that the Company shall not, in defense of any such claim, except with the prior written consent of each Investor subject to such claim, (i) consent to the entry of any judgment that does not include as an unconditional term thereof the giving by the claimant or plaintiff in question to each Investor and its subsidiaries of a release of all liabilities in respect of such claims, or (ii) consent to any settlement of such claim. If the Company does not promptly assume the defense of such claim irrespective of whether such inability is due to the inability of the afore-described Investors and the Company to mutually agree as to the choice of counsel, or if any such counsel is unable to represent an investor due to a conflict or potential conflict of interest, then an Investor may assume such defense and be entitled to indemnification and prompt reimbursement from the Company for its costs and expenses incurred in connection therewith, including without limitation, reasonable attorneys' fees and expenses. Such fees and expenses shall be reimbursed to the Investors as soon as practicable after submission of invoices to the Company. 5.3. AMENDMENT OF THE CERTIFICATE. (a) The Company covenants to amend the definition of "Applicable Percentage" in the Certificate as soon as practicable after the date hereof to read as follows: "Applicable Percentage shall mean 25%." The undersigned shareholder hereby consents to a resolution of shareholders necessary to approve the foregoing change to the Certificate, and specifically grants James E. Alexander a proxy to cast the undersigned's vote as shareholder for such a resolution at any meeting of the holders of Series A Preferred Stock called to consider such an amendment, and appoints James E. Alexander as the undersigned's attorney-in-fact to execute in the name of the undersigned a statement of consent of the holders of Series A Preferred Stock approving such a resolution. (b) The Company further agrees that if, for any reason, such amendment is not made prior to the occurrence of a Silicon Isotope Transaction (as defined in the Certificate), the holders of the Series A Preferred Stock shall have the same rights and shall receive the same benefits (including Exchange Interests and Transaction Cash Proceeds, as defined in the Certificate) as if such amendment had been accomplished. 18 6. MISCELLANEOUS. 6.1. ENTIRE AGREEMENT; SUCCESSORS AND ASSIGNS. This Agreement, the Warrants and the Registration Rights Agreement constitute the entire contract between the parties relative to the subject matter hereof and no party shall be liable or bound to the other in any manner by any warranties, representations or covenants except as specifically set forth herein. Any previous agreement among the parties with respect to the sale of the Purchased Securities is superseded by this Agreement. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective executors, administrators, heirs, successors and assigns of the parties. Except as expressly provided herein, nothing in this Agreement, expressed or implied, is intended to confer upon any party, other than the parties hereto, any rights, remedies, obligations or liabilities under or by reason of this Agreement. 6.2. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Notwithstanding any right of the Investors fully to investigate the affairs of the Company and notwithstanding any knowledge of facts determined or determinable by any Investor pursuant to such right of investigation or right of investigation, each Investor has the right to rely fully upon the representations, warranties, covenants and agreements of the Company contained in this Agreement or in any documents delivered pursuant to this Agreement. All such representations and warranties of the Company shall survive the execution and delivery of this Agreement and each Closing hereunder and shall continue in full force and effect for six months after any applicable statute of limitations (taking into account any waiver or tolling thereof) with respect to claims which may arise thereunder or relate thereto shall have run and the provisions of this Section 6.2 shall constitute a waiver by the Company of any such applicable statute of limitations. 6.3. GOVERNING LAW; JURISDICTION. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of law. Each party hereby irrevocably consents and submits to the jurisdiction of any New York State or United States Federal Court sitting in the State of New York, County of New York, over any action or proceeding arising out of or relating to this Agreement and irrevocably consents to the service of any and all process in any such action or proceeding by registered mail addressed to such party at its address specified in Section 8(b). Each party further waives any objection to venue in New York and any objection to an action or proceeding in such state and county on the basis of forum non conveniens. Each party also waives any right to trial by jury. 6.4. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 6.5. HEADINGS. The headings of the sections of this Agreement are for convenience and shall not by themselves determine the interpretation of this Agreement. 19 6.6. NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery and if a fax number has been provided, upon delivery (with answerback confirmed), addressed to a party at its address and the fax number, if any, shown below or at such other address and fax number as such party may designate by three days advance notice to the other party. Any notice to the Investors shall be sent to the addresses set forth on EXHIBIT 3, with a copy to: Hahn & Hessen LLP 350 Fifth Avenue New York, New York 10118, Fax Number: (212) 594-7167 Attention: James Kardon, Esq. Any notice to the Company shall be sent to: Isonics Corporation 5906 McIntyre Street Golden, Colorado 80403 Fax Number: 303-279-7300 Attention: James Alexander, President with a copy to: Norton - Lidstone, LLC 5445 DTC Parkway, Suite 850 Englewood, Colorado 80111 Fax Number: 303-221-5553 Attention: Herrick Lidstone, Esq. 6.7. RIGHTS OF TRANSFEREES. Any and all rights and obligations of Investors herein incident to the ownership of Purchased Securities shall pass successively to all subsequent transferees of such Purchased Securities until extinguished pursuant to the terms hereof. 6.8. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be deemed prohibited or invalid under such applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, and such prohibition or invalidity shall not invalidate the remainder of such provision or any other provision of this Agreement. 20 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. (signatures) 21 EXHIBITS AND SCHEDULES TO THE SUBSCRIPTION AGREEMENT (exhibits and schedules are not included in filing with the Form 8-K) Exhibit 1: Certificate of Determination of Preferences and Rights of Series A Convertible Preferred Stock Exhibit 2: Form of Warrants Exhibit 3: Name, Address and Fax of Investors Exhibit 4: Legal Opinion Exhibit 5: Use of Proceeds Exhibit 6: Required Agreements Exhibit 7: Series A Preferred Stock to be Outstanding Post-Closing. Exhibit 8: Registration Rights Agreement Exhibit 9: Investment Banking Agreement Exhibit 10: Disclosure Letter 22 EX-3 4 EXHIBIT 3 ISONICS CORPORATION Exhibit 3 to Form 8-K reporting an event of July 29, 1999 FORM OF WARRANT AGREEMENT Void after July 29, 2002 Warrant No. 1999-____ Name: to acquire __________ shares THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THIS WARRANT AND SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. THIS WARRANT AND SUCH SHARES MAY NOT BE TRANSFERRED EXCEPT UPON THE CONDITIONS SPECIFIED IN THIS WARRANT, AND NO TRANSFER OF THIS WARRANT OR SUCH SHARES SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL SUCH CONDITIONS SHALL HAVE BEEN COMPLIED WITH. ISONICS CORPORATION COMMON STOCK PURCHASE WARRANT Isonics Corporation (the "Company"), having its principal office at 5906 McIntyre Street, Golden, Colorado, 80403 hereby certifies that, for value received, ___________________, or assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time on or from time to time after July 29, 1999 and before 5:00 P.M., New York City time, on July 29, 2002 or as extended in accordance with the terms hereof (the "Expiration Date"), _______ fully paid and non-assessable shares of Common Stock of the Company, at the initial Purchase Price per share (as defined below) of $3.75. The number and character of such shares of Common Stock and the Purchase Price per share are subject to adjustment as provided herein. BACKGROUND. The Company will issue warrants to purchase up to an aggregate of up to 2,330,000 shares of Common Stock (subject to adjustment as provided herein) in connection with (i) the Company's private placement (the "Private Placement") of up to 1,500,000 shares of Series A Convertible Preferred Stock of the Company, and up to 1,500,000 redeemable common stock purchase warrants (each a "Private Placement Warrant"), each Warrant entitling the Holder thereof to purchase one share of Common Stock; and (ii) the issuance to Adam Smith & Company, Inc. of an additional 500,000 Warrants (the "ASC Warrants") to purchase up to 500,000 shares of Common Stock, and (iii) the Company's issuance of up to an additional 330,000 shares of Series A Convertible Preferred Stock and up to 330,000 private placement warrants of like tenor (the "Conversion Warrants", and collectively with the Private Placement Warrants and the ASC Warrants, the "Warrants") to certain persons in satisfaction of certain debt and contractual obligations as described in the Subscription Agreement of even date herewith executed in connection with the Private Placement. This Warrant is one of the Warrants originally issued as of the Original Issue Date (as defined below). As used herein the following terms, unless the context otherwise requires, have the following respective meanings: The term "Company" includes the Company and any corporation which shall succeed to or assume the obligations of the Company hereunder. The term "Common Stock" includes all stock of any class or classes (however designated) of the Company, authorized upon the Original Issue Date or thereafter, the Holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the Holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency). The term "Exchange Act" means the Securities Exchange Act of 1934 as the same shall be in effect at the time. The term "Holder" means any record owner of Warrants or Underlying Securities. The term "Nasdaq" shall mean the Nasdaq SmallCap Market or other principal market on which the Common Stock is traded. The "Original Issue Date" is July 29, 1999, the date as of which the Warrants were first issued. The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the Holders of the Warrants at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrants, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to section 6 or otherwise. The term "Purchase Price per share" shall be the then applicable exercise price for one share of Common Stock. The terms "registered" and "registration" refer to a registration effected by filing a registration statement in compliance with the Securities Act, to permit the disposition of Common Stock (or Other Securities) issued or issuable upon the exercise of Warrants, and any post-effective amendments and supplements filed or required to be filed to permit any such disposition. The term "Securities Act" means the Securities Act of 1933 as the same shall be in effect at the time. 2 The term "Series A Preferred Stock" shall mean the 1,500,000 shares of Series A Convertible Preferred Stock of the Company issued simultaneously with the issuance of the Private Placement Warrants and the 330,000 shares of Series A Convertible Preferred Stock of the Company to be issued upon the conversion of certain debt of the Company, as described in the Subscription Agreement of even date herewith executed in connection with the Private Placement. The term "Underlying Securities" shall mean any Common Stock or Other Securities issued or issuable upon exercise of Warrants. The term "Warrant" shall mean, as applicable, this Warrant or each right as set forth in this Warrant to purchase one share of Common Stock, as adjusted. 