EXHIBIT 4.2
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND IS
BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THIS SECURITY MAY NOT BE SOLD
OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER LAWS.
8 % CONVERTIBLE DEBENTURE
Company: American Ammunition, Inc.
Company Address: 3545 NW 71st St., Miami, FL 33147
Maturity Date: October ___, 2004
Principal Amount: $250,000
American Ammunition, Inc., a California corporation, and any successor or
resulting corporation by way of merger, consolidation, sale or exchange of all
or substantially all of the assets or otherwise (the "Company"), for value
received, hereby promises to pay to the Holder (as such term is hereinafter
defined), or such other Person (as such term is hereinafter defined) upon order
of the Holder, on October ___, 2004 (the "Maturity Date"), the principal sum of
two-hundred fifty thousand dollars ($250,000), as such sum may be adjusted
pursuant to Article 3, and to pay interest thereon from the date hereof, monthly
in arrears, on the 15th day of each month (each an "Interest Payment Due Date"
and collectively, the "Interest Payment Due Dates"), commencing on November 15,
2002, at the rate of eight percent (8%) per annum (the "Debenture Interest
Rate"), until the Principal Amount (as such term is hereinafter defined) of this
Debenture has been paid in full. All interest payable on the Principal Amount of
this Debenture shall be calculated on the basis of a 360-day year for the actual
number of days elapsed. Payment of interest on this Debenture shall be in cash.
This Debenture may not be prepaid without the written consent of the Holder.
ARTICLE 1
DEFINITIONS
SECTION 1.1 Definitions. The terms defined in this Article whenever used in this
Debenture have the following respective meanings:
(i) "Affiliate" has the meaning ascribed to such term in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended.
(ii) "Bankruptcy Code" means the United States Bankruptcy Code of 1986, as
amended (11 U.S.C.ss.ss.101 et. seq.). -- ---
(iii) "Business Day" means a day other than Saturday, Sunday or any day on which
banks located in the State of California are authorized or obligated to close.
(iv) "Capital Shares" means the Common Stock and any other shares of any other
class or series of capital stock, whether now or hereafter authorized and
however designated, which have the right to participate in the distribution of
earnings and assets (upon dissolution, liquidation or winding-up) of the
Company.
(v) "Closing Date" means October ___, 2002.
(vi) "Common Shares" or "Common Stock" means shares of the Company's Common
Stock.
(vii) "Common Stock Issued at Conversion", when used with reference to the
securities deliverable upon conversion of this Debenture, means all Common
Shares now or hereafter Outstanding and securities of any other class or series
into which this Debenture hereafter shall have been changed or substituted,
whether now or hereafter created and however designated.
(viii) "Conversion" or "conversion" means the repayment by the Company of the
Principal Amount of this Debenture (and, to the extent the Holder elects as
permitted by Section 3.1, accrued and unpaid interest thereon) by the delivery
of Common Stock on the terms provided in Section 3.2, and "convert,"
"converted," "convertible" and like words shall have a corresponding meaning.
(ix) "Conversion Date" means any day on which all or any portion of the
Principal Amount of this Debenture is converted in accordance with the
provisions hereof.
(x) "Conversion Notice" means a written notice of conversion substantially in
the form annexed hereto as Exhibit A. (xi) "Conversion Price" on any date of
determination means the applicable price for the conversion of this Debenture
into Common Shares on such day as set forth in Section 3.1(a).
(xii) "Current Market Price" on any date of determination means the closing
price of a Common Share on such day as reported on the NASDAQ OTCBB Exchange;
provided that, if such security is not listed or admitted to trading on the
NASDAQ OTCBB, as reported on the principal national security exchange or
quotation system on which such security is quoted or listed or admitted to
trading, or, if not quoted or listed or admitted to trading on any national
securities exchange or quotation system, the closing bid price of such security
on the over-the-counter market on the day in question as reported by Bloomberg
LP or a similar generally accepted reporting service, as the case may be.
(xiii) "Deadline" means the date that is the 120th day from the Closing Date.
