Exhibit 4.1
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO,
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
THIS DEBENTURE DOES NOT REQUIRE PHYSICAL SURRENDER OF THE DEBENTURE IN THE EVENT
OF A PARTIAL REDEMPTION OR CONVERSION. AS A RESULT, FOLLOWING ANY REDEMPTION OR
CONVERSION OF ANY PORTION OF THIS DEBENTURE, THE OUTSTANDING PRINCIPAL AMOUNT
REPRESENTED BY THIS DEBENTURE MAY BE LESS THAN THE PRINCIPAL AMOUNT AND ACCRUED
INTEREST SET FORTH BELOW.
4% CONVERTIBLE DEBENTURE DUE JUNE 30, 2002
OF
FONAR CORPORATION
Debenture No.: 1 Original Principal Amount: $4,500,000
Issuance Date: May 24, 2001 New York, New York
THIS DEBENTURE ("Debenture") is one of a duly authorized issue of
debentures of FONAR CORPORATION, a corporation duly organized and existing under
the laws of the State of Delaware (the "Company"), designated as the Company's
4% Convertible Debentures Due June 30, 2002 ("Maturity Date") in an aggregate
principal amount (when taken together with the original principal amounts of all
other Debentures) which does not exceed Four Million Five Hundred Thousand U.S.
Dollars (U.S. $4,500,000) (the "Debentures").
FOR VALUE RECEIVED, the Company hereby promises to pay to the order of The
Tail Wind Fund, Ltd. or its registered assigns or successors-in-interest
("Holder") the principal sum of Four Million Five Hundred Thousand Dollars (U.S.
$4,500,000), together with all accrued but unpaid interest thereon, if any, on
the Maturity Date, to the extent such principal amount and interest has not been
repaid or converted into the Company's Common Stock, $0.0001 par value per share
(the "Common Stock"), in accordance with the terms hereof. Interest on the
unpaid principal balance hereof shall accrue at the rate of 4% per annum from
the date of original issuance hereof (the "Issuance Date") until the same
becomes due and payable on the Maturity Date, or such earlier date upon
acceleration or by conversion or redemption in accordance with the terms hereof
or of the other Agreements. Interest on this Debenture shall accrue daily
commencing on the Issuance Date and shall be computed on the basis of a 360-day
year, 30-day months and actual days elapsed and shall be payable in accordance
with Section 1 hereof. Notwithstanding anything contained herein, this Debenture
shall bear interest on the due and unpaid Principal Amount from and after the
occurrence and during the continuance of an Event of Default pursuant to Section
4(a), at the rate (the "Default Rate") equal to the lower of sixteen and
one-half percent (16.5%) per annum or the highest rate permitted by law. Unless
otherwise agreed or required by applicable law, payments will be applied first
to any unpaid collection costs, then to unpaid interest and fees and any
remaining amount to principal.
All payments of principal and interest on this Debenture shall be made in
lawful money of the United States of America by wire transfer of immediately
available funds to such account as the Holder may from time to time designate by
written notice in accordance with the provisions of this Debenture or by Company
check. This Debenture may not be prepaid in whole or in part except as otherwise
provided herein or in the Transaction Documents. Whenever any amount expressed
to be due by the terms of this Debenture is due on any day which is not a
Business Day (as defined below), the same shall instead be due on the next
succeeding day which is a Business Day.
Capitalized terms used herein and not otherwise defined shall have the
meanings set forth in the Purchase Agreement dated on or about the Issuance Date
pursuant to which the Debentures were originally issued (the "Purchase
Agreement"). For purposes hereof the following terms shall have the meanings
ascribed to them below:
"Business Day" shall mean any day other than a Saturday, Sunday or a day on
which commercial banks in the City of New York are authorized or required by law
or executive order to remain closed.
"Change in Control Transaction" will be deemed to exist if (i) there occurs
any consolidation, merger or other business combination of the Company with or
into any other corporation or other entity or person (whether or not the Company
is the surviving corporation), or any other corporate reorganization or
transaction or series of related transactions in which in any of such events the
voting stockholders of the Company prior to such event cease to own 50% or more
of the voting power, or corresponding voting equity interests, of the surviving
corporation after such event (including without limitation any "going private"
transaction under Rule 13e-3 promulgated pursuant to the Exchange Act or tender
offer by the Company under Rule 13e-4 promulgated pursuant to the Exchange Act
for 20% or more of the Company's Common Stock), (ii) any person (as defined in
Section 13(d) of the Exchange Act), together with its affiliates and associates
(as such terms are defined in Rule 405 under the Act), beneficially owns or is
deemed to beneficially own (as described in Rule 13d-3 under the Exchange Act
without regard to the 60-day exercise period) in excess of 50% of the Company's
voting power, (iii) there is a replacement of more than one-half of the members
of the Company's Board of Directors which is not approved by those individuals
who are members of the Company's Board of Directors on the date thereof, (iv) in
one or a series of related transactions, there is a sale or transfer of all or
substantially all of the assets of the Company, determined on a consolidated
basis, or (v) the execution by the Company of an agreement to which the Company
is a party or which it is bound providing for an event set forth in (i), (ii),
(iii) or (iv) above.
"Conversion Ratio" means, at any time, a fraction, of which the numerator
is the entire outstanding Principal Amount of this Debenture (or such portion
thereof that is being redeemed or repurchased), and of which the denominator is
the lesser of the Conversion Price and the Market Price as of the date such
ratio is being determined.
"Conversion Price" shall equal 125% of the average closing bid price of the
Common Stock as reported by the Principal Market over the twenty-five (25)
Trading Days immediately preceding the Closing Date (which Conversion Price
shall be subject to adjustment as set forth herein, and the closing bid prices
used to determine the Conversion Price shall be appropriately and equitably
adjusted for any stock splits, stock dividends, recapitalizations and the like).