1. REGISTRATION, ETC. 1.1. The Holder shall have the rights to registration of Underlying Securities issuable upon exercise of the Warrants that are set forth in the Registration Rights Agreement, dated the date hereof between the Company and the Holder (the "Registration Rights Agreement"). 2. SALE OR EXERCISE WITHOUT REGISTRATION. If, at the time of any exercise, transfer or surrender for exchange of a Warrant or of Underlying Securities previously issued upon the exercise of Warrants, such Warrant or Underlying Securities shall not be registered under the Securities Act, the Company may require, as a condition of allowing such exercise, transfer or exchange, that the Holder or transferee of such Warrant or Underlying Securities, as the case may be, furnish to the Company a satisfactory opinion of counsel to the effect that such exercise, transfer or exchange may be made without registration under the Securities Act, provided that the disposition thereof shall at all times be within the control of such Holder or transferee, as the case may be, and provided further that nothing contained in this section 2 shall relieve the Company from complying with any request for registration pursuant to the Registration Rights Agreement. The first Holder of this Warrant, by acceptance hereof, represents to the Company that it is acquiring the Warrants for investment and not with a view to the distribution thereof. 3. EXERCISE OF WARRANT. 3.1. EXERCISE IN FULL. Subject to the provisions hereof, this Warrant may be exercised in full by the Holder hereof by surrender of this Warrant, with the form of subscription at the end hereof duly executed by such Holder, to the Company at its principal office accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock called for on the face of this Warrant (without giving effect to any adjustment therein) by the Purchase Price per share. 3 3.2. PARTIAL EXERCISE. Subject to the provisions hereof, this Warrant may be exercised in part by surrender of this Warrant in the manner and at the place provided in subsection 3.1 except that the amount payable by the Holder upon any partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock (without giving effect to any adjustment therein) designated by the Holder in the subscription at the end hereof by (b) the Purchase Price per share. Upon any such partial exercise, the Company at its expense will forthwith issue and deliver to or upon the order of the Holder hereof a new Warrant or Warrants of like tenor, in the name of the Holder hereof or as such Holder (upon payment by such Holder of any applicable transfer taxes) may request, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of such shares designated by the Holder in the subscription at the end hereof. 3.3. EXERCISE BY SURRENDER OF WARRANT OR SHARES OF COMMON STOCK. In addition to the method of payment set forth in sections 3.1 and 3.2 and in lieu of any cash payment required thereunder, the Holder(s) of the Warrants shall have the right at any time and from time to time to exercise the Warrants in full or in part by surrendering shares of Common Stock or the Warrant Certificate in the manner and at the place specified in section 3.1 as payment of the aggregate Purchase Price per share for the Warrants to be exercised. The number of Warrants or shares of Common Stock to be surrendered in payment of the aggregate Purchase Price for the Warrants to be exercised shall be determined by multiplying the number of Warrants to be exercised by the Purchase Price per share, and then dividing the product thereof by an amount equal to the Market Price (as defined below). 3.4. DEFINITION OF MARKET PRICE. As used herein, the phrase "Market Price" at any date shall be deemed to be (i) if the principal trading market for such securities is an exchange, the last reported sale price, or, in case no such reported sale takes place on such date, the last reported sale prices for the last previous trading days in which a sale was reported, in either case as officially reported on any consolidated tape, (ii) if the principal market for such securities is the over-the-counter market, the high bid price on such trading days as set forth by Nasdaq or, (iii) if the security is not quoted on Nasdaq, the high bid price as set forth in the National Quotation Bureau sheet listing such securities for such day. Notwithstanding the foregoing, if there is no reported closing price or high bid price, as the case may be, on any of the ten trading days preceding the event requiring a determination of Market Price hereunder, then the Market Price shall be determined in good faith by resolution of the Board of Directors of the Company, based on the best information available to it. 3.5. COMPANY TO REAFFIRM OBLIGATIONS. The Company will, at the time of any exercise of this Warrant, upon the request of the Holder hereof, acknowledge in writing its continuing obligation to afford to such Holder any rights (including, without limitation, any right to registration of the Underlying Securities) to which such Holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant, PROVIDED that if the Holder of this Warrant shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford such Holder any such rights. 4 4. DELIVERY OF STOCK CERTIFICATES, ETC., ON EXERCISE. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within three business days thereafter, the Company at its own expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder hereof, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of full paid and non-assessable shares of Common Stock or Other Securities to which such Holder shall be entitled upon such exercise, plus, in lieu of any fractional share to which such Holder would otherwise be entitled, cash equal to such fraction multiplied by the then current Market Price of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to section 5 or otherwise. 5. ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK, PROPERTY, ETC.; RECLASSIFICATION, ETC. In case at any time or from time to time after the Original Issue Date the holders of Common Stock (or Other Securities) shall have received, or (on or after the record date fixed for the determination of stockholders eligible to receive) shall have become entitled to receive, without payment therefor (a) other or additional stock or other securities or property (other than cash) by way of dividend, or (b) any cash paid or payable (including, without limitation, by way of dividend), or (c) other or additional (or less) stock or other securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement, then, and in each such case the Holder of this Warrant, upon the exercise hereof as provided in section 3, shall be entitled to receive the amount of stock and other securities and property (including cash in the cases referred to in subdivisions (b) and (c) of this section 5) which such Holder would hold on the date of such exercise if on the Original Issue Date such Holder had been the Holder of record of the number of shares of Common Stock called for on the face of this Warrant and had thereafter, during the period from the Original Issue Date to and including the date of such exercise, retained such shares and all such other or additional (or less) stock and other securities and property (including cash in the cases referred to in subdivisions (b) and (c) of this section 5) receivable by such Holder as aforesaid during such period, giving effect to all adjustments called for during such period by sections 6 and 7 hereof. 6. REORGANIZATION, CONSOLIDATION, MERGER, ETC. In case the Company after the Original Issue Date shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement 5 contemplating the dissolution of the Company, then, in each such case, the Holder of this Warrant, upon the exercise hereof as provided in section 3 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall be entitled to receive (and the Company shall be entitled to deliver), in lieu of the Underlying Securities issuable upon such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such Holder had so exercised this Warrant immediately prior thereto, all subject to further adjustment thereafter as provided in sections 5 and 7 hereof. The Company shall not effect any such reorganization, consolidation, merger or sale, unless prior to or simultaneously with the consummation thereof, the successor corporation resulting from such consolidation or merger or the corporation purchasing such assets or the appropriate corporation or entity shall assume, by written instrument, the obligation to deliver to each Holder the shares of stock, cash, other securities or assets to which, in accordance with the foregoing provisions, each Holder may be entitled to and all other obligations of the Company under this Warrant. 7. OTHER ADJUSTMENTS. 7.1. GENERAL. In any case to which sections 5 and 6 hereof are not applicable, where the Company shall issue or sell shares of its Common Stock after the Original Issue Date for a consideration per share less than the Purchase Price per share in effect pursuant to the terms of this Warrant at the time of issuance or sale of such additional shares (the "Lower Exercise Price"), then the Purchase Price in effect hereunder shall simultaneously with such issuance or sale be reduced to an amount equal to the Purchase Price in effect immediately prior to such issuance or sale (the "Prior Conversion Price") multiplied by a fraction, the numerator of which is the sum of (x) the total number of shares of Common Stock outstanding immediately prior to such issuance and (y) the number of shares of the Common Stock which the aggregate consideration received for the total number of additional shares of the Common Stock being issued would purchase at the Prior Conversion Price, and the denominator of which is the sum of (a) the total number of shares of Common Stock outstanding immediately prior to such issuance and (b) the number of shares of Common Stock being issued. In the event of an adjustment to the Purchase Price under this section 7, the number of shares of Underlying Securities issuable upon exercise hereof shall be increased so that the aggregate exercise price of this Warrant is not reduced as a result of such reduction of Purchase Price. 7.2. CONVERTIBLE SECURITIES. (a) In case the Company shall issue or sell any securities convertible into Common Stock of the Company ("Convertible Securities") after the date hereof, there shall be determined the price per share for which Common Stock is issuable upon the conversion or exchange thereof, such determination to be made by dividing (a) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (b) the maximum number of shares of Common Stock of the Company issuable upon the conversion or exchange of all of such Convertible Securities. 6 (b) If the price per share so determined shall be less than the applicable Purchase Price per share, then such issue or sale shall be deemed to be an issue or sale for cash (as of the date of issue or sale of such Convertible Securities) of such maximum number of shares of Common Stock at the price per share so determined, provided that, if such Convertible Securities shall by their terms provide for an increase or increases or decrease or decreases, with the passage of time, in the amount of additional consideration, if any, to the Company, or in the rate of exchange, upon the conversion or exchange thereof, the adjusted Purchase Price per share shall, forthwith upon any such increase or decrease becoming effective, be readjusted to reflect the same, and provided further, that upon the expiration of such rights of conversion or exchange of such Convertible Securities, if any thereof shall not have been exercised, the adjusted Purchase Price per share shall forthwith be readjusted and thereafter be the price which it would have been had an adjustment been made on the basis that the only shares of Common Stock so issued or sold were issued or sold upon the conversion or exchange of such Convertible Securities, and that they were issued or sold for the consideration actually received by the Company upon such conversion or exchange, plus the consideration, if any, actually received by the Company for the issue or sale of all of such Convertible Securities which shall have been converted or exchanged. 