(xiv) "Debenture" or "Debentures" means this 8% Convertible Debenture of the
Company or such other convertible debenture(s) exchanged therefor as provided in
Section 2.1.
(xv) "Discount Multiplier" has the meaning set forth in Section 3.1(a).
(xvi) "Event of Default" has the meaning set forth in Section 6.1.
(xvii) "Holder" means La Jolla Cove Investors, Inc., any successor thereto, or
any Person to whom this Debenture is subsequently transferred in accordance with
the provisions hereof.
(xviii) "Interest Payment Due Date" has the meaning set forth in the opening
paragraph of this Debenture.
(xix) "Market Disruption Event" means any event that results in a material
suspension or limitation of trading of the Common Shares.
(xx) "Market Price" per Common Share means the lowest price of the Common Shares
during any Trading Day as reported on the NASDAQ OTCBB; provided that, if such
security is not listed or admitted to trading on the NASDAQ OTCBB, as reported
on the principal national security exchange or quotation system on which such
security is quoted or listed or admitted to trading, or, if not quoted or listed
or admitted to trading on any national securities exchange or quotation system,
the lowest price of the Common Shares during any Trading Day on the
over-the-counter market as reported by Bloomberg LP or a similar generally
accepted reporting service, as the case may be.
(xxi) "Maximum Rate" has the meaning set forth in Section 6.3.
(xxii) "Outstanding" when used with reference to Common Shares or Capital Shares
(collectively, "Shares") means, on any date of determination, all issued and
outstanding Shares, and includes all such Shares issuable in respect of
outstanding scrip or any certificates representing fractional interests in such
Shares; provided, however, that any such Shares directly or indirectly owned or
held by or for the account of the Company or any Subsidiary of the Company shall
not be deemed "Outstanding" for purposes hereof.
(xxiii) "Person" means an individual, a corporation, a partnership, an
association, a limited liability company, an unincorporated business
organization, a trust or other entity or organization, and any government or
political subdivision or any agency or instrumentality thereof.
(xxiv) "Principal Amount" means, for any date of calculation, the principal sum
set forth in the first paragraph of this Debenture (but only such principal
amount as to which the Holder has (a) actually advanced pursuant to the
Securities Purchase Agreement (b) not theretofore furnished a Conversion Notice
in compliance with Section 3.2).
(xxv) "Registration Rights Agreement" means that certain Registration Rights
Agreement of even date herewith by and between the Company and Holder, as the
same may be amended from time to time. (xxvi) "SEC" means the United States
Securities and Exchange Commission.
(xxvii) "Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC thereunder, all as in effect at the time.
(xxviii) "Securities Purchase Agreement" means that certain Securities Purchase
Agreement of even date herewith by and among the Company and Holder, as the same
may be amended from time to time.
(xxix) "Subsidiary" means any entity of which securities or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are owned directly or
indirectly by the Company. (xxx) "Trading Day" means any day on which (i)
purchases and sales of securities on the principal national security exchange or
quotation system on which the Common Shares are traded are reported thereon, or,
if not quoted or listed or admitted to trading on any national securities
exchange or quotation system, as reported by Bloomberg LP or a similar generally
accepted reporting service, as the case may be, (ii) at least one bid for the
trading of Common Shares is reported and (iii) no Market Disruption Event
occurs.
All references to "cash" or "$" herein means currency of the United States
of America.
ARTICLE 2
EXCHANGES, TRANSFER AND OPTIONAL REDEMPTION
SECTION 2.1 Exchange and Registration of Transfer of Debentures. The Holder may,
at its option, surrender this Debenture at the principal executive offices of
the Company and receive in exchange therefor a Debenture or Debentures, each in
the denomination of $1,000 or an integral multiple of $500 in excess thereof,
dated as of the date of this Debenture (which shall accrue interest from the
most recent Interest Payment Due Date on which an interest payment was made in
full), and payable to such Person or order as may be designated by such Holder.