"Convertible Securities" means any convertible securities, warrants,
options or other rights to subscribe for or to purchase or exchange for, shares
of Common Stock.
"Effective Date" means the date on which a Registration Statement covering
all the Underlying Shares and other Registrable Securities (as defined in the
Registration Rights Agreement) is declared effective by the SEC.
"Effective Registration" shall have the meaning set forth in the Purchase
Agreement.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Market Price" shall equal the lesser of (i) 90% of the average of the four
(4) lowest closing bid prices of the Common Stock as reported by the Principal
Market during the full calendar month immediately preceding the date on which
such Market Price is being determined (such average referred to as the "Lowest
Average"), and (ii) the Lowest Average less $0.125.
"MFN Transaction" shall mean a transaction in which the Company issues or
sells any securities in a capital raising transaction or series of related
transactions (the "MFN Offering") which grants to the investor (the "MFN
Investor") the right to receive additional securities based upon future capital
raising transactions of the Company on terms more favorable than those granted
to the MFN Investor in the MFN Offering.
"Per Share Selling Price" shall include the amount actually paid by third
parties for each share of Common Stock in a sale or issuance by the Company. In
the event a fee is paid by the Company in connection with such transaction
directly or indirectly to such third party or its affiliates, any such fee shall
be deducted from the selling price pro rata to all shares sold in the
transaction to arrive at the Per Share Selling Price. A sale of shares of Common
Stock shall include the sale or issuance of rights, options, warrants or
convertible, exchangeable or exercisable securities under which the Company is
or may become obligated to issue shares of Common Stock, and in such
circumstances the Per Share Selling Price of the Common Stock covered thereby
shall also include the exercise, exchange or conversion price thereof (in
addition to the consideration received by the Company upon such sale or issuance
less the fee amount as provided above). In case of any such security issued in a
Variable Rate Transaction or an MFN Transaction, the Per Share Selling Price
shall be deemed to be the lowest conversion or exercise price at which such
securities are converted or exercised or might have been converted or exercised
in the case of a Variable Rate Transaction, or the lowest adjustment price in
the case of an MFN Transaction, over the life of such securities. If shares are
issued for a consideration other than cash, the Per Share Selling Price shall be
the fair value of such consideration as determined in good faith by independent
certified public accountants mutually acceptable to the Company and the
Purchaser. In the event the Company directly or indirectly effectively reduces
the conversion, exercise or exchange price for any Convertible Securities which
are currently outstanding, then the Per Share Selling Price shall equal such
effectively reduced conversion, exercise or exchange price.
"Principal Amount" shall refer to the sum of (i) the original principal
amount of this Debenture, (ii) all accrued but unpaid interest hereunder, and
(iii) any default payments owing under the Agreements but not previously paid or
added to the Principal Amount.
"Principal Market" shall mean the NASDAQ Small-Cap Market or such other
principal market or exchange on which the Common Stock is then listed for
trading.
"Registration Statement" shall have the meaning set forth in the
Registration Rights Agreement.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Trading Day" shall mean a day on which there is trading on the Principal
Market.
"Underlying Shares" means the shares of Common Stock into which the
Debentures are convertible (including repayment in Common Stock as set forth
herein) in accordance with the terms hereof and the Purchase Agreement.
"Variable Rate Transaction" shall mean a transaction in which the Company
issues or sells (a) any debt or equity securities that are convertible into,
exchangeable or exercisable for, or include the right to receive additional
shares of Common Stock either (x) at a conversion, exercise or exchange rate or
other price that is based upon and/or varies with the trading prices of or
quotations for the Common Stock at any time after the initial issuance of such
debt or equity securities, or (y) with a fixed conversion, exercise or exchange
price that is subject to being reset at some future date after the initial
issuance of such debt or equity security or upon the occurrence of specified or
contingent events directly or indirectly related to the business of the Company
or the market for the Common Stock (but excluding standard stock split
anti-dilution provisions), or (b) any securities of the Company pursuant to an
"equity line" structure which provides for the sale, from time to time, of
securities of the Company which are registered for resale pursuant to the
Securities Act.
The following terms and conditions shall apply to this Debenture:
Section 1. Payments of Principal and Interest.
(a) Monthly Payments. Subject to the terms of this Section 1, the Company shall
repay ten percent (10%) of the original principal amount of this Debenture,
together with interest accrued to date on such portion of the original
principal amount plus any and all default payments owing under the
Agreements but not previously paid (collectively, "Monthly Amount"), in
accordance with subsection 1(b) below, on the first business day of each
consecutive calendar month (each a "Repayment Date") beginning on the first
such day which occurs following the third full calendar month following the
Issuance Date.