7.3. RIGHTS AND OPTIONS. (a) In case the Company shall grant any rights or options to subscribe for, purchase or otherwise acquire Common Stock (other than pursuant to an incentive plan for employees adopted by a majority of the stockholders of the Company providing for the issuance of options to purchase no more than an aggregate of 500,000 shares of Common Stock at a price no less than 85% of fair market value), there shall be determined the price per share for which Common Stock is issuable upon the exercise of such rights or options, such determination to be made by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of such rights or options, by (ii) the maximum number of shares of Common Stock of the Company issuable upon the exercise of such rights or options. (b) If the price per share so determined shall be less than the applicable Purchase Price per share, then the granting of such rights or options shall be deemed to be an issue or sale for cash (as of the date of the granting of such rights or options) of such maximum number of shares of Common Stock at the price per share so determined, provided that, if such rights or options shall by their terms provide for an increase or increases or decrease or decreases, with the passage of time, in the amount of additional consideration payable to the Company upon the exercise thereof, the adjusted Purchase Price per share shall, forthwith upon any such increase or decrease becoming effective, be readjusted to reflect the same, and provided, further, that upon the expiration of such rights or options, if any thereof shall not have been exercised, the adjusted Purchase Price per share shall forthwith be readjusted and thereafter be the price which it would have been had an adjustment been made on the basis that the only shares of Common Stock so issued or sold were those issued or sold upon the exercise of such rights or options and that they were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of all such rights or options, whether or not exercised. 7 7.4. EXCEPTIONS. This Section 7 shall not apply to (a) the issuance of the Series A Preferred Stock, (b) the issuance of shares of Common Stock upon conversion of the Series A Preferred Stock, (c) upon the exercise of the Warrants aggregating not in excess of 2,330,000 shares, (d) issuances of Common Stock, Convertible Securities, rights and options that have been approved by the holders of not less than a majority of the outstanding shares of Series A Preferred Stock, or (e) issuances of Common Stock pursuant to the exercise of options, warrants and rights outstanding on the date hereof. 8. FURTHER ASSURANCES. The Company will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of stock upon the exercise of all Warrants from time to time outstanding. 9. ACCOUNTANTS' CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable upon the exercise of the Warrants, the Company at its expense will promptly cause the Company's regularly retained auditor to compute such adjustment or readjustment in accordance with the terms of the Warrants and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, and the number of shares of Common Stock outstanding or deemed to be outstanding. The Company will forthwith mail a copy of each such certificate to each Holder. 10. NOTICES OF RECORD DATE, ETC. In the event of (a) any taking by the Company of a record of the Holders of any class of securities for the purpose of determining the Holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, or (d) any proposed issue or grant by the Company of any shares of stock of any class or any other securities, or any right or option to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities (other than the issue of Common Stock on the exercise of the Warrants), then and in each such event the Company will mail or cause to be mailed to each Holder of a Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and 8 character of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any, as of which the Holders of record of Underlying Securities shall be entitled to exchange their shares of Underlying Securities for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up, and (iii) the amount and character of any stock or other securities, or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall be mailed at least 20 days prior to the date therein specified. 11. RESERVATION OF STOCK, ETC., ISSUABLE ON EXERCISE OF WARRANTS. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of the Warrants, all shares of Common Stock (or Other Securities) from time to time issuable upon the exercise of the Warrants. 12. LISTING ON SECURITIES EXCHANGES; REGISTRATION. In furtherance and not in limitation of any other provision of this Warrant, if the Company at any time shall list any Common Stock on any national securities exchange and shall register such Common Stock under the Exchange Act, the Company will, at its expense, simultaneously list on such exchange or Nasdaq, upon official notice of issuance upon the exercise of the Warrants, and maintain such listing of all shares of Common Stock from time to time issuable upon the exercise of the Warrants; and the Company will so list on any national securities exchange or Nasdaq, will so register and will maintain such listing of, any Other Securities if and at the time that any securities of like class or similar type shall be listed on such national securities exchange or Nasdaq by the Company. 13. EXCHANGE OF WARRANTS. Subject to the provisions of section 2 hereof, upon surrender for exchange of any Warrant, properly endorsed, to the Company, as soon as practicable (and in any event within three business days) the Company at its own expense will issue and deliver to or upon the order of the Holder thereof a new Warrant or Warrants of like tenor, in the name of such Holder or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 14. REPLACEMENT OF WARRANTS. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 9 15. WARRANT AGENT. The Company may, by written notice to each Holder of a Warrant, appoint an agent having an office in New York, New York, for the purpose of issuing Common Stock (or Other Securities) upon the exercise of the Warrants pursuant to section 3, exchanging Warrants pursuant to section 13, and replacing Warrants pursuant to section 14, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 16. REMEDIES. The Company stipulates that the remedies at law of the Holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 17. NEGOTIABILITY, ETC. Subject to Section 2 above, this Warrant is issued upon the following terms, to all of which each Holder or owner hereof by the taking hereof consents and agrees: (a) subject to the provisions hereof, title to this Warrant may be transferred by endorsement (by the Holder hereof executing the form of assignment at the end hereof) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery; (b) subject to the foregoing, any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is empowered to transfer absolute title hereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of each such bona fide purchaser and each such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby; and (c) until this Warrant is transferred on the books of the Company, the Company may treat the registered Holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 18. NOTICES, ETC. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such Holder, or, until an address is so furnished, to and at the address of the last Holder of this Warrant who has so furnished an address to the Company. 10 19. MISCELLANEOUS. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant is being delivered in the State of New York and shall be construed and enforced in accordance with and governed by the laws of such State. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. 20. EXTENDED EXPIRATION. The right to exercise this Warrant shall expire at 5:00 P.M., New York City time, on the Expiration Date, provided, however, that if the Holders of Warrants issued hereunder have, in accordance with the terms thereof, requested a registration statement pursuant to the Registration Rights Agreement 90 days or more prior to the Expiration Date and such registration statement has not become effective prior to the Expiration Date then the right to exercise this Warrant shall be extended and shall expire 30 days after the effective date of such registration statement. 21. ASSIGNABILITY. Subject to Section 2 hereof, this Warrant is fully assignable at any time. Dated: July 29, 1999 ISONICS CORPORATION By: ----------------------------- James E. Alexander, President [Corporate Seal] Attest: ------------------------------- Brantley J. Halstead, Secretary 11 FORM OF SUBSCRIPTION (To be signed only upon exercise of Warrant) To: ISONICS CORPORATION The undersigned, the Holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, shares of Common Stock of Isonics Corporation, and herewith makes payment of $ * therefor, and requests that the certificates for such shares be issued in the name of, and delivered to, _____________ , whose address is ___________________________ . Dated: (Signature must conform in all respects to name of Holder as specified on the face of the Warrant) (Address) * Insert here the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for additional Common Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise. 12 FORM OF ASSIGNMENT (To be signed only upon transfer of Warrant) For value received, the undersigned hereby sells, assigns and transfers unto _________________________ the right represented by the within Warrant to purchase _________ of Common Stock of Isonics Corporation to which the within Warrant relates, and appoints ______________________________ Attorney to transfer such right on the books of Isonics Corporation with full power of substitution in the premises. The Warrant being transferred hereby is one of the Warrants issued by Isonics Corporation as of July 29, 1999 to purchase an aggregate of up to 2,330,000 shares of Common Stock. Dated: --------------------------------------- (Signature must conform in all respects to name of Holder as specified on the face of the Warrant) --------------------------------------- (Address) - ------------------------------ Signature guaranteed by a Bank or Trust Company having its principal office in New York City or by a Member Firm of the New York or American Stock Exchange 13 EX-4 5 EXHIBIT 4 ADAM SMITH & COMPANY, INC. 101 East 52nd Street New York, NY 10022 Tel (212) 751-4900 Fax (212) 751-2892 July 29, 1999 Mr. James E. Alexander President & CEO Isonics Corporation 5906 McIntyre Street Golden, Colorado 80403 Re: INVESTMENT BANKING AGREEMENT Gentlemen: 1. Isonics Corporation and/or related entities (the "Company") hereby engages Adam Smith & Company, Inc. ("Adam Smith") to provide investment banking services on a non-exclusive basis under the terms described herein. Adam Smith will provide investment banking services that the Company may reasonably request including providing advice concerning relations with securities analysts, the evaluation of potential public or private financing, acquisitions, purchases or sales of major assets and mergers that have been proposed to the Company and those which may be proposed to the Company in the future. We shall not be responsible, of course, for your effectuating any particular transaction. In the event we perform any functions other than acting as your agent hereunder, such as obtaining funds for you or placing your securities, acting as tender agent or arranging for acquisitions or mergers, we shall be entitled to such compensation for such services as we may hereafter agree upon, in addition to the compensation provided for in the next paragraph; however, inability to reach agreement shall not be deemed a breach hereof. 