The aggregate Principal Amount of the Debenture or Debentures exchanged in
accordance with this Section 2.1 shall equal the aggregate unpaid Principal
Amount of this Debenture as of the date of such surrender; provided, however,
that upon any exchange pursuant to this Section 2.1 there shall be filed with
the Company the name and address for all purposes hereof of the Holder or
Holders of the Debenture or Debentures delivered in such exchange. This
Debenture, when presented for registration of transfer or for exchange or
conversion, shall (if so required by the Company) be duly endorsed, or be
accompanied by a written instrument of transfer in form reasonably satisfactory
to the Company duly executed, by the Holder duly authorized in writing.
SECTION 2.2 Loss, Theft, Destruction of Debenture. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Debenture and, in the case of any such loss, theft or destruction, upon
receipt of indemnity or security reasonably satisfactory to the Company, or, in
the case of any such mutilation, upon surrender and cancellation of this
Debenture, the Company shall make, issue and deliver, in lieu of such lost,
stolen, destroyed or mutilated Debenture, a new Debenture of like tenor and
unpaid Principal Amount dated as of the date hereof (which shall accrue interest
from the most recent Interest Payment Due Date on which an interest payment was
made in full). This Debenture shall be held and owned upon the express condition
that the provisions of this Section 2.2 are exclusive with respect to the
replacement of a mutilated, destroyed, lost or stolen Debenture and shall
preclude any and all other rights and remedies notwithstanding any law or
statute existing or hereafter enacted to the contrary with respect to the
replacement of negotiable instruments or other securities without the surrender
thereof.
SECTION 2.3 Who Deemed Absolute Owner. The Company may deem the Person in whose
name this Debenture shall be registered upon the registry books of the Company
to be, and may treat it as, the absolute owner of this Debenture (whether or not
this Debenture shall be overdue) for the purpose of receiving payment of or on
account of the Principal Amount of this Debenture, for the conversion of this
Debenture and for all other purposes, and the Company shall not be affected by
any notice to the contrary. All such payments and such conversions shall be
valid and effectual to satisfy and discharge the liability upon this Debenture
to the extent of the sum or sums so paid or the conversion or conversions so
made.
SECTION 2.4 Repayment at Maturity. At the Maturity Date, the Company shall repay
the outstanding Principal Amount of this Debenture in whole in cash, together
with all accrued and unpaid interest thereon, in cash, to the Maturity Date.
SECTION 2.5 Optional Redemption.On any day that the Volume Weighted Average
Price of the Common Stock is below $0.30, the Company may redeem this Debenture
in whole in cash for 125% of the outstanding Principal Amount plus accrued
interest, provided however, that Holder may defer redemption of the Debenture by
agreeing to forego interest on the Debenture for the number of days that the
Volume Weighted Average Price of the Common Stock is below $0.30 per share.
ARTICLE 3
CONVERSION OF DEBENTURE
SECTION 3.1 Conversion; Conversion Price; Valuation Event. (a) At the option of
the Holder, this Debenture may be converted, either in whole or in part, up to
the full Principal Amount hereof (in increments of $1,000 in Principal Amount)
into Common Shares (calculated as to each such conversion to the nearest 1/100th
of a share), at any time and from time to time on any Business Day, subject to
compliance with Section 3.2. The number of Common Shares into which this
Debenture may be converted is equal to (i) the Principal Amount of the Debenture
being converted at the Conversion Date (plus, at the option of the Holder, any
accrued and unpaid interest on the Debenture being converted through the
Conversion Date) divided by (ii) the Conversion Price. In addition, the Company
shall pay to the Holder on the Conversion Date, in cash, any accrued and unpaid
interest on the Debenture being converted not included at the option of the
Holder in clause (i) of the immediately preceding sentence. The "Conversion
Price" shall be equal to the lesser of (i) $1.00, or (ii) eighty percent (80%)
of the average of the 5 lowest Volume Weighted Average Price days during the
twenty (20) Trading Days prior to Holder's election to convert (a "Discount
Multiplier"); provided, that in the event the Registration Statement has not
been declared effective by the SEC by the Deadline or, if the Registration
Statement has theretofore been declared effective but is not thereafter
effective, then the applicable Discount Multiplier shall decrease by three
percentage points (3%) for each month or partial month occurring after the
Deadline that the Registration Statement is not effective. If the Holder elects
to convert a portion of the Debenture and, on the day that the election is made,
the Volume Weighted Average Price of the Common Stock is below $0.30 per share,
the Company shall have the right to prepay that portion of the Debenture that
Holder elected to convert, plus any accrued and unpaid interest, at 125% of such
amount, unless Holder withdraws its Conversion Notice.