(b) Cash or Common Stock. Subject to the terms hereof, the Company shall have
the right to satisfy payment of the Monthly Amount in full on each
Repayment Date either in cash or in shares of Common Stock (but not both)
at the Company's option. The Company shall deliver to all the holders of
Debentures a written irrevocable notice in the form of Exhibit B attached
hereto electing to pay such Monthly Amount in full on such Repayment Date
in either cash or Common Stock ("Repayment Election Notice"). Such
Repayment Election Notice shall be delivered at least four (4) Trading Days
prior to the applicable Repayment Date but no more than twenty (20) Trading
Days prior to such Repayment Date (the date of such notice being
hereinafter referred to as the "Notice Date"). If such Repayment Election
Notice is not delivered within the prescribed period set forth in the
preceding sentence, then the repayment shall be made in either cash or
shares of Common Stock on the same terms hereunder at the Holder's sole
option. If the Company elects or is required to repay any Monthly Amount in
cash on a Repayment Date, then on such Repayment Date the Company shall pay
to the Holder an amount equal to such Monthly Amount in satisfaction of
such obligation. If the Company elects or is required to repay any Monthly
Amount in shares of Common Stock, the number of such shares to be issued
for such Repayment Date shall be the number determined by dividing (x) the
Monthly Amount, by (y) the Market Price as of such Repayment Date. Such
shares shall be issued and delivered within three (3) Trading Days
following such Repayment Date and shall be duly authorized, validly issued,
fully paid, non-assessable and free and clear of all encumbrances,
restrictions and legends. If any Holder does not receive the requisite
number of shares of Common Stock in the form required above within such
three Trading Day period, the Holder shall have the option of either (a)
requiring the Company to issue and deliver all or a portion of such shares
or (b) canceling such election (whether by the Company or Holder) to pay
the Monthly Amount in Common Stock (in whole or in part), in which case the
Company shall immediately pay in cash the full Monthly Amount due hereunder
or such portion as the Holder specifies is to be paid in cash instead of
Common Stock. Except as otherwise provided in this Section 1, all holders
of Debentures must be treated equally with respect to such payment of the
Monthly Amount in shares of Common Stock.
(c) No Effective Registration. Notwithstanding anything to the contrary herein,
the Company shall be prohibited from exercising its right to repay the
Monthly Amount in shares of Common Stock (and must deliver cash in respect
thereof) on the applicable Repayment Date if at any time from the Notice
Date until the time at which the Holders receive such shares there fails to
exist Effective Registration (defined below) or an Event of Default
hereunder exists or occurs, unless otherwise waived in writing by the
Holder in whole or in part at the Holder's option. "Effective Registration"
shall mean: (i) the Company has complied with its material obligations
under all the Agreements in all material respects and has not made any
material misrepresentations under any of the Agreements or under any other
agreements between the Company and the Purchaser, except for those breaches
or defaults which are capable of being cured and have been so cured within
a reasonable time following notice of such breach or default (not to exceed
5 business days); (ii) the resale of all Registrable Securities (as defined
in the Registration Rights Agreement) is covered by an effective
registration statement in accordance with the terms of the Registration
Rights Agreement and such registration statement is not subject to any
suspension or stop orders; (iii) the resale of such Registrable Securities
may be effected pursuant to a current and deliverable prospectus that is
not subject to any blackout or similar circumstance; (iv) such Registrable
Securities are listed, or approved for listing prior to issuance, on an
Approved Market and are not subject to any trading suspension (nor shall
trading generally have been suspended on such exchange or market), and the
Company shall not have been notified of any pending or threatened
proceeding or other action to delist or suspend the Common Stock on the
Approved Market on which the Common Stock is then traded or listed; (v) the
requisite number of shares of Common Stock shall have been duly authorized
and reserved for issuance as required by the terms of the Agreements; and
(vi) none of the Company or any direct or indirect subsidiary of the
Company is subject to any Bankruptcy Event. For purposes hereof,
"Bankruptcy Event" means any of the following events: (a) the Company or
any subsidiary commences a case or other proceeding under any bankruptcy,
reorganization, arrangement, adjustment of debt, relief of debtors,
dissolution, insolvency or liquidation or similar law of any jurisdiction
relating to the Company or any subsidiary thereof; (b) there is commenced
against the Company or any subsidiary any such case or proceeding that is
not dismissed within 60 days after commencement; (c) the Company or any
subsidiary is adjudicated insolvent or bankrupt or any order of relief or
other order approving any such case or proceeding is entered; (d) the
Company or any subsidiary suffers any appointment of any custodian or the
like for it or any substantial part of its property that is not discharged
or stayed within 60 days; (e) the Company or any subsidiary makes a general
assignment for the benefit of creditors; (f) the Company or any subsidiary
fails to pay, or states that it is unable to pay or is unable to pay, its
debts generally as they become due; (g) the Company or any subsidiary calls
a meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts; or (h) the Company or any
subsidiary, by any act or failure to act, expressly indicates its consent
to, approval of or acquiescence in any of the foregoing or takes any
corporate or other action for the purpose of effecting any of the
foregoing.
(d) Ownership/Issuance Limitations. Notwithstanding anything to the contrary
herein, the Company shall be prohibited from exercising its right to repay
the Monthly Amount in shares of Common Stock (and must deliver cash in
respect thereof) on the applicable Repayment Date to the extent, and only
to the extent, that such repayment in shares of Common Stock would result
in the Holder hereof exceeding the limitations contained in Section 3(i)
below. In such event, then (i) the Company on the Repayment Date shall
repay such portion of the Monthly Amount in shares of Common Stock as may
be effected without exceeding such limitations, (ii) the Repayment Date for
the balance of the Monthly Amount shall be extended until such time as such
stock payment can be made without violating Section 3(i), provided that if
such stock payment cannot be made only because it would violate Section
3(i)(C) below, then at the Holder's option the Company shall redeem such
Monthly Amount portion of this Debenture at a redemption price equal to
120% of such Monthly Amount. If any portion of any Monthly Amount remains
unpaid as of the Maturity Date hereof, such amount shall be repaid in cash
on the Maturity Date (unless accelerated hereunder pursuant to Section 4
below).
(e) Deemed Conversions. Any repayment of the Monthly Amount in shares of Common
Stock pursuant to the terms hereof shall constitute and be deemed a
conversion of such portion of the Principal Amount of this Debenture for
all purposes under this Debenture and the other Agreements (except that
such conversion shall be at the Market Price and except as otherwise
provided herein).
Section 2. [INTENTIONALLY OMITTED]
Section 3. Conversion.