2. In consideration of the execution and delivery of this investment banking agreement, the Company will irrevocably issue to Adam Smith warrants to purchase 500,000 (five hundred thousand) shares of the Company's common stock ("Common Stock") at a price of U.S. $3.75 (three dollars and seventy-five cents) per share. All warrants referred to herein will be substantially in the form attached hereto as Exhibit A and will be exercisable from the date of issuance and will expire three years from the date of issuance. The rights granted pursuant to the warrant shall not be affected by the performance of services hereunder or payment of other compensation for such services. ADAM SMITH & COMPANY, INC. 3. In the event the Company consummates a transaction(s) (such as a merger or sale of the Company a sale by the Company of all or substantially all of its assets, an acquisition of another company, a public or private financing of the Company, a joint venture or licensing arrangement or similar transaction) during the period set forth in Section 6 below and Adam Smith initiated the transaction, identified or had conversations with the other party (at the request of the Company) to the transaction or otherwise rendered any services in connection with the transaction (each a "Consummated Transaction"), Adam Smith shall be entitled to receive, and the Company agrees to pay Adam Smith, the following compensation: The Company shall pay to Adam Smith an investment banking fee equal to five percent (5%) of the value of the first five million dollars ($5,000,000) of the Consummated Transaction and two percent (2%) of the value thereof in excess of five million dollars ($5,000,000). The fee due to Adam Smith shall be paid by the Company in cash at the closing of the Consummated Transaction, without regard to whether the Consummated Transaction involves payment in cash, in stock, or a combination of cash and stock, or is made on an installment basis. In the case of a leveraged buyout or leveraged transaction, the value of the Consummated Transaction shall include all funds borrowed or debt incurred or assumed by the acquiring or acquired entity. In the event a Consummated Transaction is consummated in one or more steps, including, without limitation, by way of a two step merger or royalty arrangement, the value of any additional consideration paid or to be paid in any subsequent step in the Consummated Transaction whether in the form of (i) property, (ii) capital stock (and any securities convertible into, or options, warrants or other rights to acquire, such capital stock) or (iii) the assumption, directly or indirectly (by operation of law, or otherwise), or repayment of indebtedness and other liabilities, shall be included in the value of the Consummated Transaction for purposes of calculating Adam Smith's fee pursuant to this paragraph. If all or a portion of the consideration paid in the Consummated Transaction is other than cash or securities, then the value of such non- cash consideration shall be the fair market value thereof on the date the Consummated Transaction is consummated as mutually agreed upon in good faith by the Company's Board of Directors and Adam Smith. If such non-cash consideration consists of common stock, options, warrants or rights for which a public trading market existed prior to the consummation of the Consummated Transaction, then the value of such securities shall be determined by the closing or last sales price thereof on the date of the consummation of the Consummated Transaction; provided, however, that if such non-cash consideration consists of newly-issued, publicly-traded common stock, options, warrants or rights for which no public trading market existed prior to the consummation of the Consummated Transaction, then the value thereof shall be the average of the closing prices for the twenty (20) trading days subsequent to the fifth trading day after the consummation of the Consummated Transaction. In such event, the fee payable to Adam Smith pursuant to this paragraph shall be paid on the 30th trading day subsequent to consummation of the Consummated Transaction. If no public market exists for the common stock, options, warrants or other rights issued in the Consummated Transaction, then the value thereof shall be as mutually agreed upon in good faith by the Company's Board of Directors and Adam Smith. If the non-cash consideration paid in the Consummated Transaction consists of preferred stock or debt securities (regardless of whether a public trading market existed for such preferred stock or debt securities prior to the consumma- 2 ADAM SMITH & COMPANY, INC. tion of the Consummated Transaction or exists thereafter), the value thereof shall be the face or principal amount, as the case may be. Any amounts payable by a party to the Consummated Transaction, any shareholder of such party or any affiliate of either such party or any shareholder of such party in connection with a non-competition, employment, consulting, joint venture, licensing, supply or other agreement shall be deemed to be part of the value of the Consummated Transaction. If all or a portion of the consideration payable in connection with the Consummated Transaction includes contingent future payments, then the Company shall pay to Adam Smith upon consummation of such Consummated Transaction, an additional cash fee, determined in accordance with this paragraph based upon the present value of the reasonably expected maximum amount of such contingent future payments (as such amount is determined in good faith between the Company and Adam Smith) using a discount rate of ten percent (10%). However, in the event of an installment purchase at a fixed price and a fixed time schedule, the Company agrees to pay Adam Smith, upon consummation of the Consummated Transaction, a cash fee determined in accordance with this paragraph based upon the present value of such installment payments using a discount rate of ten percent (10%). Any disputes concerning value of a Consummated Transaction or any component thereof shall be resolved by an investment banking firm or other professional valuation firm mutually agreed upon by the parties (or if the parties fail to agree on such firm, then such a firm chosen by the investment banking firm chosen by each party), whose determination of value shall be final and binding on the parties. 4. In order to coordinate efforts to effect a Consummated Transaction, in the event that either Adam Smith initiates a transaction or the Company requests investment banking services for a particular transaction pursuant to this Agreement, neither the Company nor any other person acting on the Company's behalf shall, directly or indirectly (except through Adam Smith), solicit any offer from any party to enter into such a transaction. In the event that, during the period of the engagement of Adam Smith hereunder, the Company or any of its officers, directors, employees or representatives are contacted by or on behalf of any party concerning the possibility of a transaction, the Company will promptly so inform Adam Smith in order that Adam Smith can evaluate such party and its interest and assist the Company, including assisting the Company in any subsequent discussions. 5. In the event that for any reason the Company shall fail to pay to Adam Smith all or any portion of any fees payable hereunder when due, interest shall accrue and be payable on the unpaid cash balance hereunder from the date then first due through and including the date when actually collected by Adam Smith, at a rate equal to fourteen percent (14%) per year. 6. This Agreement shall be effective on the date hereof and shall be in effect for a minimum of one year following the date hereof. After this one year anniversary, this Agreement shall remain in effect until thirty (30) days after written notice is given by either party to terminate this Agreement. Notwithstanding anything herein to the contrary, if the Company shall, within one year immediately following the termination of the Agreement, conclude a Consummated Transaction based on any transaction that was initiated prior to the termination of the Agreement, the Company shall also pay Adam Smith the fee determined above. 3 ADAM SMITH & COMPANY, INC. 7. (a) The Company agrees to indemnify and hold harmless Adam Smith, its directors, officers, employees, legal counsel, agents and stockholders, (all of such persons being hereinafter collectively referred to as the "Indemnified Parties") against any and all losses, claims, damages, obligations, penalties, judgments, awards, liabilities, costs, expenses and disbursements (and any and all actions, suits, proceedings and investigations in respect thereof and any and all legal and other costs, expenses and disbursements reasonably incurred in giving testimony or furnishing documents in response to a subpoena or otherwise), including, without limitation, the reasonable costs, expenses and disbursements, as and when incurred, of investigating, preparing or defending any such action, suit, proceeding or investigation (whether or not in connection with litigation in which an Indemnified Party is a party), directly or indirectly caused by, relating to, based upon, arising out of or in connection with (a) Adam Smith's acting for the Company, including, without limitation, any act or omission by an Indemnified Party in connection with its acceptance of or the performance or nonperformance of its obligations under the Agreement, as it may be amended from time to time; (b) any untrue statement or alleged untrue statement of material fact contained in, or omissions or alleged omissions from, any information furnished to an Indemnified Party, an investor, lender, provider of funding or any party to the transaction; or (c) any Consummated Transaction, PROVIDED, HOWEVER, such indemnity agreement shall not apply to any portion of any such loss, claim, damage, obligation, penalty, judgment, award, liability, cost, expense or disbursement to the extent it is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) to have resulted primarily and directly from the gross negligence or willful misconduct of the particular Indemnified Party. The Company also agrees that an Indemnified Party shall not have any liability (whether direct or indirect, in contract or tort or otherwise) to the Company or to any person claiming through the Company for or in connection with the engagement of Adam Smith, except to the extent that any such liability is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) to have resulted primarily and directly from Adam Smith's gross negligence or willful misconduct. (b) The provisions shall be in addition to any liability the Company may otherwise have to any of the Indemnified Parties. (c) If any action, suit, proceeding or investigation is commenced, as to which an Indemnified Party proposes to demand indemnification, it shall notify the Company with reasonable promptness; PROVIDED, HOWEVER, that any failure by an Indemnified Party to notify the Company shall not relieve the Company from its obligations hereunder. Each Indemnified Party shall have the right to retain counsel of its own choice to represent it, and the Company shall pay the fees, expenses and disbursements of such counsel; and such counsel shall to the extent consistent with its professional responsibilities cooperate with the Company and any counsel designated by the Company. The Company shall be liable for any settlement of any claim against an Indemnified Party made with the Company's written consent, which consent shall not be unreasonably withheld. The Company shall not, without the prior written consent of an Indemnified Party, settle or compromise any claim, or permit a default or consent to the entry of any judgment in respect thereof, unless such settlement, compromise or consent includes, as an unconditional term thereof, the giving by the claimant to the respective Indemnified Party of an unconditional release from all liability in respect of such claim. 4 ADAM SMITH & COMPANY, INC. In order to provide for just and equitable contribution, if a claim for indemnification pursuant to these Indemnification Provisions is made but it is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) that such indemnification may not be enforced in such case, even though the express provisions hereof provide for indemnification in such case, then the Company, on the one hand, and the respective Indemnified Party or Indemnified Parties, as applicable on the other hand, shall contribute to the losses, claims, damages, obligations, penalties, judgments, awards, liabilities, costs, expenses and disbursements to which the indemnified persons may be subject in accordance with the relative benefits received by the Company, on the one hand, and the respective Indemnified Party or Indemnified Parties, as applicable on the other hand, and also the relative fault of the Company, on the one hand, and the respective Indemnified Party or Indemnified Parties, as applicable on the other hand, in connection with the statements, acts or omissions which resulted in such losses, claims, damages, obligations, penalties, judgments, awards, liabilities, costs, expenses and disbursements and the relative equitable considerations shall also be considered. No person found liable for a fraudulent misrepresentation shall be entitled to contribution from any person who is not also found liable for such fraudulent misrepresentation. Notwithstanding the foregoing, the respective Indemnified Party or Indemnified Parties, as applicable, shall not be obligated to contribute any amount hereunder that exceeds the amount of fees previously received by the respective Indemnified Party or Indemnified Parties, as applicable, in connection with the foregoing. Neither termination nor completion of the engagement of Adam Smith pursuant to the Agreement shall affect the provisions of this Section 7 which then shall remain operative and in full force and effect. 