(b) Notwithstanding the provisions of Section 3.1(a), in the event the
Company's Registration Statement has not been declared effective by the
Deadline, other than as a result of unreasonable delay by either the SEC or the
attorneys filing the Registration Statement on behalf of the Company, or, if the
Registration Statement has theretofore been declared effective but is not
thereafter effective, the following will also apply in addition to any damages
incurred by the Holder as a result thereof unless, upon Holder's election to
convert, tradable shares are otherwise made available to Holder:
(i) The Holder may demand repayment of one hundred and twenty-five
percent (125%) of the Principal Amount of the Debenture, together with all
accrued and unpaid interest thereon, in cash, at any time prior to the
Company's Registration Statement being declared effective by the SEC or
during the period that the Company's Registration Statement is not
effective, such repayment to be made within three (3) business days of such
demand. In the event that the Debenture is so accelerated, in addition to
the repayment of one hundred and twenty-five percent (125%) of the
Principal Amount together with accrued interest as aforesaid, the Company
shall immediately issue and pay, as the case may be, to the Holder 25,000
Shares of Common Stock and $10,000 for each thirty (30) day period, or
portion thereof, during which the Principal Amount, including interest
thereon, remains unpaid, with the monthly payment amount to increase to
$15,000 for each thirty (30) day period, or portion thereof, after the
first ninety (90) day period;
(ii) If the Holder does not elect to accelerate the Debenture, the
Company shall immediately issue or pay, as the case may be, to Holder
25,000 Shares of Common Stock and $10,000 for each thirty (30) day period,
or portion thereof, that the Registration Statement is not effective, with
the monthly payment amount to increase to $15,000 for each thirty (30) day
period, or portion thereof, after the first ninety (90) day period.
SECTION 3.2 Exercise of Conversion Privilege. (a) Conversion of this Debenture
may be exercised on any Business Day by the Holder by telecopying an executed
and completed Conversion Notice to the Company. Each date on which a Conversion
Notice is telecopied to the Company in accordance with the provisions of this
Section 3.2 shall constitute a Conversion Date. The Company shall convert this
Debenture and issue the Common Stock Issued at Conversion in the manner provided
below in this Section 3.2, and all voting and other rights associated with the
beneficial ownership of the Common Stock Issued at Conversion shall vest with
the Holder, effective as of the Conversion Date at the time specified in the
Conversion Notice. The Conversion Notice also shall state the name or names
(with addresses) of the persons who are to become the holders of the Common
Stock Issued at Conversion in connection with such conversion. The Holder shall
deliver this Debenture by express courier within thirty (30) days following the
date on which the telecopied Conversion Notice has been transmitted to the
Company. Upon surrender for conversion, this Debenture shall be accompanied by a
proper assignment hereof to the Company or be endorsed in blank. As promptly as
practicable after the receipt of the Conversion Notice as aforesaid, but in any
event not more than three (3) Business Days after the Company's receipt of such
Conversion Notice, the Company shall (i) issue the Common Stock Issued at
Conversion in accordance with the provisions of this Article 3 and (ii) cause to
be mailed for delivery by overnight courier, or if a Registration Statement
covering the Common Stock has been declared effective by the SEC cause to be
electronically transferred, to Holder (x) a certificate or certificate(s)
representing the number of Common Shares to which the Holder is entitled by
virtue of such conversion, (y) cash, as provided in Section 3.3, in respect of