(a) Conversion Right. Subject to the terms hereof and restrictions and
limitations contained herein, the Holder shall have the right, at such
Holder's option, at any time and from time to time to convert the
outstanding Principal Amount under this Debenture in whole or in part by
delivering to the Company a fully executed notice of conversion in the form
of conversion notice attached hereto as Exhibit A (the "Conversion
Notice"), which may be transmitted by facsimile. Notwithstanding anything
to the contrary herein, this Debenture and the outstanding Principal Amount
hereunder shall not be convertible into Common Stock to the extent that
such conversion would result in the Holder hereof exceeding the limitations
contained in, or otherwise violating the provisions of, Section 3(i) below.
For clarification purposes, any conversions of the outstanding Principal
Amount under this Debenture in part pursuant to this Section 3(a) shall not
affect the Company's obligation to repay the Monthly Amount as provided in
Section 1 above.
(b) Common Stock Issuance Upon Conversion.
(i) Conversion Date Procedures. Upon conversion of this Debenture pursuant to
Section 3(a) above, the outstanding Principal Amount hereunder shall be
converted into such number of fully paid, validly issued and non-assessable
shares of Common Stock, free of any liens, claims and encumbrances, as is
determined by dividing the outstanding Principal Amount being converted by
the then applicable Conversion Price. The date of any Conversion Notice
hereunder and any Repayment Date shall be referred to herein as the
"Conversion Date". If a conversion under this Debenture cannot be effected
in full for any reason, or if the Holder is converting less than all of the
outstanding Principal Amount hereunder pursuant to a Conversion Notice, the
Company shall promptly deliver to the Holder (but no later than five
Trading Days after the Conversion Date) a Debenture for such outstanding
Principal Amount as has not been converted if this Debenture has been
surrendered to the Company for partial conversion. The Holder shall not be
required to physically surrender this Debenture to the Company upon any
conversion or payment for the Monthly Amount hereunder unless the full
outstanding Principal Amount represented by this Debenture is being
converted or repaid. The Holder and the Company shall maintain records
showing the outstanding Principal Amount so converted and repaid and the
dates of such conversions or repayments or shall use such other method,
reasonably satisfactory to the Holder and the Company, so as not to require
physical surrender of this Debenture upon each such conversion or
repayment.
(ii) Stock Certificates or DWAC. The Company will deliver to the Holder not
later than three (3) Trading Days after the Conversion Date, a certificate
or certificates which shall be free of restrictive legends and trading
restrictions, representing the number of shares of Common Stock being
acquired upon the conversion of this Debenture. In lieu of delivering
physical certificates representing the shares of Common Stock issuable upon
conversion of this Debenture, provided the Company's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer ("FAST") program, upon request of the Holder, the
Company shall use commercially reasonable efforts to cause its transfer
agent to electronically transmit such shares issuable upon conversion to
the Holder (or its designee), by crediting the account of the Holder's (or
such designee's) prime broker with DTC through its Deposit Withdrawal Agent
Commission system (provided that the same time periods herein as for stock
certificates shall apply). If in the case of any conversion hereunder, such
certificate or certificates are not delivered to or as directed by the
Holder by the third Trading Day after the Conversion Date, the Holder shall
be entitled by written notice to the Company at any time on or before its
receipt of such certificate or certificates thereafter, to rescind such
conversion, in which event the Company shall immediately return this
Debenture tendered for conversion. If the Company fails to deliver to the
Holder such certificate or certificates (or shares through DTC) pursuant to
this Section 3(b) (free of any restrictions on transfer or legends, if such
shares have been registered) in accordance herewith, prior to the sixth
Trading Day after the Conversion Date, the Company shall pay to the Holder,
in cash, an amount equal to 2% of the Principal Amount per month.
(c) Conversion Price Adjustments.
(i) Stock Dividends, Splits and Combinations. If the Company or any of its
subsidiaries, at any time while the Debentures are outstanding (A) shall
pay a stock dividend or otherwise make a distribution or distributions on
any equity securities (including instruments or securities convertible into
or exchangeable for such equity securities) in shares of Common Stock, (B)
subdivide outstanding Common Stock into a larger number of shares, or (C)
combine outstanding Common Stock into a smaller number of shares, then each
Affected Conversion Price (as defined below) shall be multiplied by a
fraction, the numerator of which shall be the number of shares of Common
Stock outstanding before such event and the denominator of which shall be
the number of shares of Common Stock outstanding after such event. Any
adjustment made pursuant to this Section 3(c)(i) shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision
or combination.
As used herein, the Affected Conversion Prices (each an "Affected Conversion
Price") shall refer to: (i) the Conversion Price; (ii) each reported daily
closing bid price of the Common Stock on the Principal Market occurring on
any Trading Day included in the period used for determining the Market
Price or Conversion Price, as the case may be, which Trading Day occurred
before the record date in the case of events referred to in clause (A) of
this subparagraph 3(c)(i) and before the effective date in the case of the
events referred to in clauses (B) and (C) of this subparagraph 3(c)(i).
(ii) Distributions. If the Company or any of its subsidiaries, at any time while
the Debentures are outstanding, shall distribute to all holders of Common
Stock evidences of its indebtedness or assets or cash or rights or warrants
to subscribe for or purchase any security of the Company or any of its
subsidiaries (excluding those referred to in Section 3(c)(i) above), then
concurrently with such distributions to holders of Common Stock, the
Company shall distribute to holders of the Debentures the amount of such
indebtedness, assets, cash or rights or warrants which the holders of
Debentures would have received had all their Debentures been converted into
Common Stock at the lower of the Conversion Price and the then applicable
Market Price immediately prior to the record date for such distribution.