8. The Company shall bear Adam Smith's reasonable expenses incurred in connection with performance of its duties hereunder, including without limitation the reasonable fees and expenses of its outside counsel and travel expenses; provided that Adam Smith will obtain the Company's prior approval before incurring travel expenses or retaining experts (other than counsel). 9. Neither the Company nor Adam Smith shall make any public statement about this agreement or any transactions or services described herein mentioning the other party without the prior written consent of the other party, unless that party determines in good faith, on the advice of legal counsel, that public disclosure is required by law, in which case that party shall consult with the other party prior to making a statement. 10. The Company represents and warrants to Adam Smith that Adam Smith's engagement and compensation hereunder has been duly authorized and approved by the Board of Directors of the Company and this Agreement has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company. 11. This Agreement has been executed and delivered in the State of New York and shall be governed by the laws of such state, without giving effect to the conflict of laws rules thereunder. 12. This Agreement shall be binding upon, and enforceable against, the successors and assigns of each of the undersigned. 5 ADAM SMITH & COMPANY, INC. 13. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. Please sign this letter at the place indicated below and return it to the undersigned. [REMAINDER OF PAGE INTENTIONALLY BLANK] 6 ADAM SMITH & COMPANY, INC. Very truly yours, ADAM SMITH & COMPANY, INC. By: -------------------------- Managing Director AGREED: ISONICS CORPORATION By: -------------------------- James E. Alexander President & CEO 7 EX-5 6 EXHIBIT 5 ISONICS CORPORATION Exhibit 5 to Form 8-K reporting an event of July 29, 1999 FORM OF REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered into this 29th day of July, 1999, by and among Isonics Corporation, a California corporation (the "Company"), Adam Smith & Company, Inc. ("ASC"), the individuals and trusts whose names are set forth on the signature page(s) hereof, and the individuals described on Exhibits 6A and 6B to the Subscription Agreement (as that term is defined in the next paragraph) (collectively, the "Stockholders"). BACKGROUND. The Company has entered into (i) a Subscription Agreement of even date herewith (as amended, the "Subscription Agreement") with the Stockholders pursuant to which the Company will issue to the Stockholders an aggregate of 1,500,000 Units, each consisting of one share of Class A Convertible Preferred Stock of the Company and one redeemable common stock purchase warrant (each a "Unit Warrant"), each Unit Warrant entitling the holder thereof to purchase one share of common stock; and (ii) an investment banking agreement with ASC providing for, among other matters, the issuance of an additional 500,000 Warrants (the "ASC Warrants", and collectively with the Unit Warrants, the "Warrants") to purchase up to 500,000 shares of common stock; and (iii) agreements to issue of up to an additional 330,000 shares of Series A Convertible Preferred Stock and up to 330,000 warrants to certain persons in satisfaction of certain debt and contractual obligations (the "Conversion Warrants"). An aggregate of 1,850,000 authorized but unissued shares of common stock, no par value per share, of the Company ("Common Stock") are reserved for issuance upon conversion of the Preferred Stock to be issued to the Stockholders under the Subscription Agreement and the respective conversion agreements, and an aggregate of 2,330,000 authorized but unissued shares of Common Stock are reserved for issuance upon exercise of the Warrants and the Conversion Warrants. In consideration of the background transactions and the mutual covenants and agreements herein set forth, the parties to this Agreement hereby agree, effective at the Effective Date (as defined below), subject to the terms and conditions hereinafter set forth, as follows: 1. DEFINITIONS. As used herein, unless the context otherwise requires, the following terms have the following respective meanings: AGREEMENT: As defined in the introductory paragraph of this Agreement. COMMISSION: The U.S. Securities and Exchange Commission or any other governmental authority at the time administering the Securities Act or the Exchange Act. COMMON STOCK: As defined in the paragraph of this Agreement entitled "Background." COMPANY: As defined in the introductory paragraph of this Agreement. EFFECTIVE DATE: The date on which Preferred Stock and Warrants are issued to the Stockholders. EXCHANGE ACT: The U.S. Securities Exchange Act of 1934, as amended, or any similar or successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Exchange Act shall include a reference to the comparable section, if any, of any such similar or successor federal statute. PERSON: A corporation, an association, a partnership, a limited liability company, an individual, a joint venture, a trust or estate, an unincorporated organization, or a government or any department or agency thereof. PREFERRED STOCK: As defined in the paragraph of this Agreement entitled "Background": REGISTRABLE SECURITIES: (a) Any shares of Common Stock issued or issuable upon conversion of any shares of Preferred Stock issued to the Stockholders pursuant to the Subscription Agreement or upon exercise of the Warrants and (b) any securities issued or issuable with respect to any Common Stock referred to in the foregoing clauses by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. As to any particular Registrable Securities, once issued, such securities shall cease to be Registrable Securities when (v) they may be sold without restriction pursuant to Rule 144(k) (or any successor provision) under the Securities Act, (w) a registration statement with respect to the sale of such securities in the United States shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (x) they shall have been transferred pursuant to Rule 144 (or any successor provision) under the Securities Act, (y) they shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of them shall not require registration or qualification under the Securities Act or any similar state law then in force, or (z) they shall have ceased to be outstanding. While the shares of Preferred Stock and the Warrants outstanding from time to time are not Registrable Securities for the purpose of registration, holders of shares of Preferred Stock and Warrants shall, for purposes of giving of notices or the calculation of percentages of Registrable Securities, be treated as the holders of the Registrable Securities issuable upon conversion of their shares of Preferred Stock or upon exercise of their Warrants. In addition, for purposes of calculation of percentages of Registrable Securities, all shares of Preferred Stock shall be treated as the same number of shares of Cmmon Stock into which they are then convertible and all Warrants shall be treated as the same number of shares of Common Stock which may be purchased upon exercise thereof. REGISTRATION EXPENSES: All expenses incident to the Company's performance of or compliance with Section 2 of this Agreement, including, without limitation, all registration, filing and listing or Nasdaq fees, all fees and expenses of complying with securities or blue sky laws, all word processing, duplicating and printing expenses, all messenger and delivery expenses, the fees and disbursements of counsel for the Company and of its independent public accountants, including without limitation the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, premiums and other costs of policies of insurance, if any, against liabilities arising out of the public offering of the Registrable Securities being registered, and any fees and disbursements of underwriters customarily paid by issuers or sellers of securities, but excluding underwriting discounts and 2 commissions, transfer taxes, if any, and the fees and disbursements of any counsel and accountants retained by the holder or holders of the Registrable Securities being registered. SECURITIES ACT: The U.S. Securities Act of 1933, as amended, or any similar or successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. References to a particular section of the Securities Act shall include a reference to the comparable section, if any, of any such similar or successor federal statute. SUBSCRIPTION AGREEMENT: As defined in the paragraph of this Agreement entitled "Background." STOCKHOLDERS: As defined in the introductory paragraph of this Agreement. WARRANTS: As defined in the paragraph of this Agreement entitled "Background." 2. Registration under Securities Act 2.1. (a) REGISTRATION ON REQUEST. Upon the written request of ASC or the holder or holders of thirty percent (30%) or more of the Registrable Securities that the Company effect the registration under the Securities Act in connection with a sale of such shares in the United States of all or part of such holders, Registrable Securities and specifying the intended method of disposition thereof (including whether or not such disposition is intended to be effected as an underwritten offering), the Company will promptly give written notice of such requested registration to all other holders of Registrable Securities and thereupon the Company will use its best efforts to effect the registration under the Securities Act of: (i) the Registrable Securities which the Company has been so requested to register by the holder or holders submitting the request, and (ii) all other Registrable Securities which the Company has been requested to register by the holder or holders thereof by written request given to the Company within fifteen (15) days after the giving of such written notice by the Company (which request shall specify the intended method of disposition of such Registrable Securities), all to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities so to be registered. (b) PRIORITY IN REQUESTED REGISTRATIONS. If a requested registration pursuant to this Section 2.1 involves an underwritten offering, and the managing underwriter shall advise the Company in writing (with a copy to each holder of Registrable Securities requesting registration) that, in its opinion, the number of Registrable Securities and other securities of the Company held by any other party requested to be included in such registration exceeds the number which can be sold in (or during the time of) such offering within a price range acceptable to the holders of a majority (by number of shares) of the Registrable Securities requested to be included in such registration, the Company will include in such registration all Registrable Securities requested to be included in such registration (unless the provisions of the following sentence apply) and will include in such registration other securities of the Company (including any securities proposed to be issued and sold by the Company) held by any other party only to the extent that the number of shares which the Company is advised can be so sold in (or during the time of) such offering exceeds the number of Registrable Securities to be included in such registration. If a requested 3 registration pursuant to this Section 2.1 involves an underwritten offering, and the managing