any fraction of a Common Share deliverable upon such conversion and (z) cash or
shares of Common Stock, as applicable, representing the amount of accrued and
unpaid interest on this Debenture as of the Conversion Date. Such conversion
shall be deemed to have been effected at the time at which the Conversion Notice
indicates, and at such time the rights of the Holder of this Debenture, as such
(except if and to the extent that any Principal Amount thereof remains
unconverted), shall cease and the Person and Persons in whose name or names the
Common Stock Issued at Conversion shall be issuable shall be deemed to have
become the holder or holders of record of the Common Shares represented thereby,
and all voting and other rights associated with the beneficial ownership of such
Common Shares shall at such time vest with such Person or Persons. The
Conversion Notice shall constitute a contract between the Holder and the
Company, whereby the Holder shall be deemed to subscribe for the number of
Common Shares which it will be entitled to receive upon such conversion and, in
payment and satisfaction of such subscription (and for any cash adjustment to
which it is entitled pursuant to Section 3.4), to surrender this Debenture and
to release the Company from all liability thereon (except if and to the extent
that any Principal Amount thereof remains unconverted). No cash payment
aggregating less than $1.00 shall be required to be given unless specifically
requested by the Holder.
(b) If, at any time after the date of this Debenture,
(i) the Company
challenges, disputes or denies the right of the Holder hereof to effect the
conversion of this Debenture into Common Shares or otherwise dishonors or
rejects any Conversion Notice delivered in accordance with this Section 3.2 or
(ii) any third party who is not and has never been an Affiliate of the
Holder commences any lawsuit or legal proceeding or otherwise asserts any
claim before any court or public or governmental authority which seeks to
challenge, deny, enjoin, limit, modify, delay or dispute the right of the
Holder hereof to effect the conversion of this Debenture into Common
Shares, then the Holder shall have the right, by written notice to the
Company, to require the Company to promptly redeem this Debenture for cash
at one hundred and twenty-five percent (125%) of the Principal Amount
thereof, together with all accrued and unpaid interest thereon to the date
of redemption. Under any of the circumstances set forth above, the Company
shall be responsible for the payment of all costs and expenses of the
Holder, including reasonable legal fees and expenses, as and when incurred
in defending itself in any such action or pursuing its rights hereunder (in
addition to any other rights of the Holder). (c) The Holder shall be
entitled to exercise its conversion privilege notwithstanding the
commencement of any case under the Bankruptcy Code. In the event the
Company is a debtor under the Bankruptcy Code, the Company hereby waives to
the fullest extent permitted any rights to relief it may have under 11
U.S.C. ss. 362 in respect of the Holder's conversion privilege. The Company
hereby waives to the fullest extent permitted any rights to relief it may
have under 11 U.S.C. ss. 362 in respect of the conversion of this
Debenture. The Company agrees, without cost or expense to the Holder, to
take or consent to any and all action necessary to effectuate relief under
11 U.S.C. ss. 362.
SECTION 3.3 Fractional Shares. No fractional Common Shares or scrip representing
fractional Common Shares shall be delivered upon conversion of this Debenture.
Instead of any fractional Common Shares which otherwise would be delivered upon
conversion of this Debenture, the Company shall pay a cash adjustment in respect
of such fraction in an amount equal to the same fraction multiplied by the
Current Market Price on the Conversion Date. No cash payment of less than $1.00
shall be required to be given unless specifically requested by the Holder.