(iii)Common Stock Issuances. In the event that the Company or any of its
subsidiaries (A) issues or sells any Common Stock or securities which are
convertible into or exercisable or exchangeable for Common Stock (other
than issuances of Debentures, Warrants and of Underlying Shares pursuant to
Debentures or Warrants issued under the Purchase Agreement and other than
issuances described in and permitted under Section 7.2(b)(iii) of the
Purchase Agreement and other than issuances of Common Stock under the
Company's duly adopted stock option and bonus plans for employees and
directors), or any warrants or other rights to subscribe for or to purchase
or any options for the purchase of its Common Stock or (B) directly or
indirectly effectively reduces the conversion, exercise or exchange price
for any Convertible Securities which are currently outstanding (other than
pursuant to terms existing on the date hereof), at or to an effective Per
Share Selling Price which is less than:
(A) the closing sale price per share of the Common Stock on the Principal
Market on the Trading Day next preceding such issue or sale or, in the case
of issuances to holders of its Common Stock, the date fixed for the
determination of stockholders entitled to receive such warrants, rights, or
options ("Fair Market Price"), then in each such case, the Affected
Conversion Price in effect immediately prior to such issue or sale or
record date, as applicable, shall be automatically reduced effective
concurrently with such issue or sale to an amount determined by multiplying
the Affected Conversion Price then in effect by a fraction, (x) the
numerator of which shall be the sum of (1) the number of shares of Common
Stock outstanding immediately prior to such issue or sale, plus (2) the
number of shares of Common Stock which the aggregate consideration received
by the Company for such additional shares would purchase at such Fair
Market Price, and (y) the denominator of which shall be the number of
shares of Common Stock of the Company outstanding immediately after such
issue or sale; or
(B) the Conversion Price, then in each such case, the Conversion Price in
effect immediately prior to such issue or sale or record date, as
applicable, shall be automatically reduced effective concurrently with such
issue or sale to an amount equal to such Per Share Selling Price.
The foregoing provision of this subsection shall not apply to issuances or
sales pursuant to the Company's duly adopted employee or director bona fide
options plans and/or compensation arrangements.
For the purposes of the foregoing adjustments, in the case of the issuance
of any Convertible Securities, the maximum number of shares of Common Stock
issuable upon exercise, exchange or conversion of such Convertible Securities
shall be deemed to be outstanding, provided that no further adjustment shall be
made upon the actual issuance of Common Stock upon exercise, exchange or
conversion of such Convertible Securities.
For purposes of this Section 3(c)(iii), if an event occurs that triggers
more than one of the above adjustment provisions, then only one adjustment shall
be made and the calculation method which yields the greatest downward adjustment
in the Affected Conversion Price shall be used.
(iv) Rounding of Adjustments. All calculations under this Section 3 or Section 1
shall be made to the nearest cent or the nearest 1/100th of a share, as the
case may be.
(v) Notice of Adjustments. Whenever any Affected Conversion Price is adjusted
pursuant to Section 3(c)(i), (ii) or (iii) above, the Company shall
promptly deliver to each holder of the Debentures, a notice setting forth
the Affected Conversion Price after such adjustment and setting forth a
brief statement of the facts requiring such adjustment, provided that any
failure to so provide such notice shall not affect the automatic adjustment
hereunder.
(vi) Change in Control Transactions. In case of any Change in Control
Transaction, the Holder shall have the right thereafter to, at its option,
(A) convert this Debenture, in whole or in part, at the lower of the
Conversion Price and the then applicable Market Price into the shares of
stock and other securities, cash and/or property receivable upon or deemed
to be held by holders of Common Stock following such Change in Control
Transaction, and the Holder shall be entitled upon such event to receive
such amount of securities, cash or property as the shares of the Common
Stock of the Company into which this Debenture could have been converted
immediately prior to such Change in Control Transaction would have been
entitled if such conversion were permitted, subject to such further
applicable adjustments set forth in this Section 3 or (B) require the
Company or its successor to redeem this Debenture, in whole or in part, at
a redemption price equal to the greater of (i) the outstanding Principal
Amount being redeemed and (ii) the product of (x) the average of the Fair
Market Price for the five (5) Trading Days immediately preceding the
Holder's election to have its Debentures redeemed and (y) the Conversion
Ratio. The terms of any such Change in Control Transaction shall include
such terms so as to continue to give to the Holders the right to receive
the amount of securities, cash and/or property upon any conversion or
redemption following such Change in Control Transaction to which a holder
of the number of shares of Common Stock deliverable upon such conversion
would have been entitled in such Change in Control Transaction, and
interest payable hereunder shall be in cash or such new securities and/or
property, at the Holder's option. This provision shall similarly apply to
successive reclassifications, consolidations, mergers, sales, transfers or
share exchanges.
(vii) Notice of Certain Events. If:
A. the Company shall declare a dividend (or any other distribution) on
its Common Stock; or
B. the Company shall declare a special nonrecurring cash dividend on or a
redemption of its Common Stock; or
C. the Company shall authorize the granting to all holders of the Common
Stock rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights; or
D. the approval of any stockholders of the Company shall be required in
connection with any reclassification of the Common Stock of the
Company, any consolidation or merger to which the Company is a party,
any sale or transfer of all or substantially all of the assets of the
Company, of any compulsory share of exchange whereby the Common Stock
is converted into other securities, cash or property; or
E. the Company shall authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company;
then the Company shall cause to be filed at each office or agency
maintained for the purpose of conversion of this Debenture, and shall cause
to be mailed to the Holder at its last address as it shall appear upon the
books of the Company, on or prior to the date notice to the Company's
stockholders generally is given, a notice stating (x) the date on which a
record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date
as of which the holders of Common Stock of record to be entitled to such
dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange.