underwriter shall advise the Company in writing (with a copy to each holder of Registrable Securities requesting registration) that, in its opinion, the number of Registrable Securities requested to be included in such registration exceeds the number which can be sold in (or during the time of) such offering within a price range acceptable to the holders of a majority (by number of shares) of the Registrable Securities requested to be included in such registration, the Company will include in such registration only Registrable Securities requested to be included in such registration. In such event, such Registrable Securities will be included in such registration only to the extent of the number of shares which the Company is advised an be so sold in (or during the time of) such offering; the Registrable Securities to be included in such registration shall be taken up pro rata from the holders of Registrable Securities requesting such registration on the basis of the percentage of Registrable Securities requested to be included in such registration; and all shares proposed to be sold by the Company or any other party shall be deleted from such registration prior to effecting any reduction of Registrable Securities by the holders thereof under this paragraph (b). (c) REGISTRATION STATEMENT FORM. Registrations under this Section 2.1 shall be on such appropriate registration form of the Commission (i) for which the Company qualifies, and which the Company's counsel (after consultation with counsel or counsels for the holders of the Registrable Securities) deems appropriate, and (ii) as shall permit the disposition of such Registrable Securities in accordance with the intended method or methods of disposition specified in the request for such registration. The Company agrees to include in any such registration statement all information as to the holders of the Registrable Securities to be registered which the holders of the Registrable Securities being registered shall reasonably request or which shall be required by applicable law. (d) EXPENSES. Except as provided in paragraph (g) of this Section 2.1, the Company will pay all Registration Expenses incurred in connection with any registration requested pursuant to this Section 2.1 which the Company is obligated to effect, whether or not such registration is effected. (e) EFFECTED REGISTRATION STATEMENT. A registration requested pursuant to this Section 2.1 shall not be deemed to have been effected unless a registration statement with respect thereto has become effective except: (i) if the registration statement is withdrawn prior to its effectiveness pursuant to the request of all of the holders of Registrable Securities who have requested the inclusion in such registration statement of some or all of their Registrable Securities and one or more of the holders of Registrable Securities have not paid the Registration Expenses relating thereto in accordance with paragraph (g) of this Section 2.1, (ii) if, after the registration statement has become effective, such registration is interfered with by any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason, and such stop order, injunction or other order or requirement results from any action or inaction of a holder or holders of Registrable Securities, or (iii) if the conditions to closing specified in the purchase agreement or underwriting agreement entered into in connection with such registration are not satisfied due to a failure by a holder of Registrable Securities to satisfy a condition required to be satisfied by such holder pursuant to the purchase agreement or underwriting agreement and one or more of the holders of Registrable Securities have not paid the Registration Expenses relating thereto in accordance with paragraph (g) of this Section 2.1. 4 (f) SELECTION OF UNDERWRITER. If a requested registration pursuant to this Section 2.1 involves an underwritten offering, the underwriter or underwriters thereof shall be, selected by the holders of a majority of the Registrable Securities to be so registered, which approval shall not be unreasonably withheld. (g) LIMITATION ON REGISTRATIONS. The Company's obligations under this Section 2.1 shall be limited to effecting two (2) registrations within the meaning of paragraph (e) of this Section 2.1; provided, however, that (i) if all of the holders who have requested the inclusion of Registrable Securities held by them in a registration requested under this Section 2.1 withdraw such request prior to the time the registration statement has become effective and any or all of such persons pay all Registration Expenses relating thereto, such proposed registration shall not count as one of the registrations provided for by this Section 2.1; and (ii) if a registration is deemed to be effected pursuant to paragraph (e) of this Section 2.1 because a condition to closing specified in the purchase agreement or underwriting agreement entered into in connection with such registration is not satisfied due to a failure by a holder of Registrable Securities to satisfy a condition required to be satisfied by such holder pursuant to such agreement and one or more of the holders of Registrable Securities elects to pay (and shall actually have paid) all Registration Expenses relating thereto, such registration shall not count as one of the registrations provided for by this Section 2.1. (h) COMPANY'S RIGHT TO DELAY REGISTRATION. Notwithstanding the foregoing provisions of this Section 2.1, the Company shall not be obligated to effect a registration pursuant to this Section 2.1 within a period of one (1) year after the effective date of a registration statement previously filed as a result of a request pursuant to this Section 2.1. In addition, if the Company has issued and sold to the public, pursuant to a registration statement filed under the Securities Act, any of its securities within three (3) months prior to the date of its receipt of a request for registration pursuant to this Section 2.1 and the Company's investment banker has advised the Company in writing that the registration of Registrable Securities would materially adversely affect the market for the Common Stock, the Company shall have the right, which may not be exercised more than once in a twelve month period, to delay the requested registration of Registrable Securities for such period as the investment banker may so advise, but no more than one hundred twenty (120) days after the date on which such request was made. (i) REGISTRATION UPON OPTIONAL REDEMPTION. In the event that in connection with any optional redemption of Preferred Stock, the Company files a registration statement covering the sale of the Common Stock issuable upon the conversion of the Preferred Stock by the holders thereof, the provisions of this Agreement governing requested registrations shall apply to such registration. (j) LIMITATION ON SALES. Notwithstanding the foregoing provisions of this Section 2.1, no Registrable Securities may be sold pursuant to a registration requested under this Section 2.1 until nine months after the date of this Agreement. 2.2. INCIDENTAL REGISTRATION. (a) RIGHT TO INCIDENTAL REGISTRATION. If the Company at any time proposes to register any of its securities under the Securities Act (other than by a registration on Form S-8 or Form S-4 or any successor or similar form and other than pursuant to Section 2.1 of this Agreement), 5 whether or not for sale for its own account, it will each such time give prompt written notice to all holders of Registrable Securities of its intention to do so and of such holders' rights under this Section 2.2. Upon the written request of any such holder made within fifteen (15) days after the receipt of any such notice (which request shall specify the Registrable Securities intended to be disposed of by such holder and the intended method of disposition thereof), the Company will use its best efforts to effect the registration under the Securities Act in connection with a sale of such shares in the United States of all Registrable Securities which the Company has been so requested to register by the holders of Registrable Securities, to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities so to be registered, provided that if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason, after consultation with the holders of Registrable Securities which have requested inclusion in such registration, not to register or to delay such registration, the Company may, at its election, give written notice of such determination to each holder of Registrable Securities and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith), without prejudice, however, to the rights of any holder or holders of Registrable Securities entitled to do so to request that such registration be effected as a registration under Section 2.1 above, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities for the same period as the delay in registering such other securities. No registration effected under this Section 2.2 shall relieve the Company of its obligation to effect any registration pon request under Section 2.1 above. The Company will pay all Registration Expenses in connection with each registration of Registrable Securities requested pursuant to this Section 2.2. (b) PRIORITY IN INCIDENTAL REGISTRATIONS. If (i) a registration pursuant to this Section 2.2 involves an underwritten offering of the securities so being registered, whether or not for sale for the account of the Company, and (ii) the managing underwriter of such underwritten offering shall inform the Company and the holders of the Registrable Securities requesting such registration by letter of its belief that the number of securities requested to be included in such registration exceeds the number which can be sold in (or during the time of) such offering, then (A) in the case of an offering for the account of the Company, registration for the Registrable Securities shall be cut back such that (i) no holder of Registrable Securities shall be entitled to participate in such underwritten public offering unless all shares of Common Stock proposed to be sold by the Company for its own account have been included in such underwritten public offering, and (ii) after the Company has included its own shares of Common Stock, the holders of Registrable Securities and the holders of other securities as to which the Company has granted registration rights ("Other Registrable Securities"), including incidental registration rights, shall be entitled to include their Registrable Securities and Other Registrable Securities in an amount up to the amount that such managing underwriter or underwriters advise may be included therein (allocated among the holders of Registrable Securities and the holders of other Registrable Securities pro rata on the basis of the number of securities requested to be included therein by each such holder) and (B) in the case of an offering that was commenced as a result of the exercise of demand registration rights by Persons other than Stockholders, the Persons commencing such registration and the holders of Registrable Securities shall be entitled to include their Registrable Securities and Other Registrable securities in an amount up to the amount such managing underwriters or underwriters advise may be included therein (allocated 6 among the persons commencing such registration and the holders of Registrable Securities pro rate on the basis of the number of securities requested to be so included therein by each such person or holder). If, however, the registration was initiated by the Company within one hundred twenty (120) days of a requested registration and is in lieu thereof, then the Company shall include in the registration all Registrable Securities requested to be included in such registration and shall decrease the number of securities proposed to be sold by the Company and to be included in such registration to the extent necessary to reduce the number of securities to be included in the registration to the level recommended by the managing underwriter. 