SECTION 3.4 Adjustments. The Conversion Price and the number of shares
deliverable upon conversion of this Debenture are subject to adjustment from
time to time as follows:
(i) Reclassification, Etc. In case the Company shall reorganize its
capital, reclassify its capital stock, consolidate or merge with or into
another Person (where the Company is not the survivor or where there is a
change in or distribution with respect to the Common Stock of the Company),
sell, convey, transfer or otherwise dispose of all or substantially all its
property, assets or business to another Person, or effectuate a transaction
or series of related transactions in which more than fifty percent (50%) of
the voting power of the Company is disposed of (each, a "Fundamental
Corporate Change") and, pursuant to the terms of such Fundamental Corporate
Change, shares of common stock of the successor or acquiring corporation,
or any cash, shares of stock or other securities or property of any nature
whatsoever (including warrants or other subscription or purchase rights) in
addition to or in lieu of common stock of the successor or acquiring
corporation ("Other Property") are to be received by or distributed to the
holders of Common Stock of the Company, then the Holder of this Debenture
shall have the right thereafter, at its sole option, to (x) require the
Company to prepay this Debenture for cash at one hundred and twenty-five
percent (125%) of the Principal Amount thereof, together with all accrued
and unpaid interest thereon to the date of prepayment, (y) receive the
number of shares of common stock of the successor or acquiring corporation
or of the Company, if it is the surviving corporation, and Other Property
as is receivable upon or as a result of such Fundamental Corporate Change
by a holder of the number of shares of Common Stock into which such the
outstanding portion of this Debenture may be converted at the Conversion
Price applicable immediately prior to such Fundamental Corporate Change or
(z) require the Company, or such successor, resulting or purchasing
corporation, as the case may be, to, without benefit of any additional
consideration therefor, execute and deliver to the Holder a debenture with
substantial identical rights, privileges, powers, restrictions and other
terms as this Debenture in an amount equal to the amount outstanding under
this Debenture immediately prior to such Fundamental Corporate Change. For
purposes hereof, "common stock of the successor or acquiring corporation"
shall include stock of such corporation of any class which is not preferred
as to dividends or assets over any other class of stock of such corporation
and which is not subject to prepayment and shall also include any evidences
of indebtedness, shares of stock or other securities which are convertible
into or exchangeable for any such stock, either immediately or upon the
arrival of a specified date or the happening of a specified event and any
warrants or other rights to subscribe for or purchase any such stock. The
foregoing provisions shall similarly apply to successive Fundamental
Corporate Changes.
(ii) Subdivision or Combination of Shares. If the Company at any time
while this Debenture remains outstanding shall subdivide or combine its
Common Shares, the Conversion Price shall be proportionately decreased in
the case of a subdivision or increased in the case of a combination. For
example, in the case of a reverse stock split, the Conversion Price would
increase proportionately and the number of Common Shares to be issued upon
conversion would decrease proportionately. Likewise, in the case of a
forward stock split, the Conversion Price would decrease proportionately
and the number of Common Shares to be issued upon conversion would increase
proportionately.
SECTION 3.5 Certain Conversion Limits. Notwithstanding anything herein to the
contrary, if and to the extent that, on any date (the "Section 16 Determination
Date"), the holding by the Holder of this Debenture would result in the Holder's
becoming subject to the provisions of Section 16(b) of the Securities Exchange
Act of 1934, as amended, by virtue of being deemed the "beneficial owner" of
more than ten percent (10%) of the then Outstanding shares of Common Stock, then
the Holder shall not have the right, and the Company shall not have the
obligation, to convert any portion of this Debenture (the "Section 16 Prepayment
Portion") as shall cause such Holder to be deemed the beneficial owner of more
than ten percent (10%) of the then Outstanding shares of Common Stock during the
period ending sixty (60) days after the Section 16 Determination Date. If any
court of competent jurisdiction shall determine that the foregoing limitation is
ineffective to prevent a Holder from being deemed the beneficial owner of more
than ten percent (10%) of the then Outstanding shares of Common Stock for the
purposes of such Section 16(b), then the Company shall prepay the Section 16
Prepayment Portion. Upon such determination by a court of competent
jurisdiction, the Holder shall have no interest in or rights under such Section
16 Prepayment Portion. Any and all interest paid on or prior to the date of such
determination shall be deemed interest paid on the remaining portion of this
Debenture held by the Holder. Such prepayment shall be for cash at a prepayment
price of one hundred and twenty-five percent (125%) of the Principal Amount
thereof, together with all accrued and unpaid interest thereon to the date of
prepayment.