(d) Reservation and Issuance of Underlying Securities. The Company covenants
that it will at all times reserve and keep available out of its authorized
and unissued Common Stock solely for the purpose of issuance upon
conversion of this Debenture (including repayments in stock), free from
preemptive rights or any other actual contingent purchase rights of persons
other than the holders of the Debentures, not less than such number of
shares of Common Stock as shall (subject to any additional requirements of
the Company as to reservation of such shares set forth in the Purchase
Agreement) be issuable (taking into account the adjustments under this
Section 3 but without regard to any ownership limitations contained herein)
upon the conversion of this Debenture hereunder in Common Stock (including
repayments in stock). The Company covenants that all shares of Common Stock
that shall be so issuable shall, upon issue, be duly authorized, validly
issued, fully paid, nonassessable and freely tradeable.
(e) No Fractions. Upon a conversion hereunder the Company shall not be required
to issue stock certificates representing fractions of shares of Common
Stock, but may if otherwise permitted, make a cash payment in respect of
any final fraction of a share based on the closing price of a share of
Common Stock at such time. If the Company elects not, or is unable, to make
such a cash payment, the Holder shall be entitled to receive, in lieu of
the final fraction of a share, one whole share of Common Stock.
(f) Charges, Taxes and Expenses. Issuance of certificates for shares of Common
Stock upon the conversion of this Debenture (including repayment in stock)
shall be made without charge to the holder hereof for any issue or transfer
tax or other incidental expense in respect of the issuance of such
certificate, all of which taxes and expenses shall be paid by the Company,
and such certificates shall be issued in the name of the Holder or in such
name or names as may be directed by the Holder; provided, however, that in
the event certificates for shares of Common Stock are to be issued in a
name other than the name of the Holder, this Debenture when surrendered for
conversion shall be accompanied by an assignment form; and provided
further, that the Company shall not be required to pay any tax or taxes
which may be payable in respect of any such transfer.
(g) Cancellation. After all of the Principal Amount (including accrued but
unpaid interest and default payments at any time owed on this Debenture)
have been paid in full or converted into Common Stock, this Debenture shall
automatically be deemed canceled and the Holder shall promptly surrender
the Debenture to the Company at the Company's principal executive offices.
(h) Notices Procedures. Any and all notices or other communications or
deliveries to be provided by the Holder hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered
personally, by confirmed facsimile, or by a nationally recognized overnight
courier service to the Company at the facsimile telephone number or address
of the principal place of business of the Company as set forth in the
Purchase Agreement. Any and all notices or other communications or
deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, or by a nationally recognized overnight
courier service addressed to the Holder at the facsimile telephone number
or address of the Holder appearing on the books of the Company, or if no
such facsimile telephone number or address appears, at the principal place
of business of the Holder. Any notice or other communication or deliveries
hereunder shall be deemed delivered (i) upon receipt, when delivered
personally, (ii) when sent by facsimile, upon receipt if received on a
Business Day prior to 5:00 p.m. (Eastern Time), or on the first Business
Day following such receipt if received on a Business Day after 5:00 p.m.
(Eastern Time) or (iii) upon receipt, when deposited with a nationally
recognized overnight courier service.
(i) Conversion Limitations.
(A) 9.9% Limitation. Notwithstanding anything to the contrary contained herein,
the number of shares of Common Stock that may be acquired by the Holder
upon conversion pursuant to the terms hereof shall not exceed a number
that, when added to the total number of shares of Common Stock deemed
beneficially owned by such Holder (other than by virtue of the ownership of
securities or rights to acquire securities (including the Debentures) that
have limitations on the Holder's right to convert, exercise or purchase
similar to the limitation set forth herein), together with all shares of
Common Stock deemed beneficially owned at such time (other than by virtue
of the ownership of securities or rights to acquire securities that have
limitations on the right to convert, exercise or purchase similar to the
limitation set forth herein) by the holder's "affiliates" at such time (as
defined in Rule 144 of the Act) ("Aggregation Parties") that would be
aggregated for purposes of determining whether a group under Section 13(d)
of the Securities Exchange Act of 1934 as amended, exists, would exceed
9.9% of the total issued and outstanding shares of the Common Stock (the
"Restricted Ownership Percentage"). Each holder shall have the right (w) at
any time and from time to time to reduce its Restricted Ownership
Percentage immediately upon notice to the Company and (x) (subject to
waiver) at any time and from time to time, to increase its Restricted
Ownership Percentage immediately in the event of the announcement as
pending or planned, of a Change in Control Transaction.
(B) Limitation Covenants. The Holder covenants at all times on each day (each
such day being referred to as a "Covenant Day") as follows: During the
balance of such Covenant Day and the succeeding sixty-one (61) days (the
balance of such Covenant Day and the succeeding 61 days being referred to
as the "Covenant Period") such Holder will not acquire shares of Common
Stock pursuant to any right (including conversion of Debentures) existing
at the commencement of the Covenant Period to the extent the number of
shares so acquired by such Holder and its Aggregation Parties (ignoring all
dispositions) would exceed:
(x) the Restricted Ownership Percentage of the total number of shares of Common
Stock outstanding at the commencement of the Covenant Period, minus
(y) the number of shares of Common Stock actually owned by such Holder and its
Aggregation Parties at the commencement of the Covenant Period.
A new and independent covenant will be deemed to be given by the Holder as
of each moment of each Covenant Day. No covenant will terminate, diminish or
modify any other covenant. The Holder agrees to comply with each such covenant.
This Section 3(i)(B) controls in the case of any conflict with any other
provision of the Purchase Agreement or any agreement entered into in connection
therewith.