2.3. REGISTRATION PROCEDURES. If and whenever the Company is required to use its best efforts to effect the registration of any Registrable Securities under the Securities Act as provided in Section 2.1 or 2.2 above, the Company will, as expeditiously as possible: (i) prepare and (as soon thereafter as possible or in any event no later than seventy-five (75) days after the end of the period within which requests for registration may be given to the Company (ninety (90) days in the case of requests for registration made during the last quarter of a fiscal year or the first fifteen (15) days of the first quarter of any fiscal year) or such longer period as the Company shall in good faith require to produce the financial statements required in connection with such registration) file with the Commission the requisite registration statement to effect such registration and thereafter use its best efforts to cause such registration statement to become effective, provided that the Company may discontinue any registration of its securities which are not Registrable Securities (and, under the circumstances specified in Section 2.2(a) above, its securities which are Registrable Securities) at any time prior to the effective date of the registration statement relating thereto; (ii) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement until such time as all of such securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in such registration statement but in no event for a period which would exceed one hundred twenty (120) days from the date on which the registration statement became effective; (iii) furnish to each seller of Registrable Securities covered by such registration statement such number of conformed copies of such registration statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents, as such seller may reasonably request; (iv) use its best efforts to register or qualify all Registrable Securities and other securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions in the United States as each seller thereof shall reasonably request, to keep such registration or qualification in effect for so long as such 7 registration statement remains in effect, and take any other action which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the securities owned by such seller, except that the Company shall not for any such purpose be required to either qualify generally to do business as a foreign corporation, or subject itself to taxation or to general service of process in any jurisdiction wherein it would not, but for the requirements of this clause (iv), be obligated to be so qualified or subject to taxation or service of process, other than as to matters and transactions related to such registration or qualification; (v) use its best efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other United States governmental agencies or authorities as may be necessary to enable the seller or sellers thereof to consummate the disposition of such Registrable Securities; (vi) furnish to each seller of Registrable Securities a copy of each of the following, if any, addressed to the underwriters: (A) an opinion of counsel for the Company, dated the effective date of. such registration statement (and, if such registration includes an underwritten public offering, dated the date of the closing under the underwriting agreement) reasonably satisfactory in form and substance to such seller, and (B) a "comfort" letter, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, dated the date of the closing under the underwriting agreement), signed by the independent public accountants who have certified the Company's financial statements included in such registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to the underwriters in underwritten public offerings of securities and, in the case of the accountants' letter, such other financial matters, and, in the case of the legal opinion, such other legal matters, as such seller (or the underwriters, if any) may reasonably request; (vii) (A) notify each seller of Registrable Securities covered by such registration statement, their counsel and the managing underwriters, if any, promptly, and (if requested in writing by any such Person), confirm such notice in writing: (1) when a registration statement or any amendment thereto has been filed, and, with respect to a registration statement or any post-effective amendment, when the same has become effective, (2) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to a registration statement or related prospectus or for additional information, (3) of the issuance by the Commission of any stop order suspending the effectiveness of a registration statement or the initiation of any proceedings for that purpose, (4) if at any time the representations and warranties of the Company contained in any agreement (including any underwriting agreement) contemplated by this Section 2 cease to be true and correct, (5) of the receipt by the 8 Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any proceeding for such purpose, and (6) of the happening of any event that makes any statement made in such registration statement or related prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes to such registration statement, prospectus or documents so that, in the case of the registration statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, not misleading, and that in the case of the prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, and (B)at the request of any such seller promptly prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary (and a post-effective amendment to such registration statement as may be necessary in connection therewith) so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; (viii) Use its best efforts to obtain the withdrawal of any order suspending the effectiveness of a registration statement, or the lifting of any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction; (ix) If requested by the managing underwriters, if any, or the Holders of a majority in interest of the Registrable Securities being sold in connection with an underwritten offering, promptly include in a prospectus supplement or post-effective amendment such information as the managing underwriters, if any, and such Holders may reasonably request in order to permit the intended method of distribution of such securities and make all required filings of such prospectus supplement or such post-effective amendment as soon as practicable after the Company has received such request; (x) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, a historical earnings statement covering the period of at least twelve (12) months, but not more than eighteen (18) months, beginning with the first month of the first full fiscal quarter after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11 (a) of the Securities Act, and will furnish to each such seller at least five business days prior to the filing thereof a copy of any amendment or supplement to such registration statement or prospectus and shall not file any thereof to which any such seller shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules or regulations thereunder; 9 (xi) provide and cause to be maintained a transfer agent and registrar for all Registrable Securities covered by such registration statement from and after a date not later than the effective date of such registration statement; (xii) use its best efforts to list all Registrable Securities covered by such registration statement on any securities exchange or trading system on which any of the Common Stock is then listed; (xiii) Cooperate with the selling holders of Registrable Securities and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold, which certificates shall be in a form eligible for deposit with The Depository Trust Company; and enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters, if any, or holders may request in writing at least two (2) business days prior to any sale of Registrable Securities; (xiv) Make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of any registration statement at the earliest possible moment; and (xv) Cooperate and assist in any filings required to be made with the NASD and in the performance of any due diligence investigation by any underwriter (including any "qualified independent underwriter" that is required to be retained in accordance with the rules and regulations of the NASD). The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish the Company such information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request in writing. Each holder of Registrable Securities agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in clause (vii) (3) or (6) of this Section 2.3, such holder will forthwith discontinue such holder's disposition of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until such holder's receipt of the copies of the supplemented or amended prospectus contemplated by clause (vii) of this Section 2.3 and, if so directed by the Company, will deliver to the Company (at the Company's expense) all copies, other than permanent file Copies, then in such holder's possession of the prospectus relating to such Registrable Securities current at the time of receipt of such notice. 2.4. UNDERWRITTEN OFFERINGS. (a) COOPERATION; UNDERWRITING AGREEMENTS. If requested by the underwriters for any underwritten offering by holders of Registrable Securities pursuant to a registration requested under Section 2.1 above, the Company will enter into an underwriting agreement with such underwriters for such offering, such agreement to contain such representations and warranties by the Company and such other terms as are generally prevailing in agreements of this type, including, without limitation, indemnities to the effect and to the extent provided in Section 2.6 below. The holders of the Registrable Securities will 10 reasonably cooperate with the Company in the negotiation of the underwriting agreement, provided that nothing herein contained shall diminish the foregoing obligations of the Company. The holders of Registrable Securities to be distributed by such underwriters shall be parties to such underwriting agreement and any necessary or appropriate custody agreements and execute appropriate powers of attorney, and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registrable Securities. Any such holder of Registrable Securities shall not be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding such holder, such holder's Registrable Securities and such holder's intended method of distribution and any other representation required by law. (b) INCIDENTAL UNDERWRITTEN OFFERINGS. If the Company at any time proposes to register any of its securities under the Securities Act, as contemplated by Section 2.2 above, and such securities are to be distributed by or through one or more underwriters, the Company will, if requested by any holder of Registrable Securities as provided in said Section 2.2 and subject to the provisions of Section 2.2(b), arrange for such underwriters to include all the Registrable Securities to be offered and sold by such holder among the securities to be distributed by such underwriters. The holders of Registrable Securities to be distributed by such underwriters shall be parties to the underwriting agreement between the Company and such underwriters and any necessary or appropriate custody agreements and execute appropriate powers of attorney, and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registrable Securities. Any such holder of Registrable Securities shall not be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding such holder, such holder's Registrable Securities and such holder's intended method of distribution and any other representation required by law. 2.5. PREPARATION; REASONABLE INVESTIGATION. In connection with the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Company will give the holders of Registrable Securities registered under such registration statement, the underwriters, if any, and their respective counsel and accountants, the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such holders, and such underwriters, respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 2.6. INDEMNIFICATION. (a) INDEMNIFICATION BY THE COMPANY. In the event of any registration of any securities of the Company under the Securities Act, the Company will, and 11 hereby does, indemnify and hold harmless the seller of any Registrable Securities covered by such registration statement, its directors and officers, each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such seller or any such underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such seller or any such director or officer or underwriter or controlling Person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company will reimburse such seller and each such director, officer, underwriter and controlling Person for any legal or any other expenses incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to theCompany through an instrument duly executed by such seller specifically stating that it is for use in the preparation thereof and, provided further that the Company shall not be liable to any Person who participates as an underwriter in the offering or sale of Registrable Securities or any other Person, if any, who controls such underwriter within the meaning of the Securities Act, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of such Person's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, to the Person asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities to such Person if such statement or omission was corrected in such final prospectus. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of such seller or any such director, officer, underwriter or controlling Person and shall survive the transfer of such securities by such seller and the termination or expiration of this Agreement. (b) INDEMNIFICATION BY THE SELLERS. The Company may require, as a condition to including any Registrable Securities in any registration statement filed pursuant to Section 2.3 above, that the Company shall have received an undertaking reasonably satisfactory to it from the prospective seller of such securities, to indemnify and hold harmless (in the same manner and to the same extent as set forth in subparagraph (a) of this section 2.6) the Company, each director of the Company, each officer of the Company and each other Person, if any, who controls the Company within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in. reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such seller specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. Such indemnity shall remain in full force and effect, 12 regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling Person and shall survive the transfer of such securities by such seller and the termination or expiration of this Agreement. The obligations of any seller under this subparagraph (b) shall be limited to the net proceeds to such seller of the Registrable Securities sold pursuant to the registration statement to which the loss, claim, damage, judgment, expense or liability relates. (c) CONTRIBUTION. If the indemnification provided for in subparagraphs (a) and (b) above for any reason is held by a court of competent jurisdiction to be unavailable to an indemnified party in respect of any losses, claims, damages, judgments, expenses or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, judgments, expenses or liabilities in such proportion as is appropriate to reflect the relative fault, if any, of the Company and the other selling holders in connection with the statements or omissions which resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company and the selling holders shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the selling holders and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the holders, and the underwriters agree that it would not be just and equitable if contribution pursuant to this subparagraph (c) were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding sentence. The obligations of any seller under this subparagraph (c) are several, not joint, and shall be limited to an amount equal to the net proceeds to such seller of Registrable Securities sold pursuant to the registration statement to which the loss, claim, damage, judgment expense or liability relates. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (d) NOTICES OF CLAIMS AND PROCEDURES. Promptly after receipt by an indemnified Person of notice of the commencement of any action or proceeding involving a claim referred to in the preceding subparagraphs of this Section 2.6, such indemnified Person will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action, provided that the failure of any indemnified Person to give notice as provided herein shall not relieve the indemnifying party of his, her or its obligations under the preceding subparagraphs of this Section 2.6, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified Person, unless in such indemnified Person's reasonable judgment a conflict of interest between such indemnified Person and such indemnifying party may exist in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified Person, and after notice from the indemnifying party to such indemnified Person of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified Person for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the consent of 13 the indemnified Person, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified Person of a release from all liability in respect to such claim or litigation and otherwise in form and substance reasonably satisfactory to the indemnified Person. (e) INDEMNIFICATION PAYMENTS. The indemnification required by this Section 2.6 shall be made by prompt payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. (f) NOT EXCLUSIVE. The indemnification and contribution provisions of Section 2.6 are in addition to any other rights to indemnification or contribution that an indemnified party may have under law or contract. 2.7. ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES. The Company will not effect or permit to occur any combination or subdivision of shares which would materially adversely affect the ability of the holders of Registrable Securities to include such Registrable Securities in any registration of its securities contemplated by this Section 2 or the marketability of such Registrable Securities under any such registration. 3. RULES 144 AND 144A. The Company will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the Commission thereunder (or, if the Company is not required to file such reports, the Company will, upon the request of any holder of Registrable Securities, make publicly available other information) and will take such further action as any holder of Registrable Securities may reasonably request, all to the extent required from time to time to enable such holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rules 144 and 144A under the Securities Act, as such Rules may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the Commission. Upon the request of any holder of Registrable Securities, the Company will deliver to such holder a written statement as to whether it has complied with such requirements. 4. AMENDMENTS AND WAIVERS. This Agreement may be amended and the Company may take any action herein prohibited or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the holder or holders of eighty percent (80%) or more of the Registrable Securities at the time outstanding. Each holder of Registrable Securities at the time or thereafter outstanding shall be bound by a consent authorized by this Section 4. 5. NOMINEES FOR BENEFICIAL OWNERS. In the event that any Registrable Securities are held by a nominee for the beneficial owner thereof, the beneficial owner thereof may, at his, her or its election, be treated as the holder of such Registrable Securities for purposes of any request or other action by any holder or holders of Registrable Securities pursuant to this Agreement or any determination of any number or percentage of shares of Registrable Securities held by any holder or holders of Registrable Securities contemplated by this Agreement. If the beneficial owner of any Registrable Securities so elects, the Company may require assurances reasonably satisfactory to it of such owner's beneficial ownership of such Registrable Securities. 14 6. NOTICES. All notices and other communications required or permitted hereunder shall be in writing, and shall be deemed to have been delivered on the date delivered by hand, telegram, facsimile or by similar means, on the third (3rd) day following the day when sent by recognized courier or overnight delivery service (fees prepaid), or on the fifth (5th) day following the day when deposited in the mail, registered or certified (postage prepaid), addressed (a) if to Stockholders, to the attention of each Person at the address set forth on Exhibit 3 of the Subscription Agreement (ASC has the same address as Adam Smith Investment Partners, L.P.), in the stock records of the Company or such address, or to the attention of such other Person or Persons, as a Stockholder shall have furnished to the Company in writing, or (b) if to the Company, Isonics Corporation, 5906 McIntyre Street, Golden, Colorado 80403, Attention: President, fax: (303) 279-7300, with a copy to Herrick K. Lidstone, Jr., Esq., Norton-Lidstone, LLC, 5445 DTC Parkway, Suite 850, Englewood, Colorado 80111, fax: (303) 221-5553, or such other address, or to the attention of such other Person or Persons, as the Company shall have furnished to each holder of Registrable Securities at the time outstanding; provided, however, that any such communication to the Company may also, at the option of Stockholders, be delivered to any officer of the Company. 7. ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. In addition, and whether or not any express assignment shall have been made, the provisions of this Agreement which are for the benefit of Stockholders shall also be for the benefit of and enforceable by any subsequent holder of any Registrable Securities who has executed a copy of this Agreement or otherwise indicated its agreement to be bound hereby, subject to the provisions respecting the minimum numbers or percentages of shares of Registrable Securities required in order to be entitled to certain rights or take certain actions contained herein. The Company acknowledges that ASC or any Stockholder may, at any time, transfer any of the Registrable Securities which they may own, beneficially or of record, to (a) their Affiliates, or (b) their partner(s), investor(s), security holder(s) or beneficial holder(s) pursuant to their organization documents or other agreements, and that, upon the consummation of any such transfer, the provisions of this Agreement shall be binding upon and inure to the benefit of each transferee of such Registrable Securities. 8. DESCRIPTIVE HEADINGS. The descriptive headings of the several sections and paragraphs of this Agreement are inserted for reference only and shall not limit or otherwise affect the meaning hereof. 9. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of New York, U.S.A., without regard to principles of conflicts of laws. 10. COUNTERPARTS. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument. 11. TERMINATION. This Agreement shall terminate only upon unanimous written consent of the Company and the Stockholders. 15 12. OTHER REGISTRATION RIGHTS. The Company shall not at any time grant registration rights to any holder of shares of the Company's capital stock (other than the rights granted to the Stockholders under this Agreement) which are equal to or more favorable to such holders than the rights set forth in this Agreement. 16 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement, or have caused this Agreement to be executed and delivered by their respective duly authorized officers, on the date first above written. ISONICS CORPORATION By: ----------------------------- ADAM SMITH & COMPANY, INC. By: ----------------------------- ADAM SMITH INVESTMENT PARTNERS, L.P. By: Adam Smith Capital Management, L.L.C. By: ----------------------------- Name: Title: ADAM SMITH INVESTMENTS, LTD. By: ----------------------------- Name: Title: ANFEL TRADING LTD. -------------------------------- 17 -------------------------------- Adolph Grossman ADAM-CEDLINDEN CO. GENERAL PARTNERSHIP II -------------------------------- ADAM-THE FISHER FUND GENERAL PARTNERSHIP II -------------------------------- FAIRWAY INVESTORS LLC -------------------------------- FBE FINVEST LLC -------------------------------- -------------------------------- James Kardon 18 -------------------------------- Paul Packer -------------------------------- Orin Hirschman -------------------------------- Richard Grossman -------------------------------- Herschel P. Berkowitz 19 -----END PRIVACY-ENHANCED MESSAGE-----