The Company's obligation to issue shares of Common Stock which would exceed
such limits referred to in this Section 3(i) shall be suspended to the extent
necessary until such time, if any, as shares of Common Stock may be issued in
compliance with such restrictions.
(C) Overall Limit on Common Stock Issuable. Notwithstanding anything contained
herein to the contrary, the number of shares of Common Stock issuable by
the Company and acquirable by the Holders of Debentures, together the
number of shares issued under the Warrants, shall not exceed 19.9% of the
number of shares of Common Stock outstanding on the Closing Date, subject
to appropriate adjustment for stock splits, stock dividends, or other
similar recapitalizations affecting the Common Stock (the "Maximum Common
Stock Issuance"), unless the issuance of shares hereunder in excess of the
Maximum Common Stock Issuance shall first be approved by the Company's
shareholders in accordance with applicable law and the By-laws and Articles
of Incorporation of the Company. If at any point in time and from time to
time (each a "Trigger Date") the number of Common Shares issued pursuant to
conversion of the Debentures and exercise of the Warrants, together with
the number of Common Shares that would then be issuable by the Company in
the event of conversion of all the Debentures and exercise of all the
Warrants then outstanding, would exceed the Maximum Common Stock Issuance
but for this Section 3(i)(C), then the Company shall, at the Company's
election, either (A) promptly call a shareholders meeting to obtain
shareholder approval for the issuance of Common Shares hereunder in excess
of the Maximum Common Stock Issuance, which such shareholder approval shall
be obtained within 60 days of the Trigger Date, or (B) purchase from the
holders of Debentures and Warrants on a pro rata basis such Principal
Amount of Debentures and number of Warrants which cannot be converted or
exercised due to such Maximum Common Stock Issuance limitation
("Shortfall") at a redemption price equal to the "Mandatory Repurchase
Price" (as defined in the Registration Rights Agreement), which such
redemption price shall be paid within three (3) Trading Days after a
Trigger Date if this clause (B) is elected. The Company shall make such
election with two (2) days following the Trigger Date by giving written
notice to all holders of Debentures and Warrants. If the Company fails to
timely make such election, or elects clause (A) but then fails to obtain
such shareholder approval within 60 days following the Trigger Date, then
the Company shall purchase the Shortfall at the Mandatory Repurchase Price
within three (3) Trading Days following any such failure.
Section 4. Defaults and Remedies.
(a) Events of Default. An "Event of Default" is: (i) a default in payment of
the Principal Amount or accrued but unpaid interest thereon of any of the
Debentures on or after the date such payment is due (to the extent such
principal and/or amount has not been converted into Common Stock in
accordance with the terms hereof), which default continues for 5 business
days after written notice of such non-payment has been received by the
Company; (ii) a default in the timely issuance of Underlying Shares upon
and in accordance with terms hereof, which default continues for five
business days after the Company has received written notice informing the
Company that it has failed to issue shares or deliver stock certificates
within the fifth day following the Conversion Date; (iii) failure by the
Company for thirty (30) days after written notice has been received by the
Company to comply with any material provision of any of the Debentures, the
Purchase Agreement, the Registration Rights Agreement or the Warrants
(including without limitation the failure to issue the requisite number of
shares of Common Stock upon conversion hereof and the failure to redeem
Debentures upon the Holder's request following a Change in Control
Transaction pursuant to Section 3(c)(vi), (iv) a material breach by the
Company of its representations or warranties in the Purchase Agreement,
Registration Rights Agreement or Warrants; (v) any default after any cure
period under, or acceleration prior to maturity of, any mortgage, indenture
or instrument under which there may be issued or by which there may be
secured or evidenced any indebtedness for money borrowed by the Company for
in excess of $1 million or for money borrowed the repayment of which is
guaranteed by the Company for in excess of $1 million, whether such
indebtedness or guarantee now exists or shall be created hereafter; or (vi)
if the Company is subject to any Bankruptcy Event.
(b) Remedies. If an Event of Default occurs and is continuing with respect to
any of the Debentures, the Holder may declare all of the then outstanding
Principal Amount of this Debenture and all other Debentures held by the
Holder, including any interest due thereon, to be due and payable
immediately, except that in the case of an Event of Default arising from
events described in clauses (v) and (vi) of Section 4(a), this Debenture
shall become due and payable without further action or notice. In the event
of such acceleration, the amount due and owing to the Holder shall be the
greater of (1) 125% of the outstanding Principal Amount of the Debentures
held by the Holder (plus all accrued and unpaid interest, if any) and (2)
the product of (A) the highest closing price for the five (5) Trading days
immediately preceding the Holder's acceleration and (B) the Conversion
Ratio. In either case the Company shall pay interest on such amount in cash
at the Default Rate to the Holder if such amount is not paid within 7 days
of Holder's request. The remedies under this Debenture shall be cumulative.
Section 5. General.
(a) Payment of Expenses. The Company agrees to pay all reasonable charges and
expenses, including attorneys' fees and expenses, which may be incurred by
the Holder in successfully enforcing this Debenture and/or collecting any
amount due under this Debenture.
(b) Savings Clause. In case any provision of this Debenture is held by a court
of competent jurisdiction to be excessive in scope or otherwise invalid or
unenforceable, such provision shall be adjusted rather than voided, if
possible, so that it is enforceable to the maximum extent possible, and the
validity and enforceability of the remaining provisions of this Debenture
will not in any way be affected or impaired thereby. In no event shall the
amount of interest paid hereunder exceed the maximum rate of interest on
the unpaid principal balance hereof allowable by applicable law. If any sum
is collected in excess of the applicable maximum rate, the excess collected
shall be applied to reduce the principal debt. If the interest actually
collected hereunder is still in excess of the applicable maximum rate, the
interest rate shall be reduced so as not to exceed the maximum allowable
under law. (c) Amendment. Neither this Debenture nor any term hereof may be
amended, waived, discharged or terminated other than by a written
instrument signed by the Company and Holders of 75% of the Principal Amount
of all Debentures.
(d) Assignment, Etc. The Holder may assign or transfer this Debenture to any
transferee only with the prior written consent of the Company, which may
not be unreasonably withheld or delayed, provided that (i) the Holder may
assign or transfer this Debenture to any of such Holder's affiliates
without the consent of the Company and (ii) upon any Event of Default, the
Holder may assign or transfer this Debenture without the consent of the
Company. The Holder shall notify the Company of any such assignment or
transfer promptly. This Debenture shall be binding upon the Company and its
successors and shall inure to the benefit of the Holder and its successors
and permitted assigns.
(e) No Waiver. No failure on the part of the Holder to exercise, and no delay
in exercising any right, remedy or power hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise by the Holder of
any right, remedy or power hereunder preclude any other or future exercise
of any other right, remedy or power. Each and every right, remedy or power
hereby granted to the Holder or allowed it by law or other agreement shall
be cumulative and not exclusive of any other, and may be exercised by the
Holder from time to time.
(f) Governing Law; Jurisdiction.
(i) Governing Law. THIS DEBENTURE WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ANY
CONFLICTS OF LAWS PROVISIONS THEREOF THAT WOULD OTHERWISE REQUIRE THE
APPLICATION OF THE LAW OF ANY OTHER JURISDICTION.
(ii) Jurisdiction. The Company irrevocably submits to the exclusive jurisdiction
of any State or Federal Court sitting in the State of New York, County of
New York, or San Jose, California, over any suit, action, or proceeding
arising out of or relating to this Debenture. The Company irrevocably
waives, to the fullest extent permitted by law, any objection which it may
now or hereafter have to the laying of the venue of any such suit, action,
or proceeding brought in such a court and any claim that suit, action, or
proceeding has been brought in an inconvenient forum.
The Company agrees that the service of process upon it mailed by certified
or registered mail (and service so made shall be deemed complete three days
after the same has been posted as aforesaid) or by personal service shall
be deemed in every respect effective service of process upon it in any such
suit or proceeding. Nothing herein shall affect Holder's right to serve
process in any other manner permitted by law. The Company agrees that a
final non-appealable judgement in any such suit or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on such
judgment or in any other lawful manner.
(iii)No Jury Trial. The COMPANY hereto knowingly and voluntarily waives any and
all rights it may have to a trial by jury with respect to any litigation
based on, or arising out of, under, or in connection with, this Debenture.
(g) Replacement Debentures. This Debenture may be exchanged by Holder at any
time and from time to time for a Debenture or Debentures with different
denominations representing an equal aggregate outstanding Principal Amount,
as reasonably requested by Holder, upon surrendering the same. No service
charge will be made for such registration or exchange. In the event that
Holder notifies the Company that this Debenture has been lost, stolen or
destroyed, a replacement Debenture identical in all respects to the
original Debenture (except for registration number and Principal Amount, if
different than that shown on the original Debenture), shall be issued to
the Holder, provided that the Holder executes and delivers to the Company
an agreement reasonably satisfactory to the Company to indemnify the
Company from any loss incurred by it in connection with the Debenture.
[Signature Page Follows]
IN WITNESS WHEREOF, the Company has caused this Debenture to be duly
executed on the day and in the year first above written.
FONAR CORPORATION
By: /s/
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Name:
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Title:
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Attest: /s/
Sign:
Print Name:
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EXHIBIT A
FORM OF CONVERSION NOTICE
(To be executed by the Holder
in order to convert a Debenture)
Re: Debenture (this "Debenture") issued by FONAR CORPORTION to THE TAIL WIND
FUND, LTD. on or about May 24, 2001 in the original principal amount of
$4,500,000.
The undersigned hereby elects to convert the aggregate outstanding
Principal Amount (as defined in the Debenture) indicated below of this
Debenture into shares of Common Stock, $0.0001 par value per share (the
"Common Stock"), of FONAR CORPORATION. (the "Company") according to the
conditions hereof, as of the date written below. If shares are to be issued
in the name of a person other than undersigned, the undersigned will pay
all transfer taxes payable with respect thereto and is delivering herewith
such certificates and opinions as reasonably requested by the Company in
accordance therewith. No fee will be charged to the holder for any
conversion, except for such transfer taxes, if any. The undersigned
represents as of the date hereof that, after giving effect to the
conversion of this Debenture pursuant to this Conversion Notice, the
undersigned will not exceed the "Restricted Ownership Percentage" contained
in Section 3(i)(A) of this Debenture and will remain in compliance with
Section 3(i)(B) of this Debenture.
Conversion information:
Date to Effect Conversion
Aggregate Principal Amount of Debenture Being Converted
Number of Shares of Common Stock to be Issued
Applicable Conversion Price
Signature
Name
Address
EXHIBIT B
FORM OF REPAYMENT ELECTION NOTICE
To: [Holder at Holder's Address]
Pursuant to Section 1(b) of Debenture No. of FONAR CORPORATION issued to
you (or your assignor or predecessor-in-interest) on May --, 2001, we hereby
notify you that we are irrevocably electing to repay the outstanding Monthly
Amount (as defined in the Debenture) due on the Repayment Date (as defined in
the Debenture) which occurs on ---------, 200- (check one):
In full in cash on such Repayment Date.
In full in shares of the Company's Common Stock within three (3) Trading
Days following such Repayment Date.
FONAR CORPORATION
By:
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Name:
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Title:
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