SECTION 3.6 Surrender of Debentures. Upon any redemption of this Debenture
pursuant to Sections 3.2, 3.5 or 6.2, or upon maturity pursuant to Section 2.4,
the Holder shall either deliver this Debenture by hand to the Company at its
principal executive offices or surrender the same to the Company at such address
by nationally recognized overnight courier. Payment of the redemption price or
the amount due on maturity specified in Section 2.4, shall be made by the
Company to the Holder against receipt of this Debenture (as provided in this
Section 3.5) by wire transfer of immediately available funds to such account(s)
as the Holder shall specify by written notice to the Company. If payment of such
redemption price is not made in full by the redemption date, or the amount due
on maturity is not paid in full by the Maturity Date, the Holder shall again
have the right to convert this Debenture as provided in Article 3 hereof or to
declare an Event of Default.
ARTICLE 4
STATUS; RESTRICTIONS ON TRANSFER
SECTION 4.1 Status of Debenture. This Debenture is an unsecured obligation of
the Company, and constitutes a legal, valid and binding obligation of the
Company, enforceable in accordance with its terms subject, as to enforceability,
to general principles of equity and to principles of bankruptcy, insolvency,
reorganization and other similar laws of general applicability relating to or
affecting creditors' rights and remedies generally.
SECTION 4.2 Restrictions on Transfer. This Debenture, and any Common Shares
deliverable upon the conversion hereof, have not been registered under the
Securities Act. The Holder by accepting this Debenture agrees that this
Debenture and the shares of Common Stock to be acquired as interest on and upon
conversion of this Debenture may not be assigned or otherwise transferred unless
and until (i) the Company has received the opinion of counsel for the Holder
that this Debenture or such shares may be sold pursuant to an exemption from
registration under the Securities Act or (ii) a registration statement relating
to this Debenture or such shares has been filed by the Company and declared
effective by the SEC.
Each certificate for shares of Common Stock deliverable hereunder shall
bear a legend as follows unless and until such securities have been sold
pursuant to an effective registration statement under the Securities Act:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"). The securities may not be offered for sale, sold or
otherwise transferred except (i) pursuant to an effective registration
statement under the Securities Act or (ii) pursuant to an exemption
from registration under the Securities Act in respect of which the
issuer of this certificate has received an opinion of counsel
satisfactory to the issuer of this certificate to such effect. Copies
of the agreement covering both the purchase of the securities and
restrictions on their transfer may be obtained at no cost by written
request made by the holder of record of this certificate to the
Secretary of the issuer of this certificate at the principal executive
offices of the issuer of this certificate."
ARTICLE 5
COVENANTS
SECTION 5.1 Conversion. The Company shall cause the transfer agent, not later
than three (3) Business Days after the Company's receipt of a Conversion Notice,
to issue and deliver to the Holder the requisite shares of Common Stock Issued
at Conversion. Such delivery shall be by electronic transfer if a Registration
Statement covering the Common Stock has been declared effective by the SEC.
SECTION 5.2 Notice of Default. If any one or more events occur which constitute
or which, with notice, lapse of time, or both, would constitute an Event of
Default, the Company shall forthwith give notice to the Holder, specifying the
nature and status of the Event of Default or such other event(s), as the case
may be.
SECTION 5.3 Payment of Obligations. So long as this Debenture shall be
outstanding, the Company shall pay, extend, or discharge at or before maturity,
all its respective material obligations and liabilities, including, without
limitation, tax liabilities, except where the same may be contested in good
faith by appropriate proceedings.
SECTION 5.4 Compliance with Laws. So long as this Debenture shall be
outstanding, the Company shall comply with all applicable laws, ordinances,
rules, regulations and requirements of governmental authorities, except for such
noncompliance which would not have a material adverse effect on the business,
properties, prospects, condition (financial or otherwise) or results of
operations of the Company and the Subsidiaries.
SECTION 5.5 Inspection of Property, Books and Records. So long as this Debenture
shall be outstanding, the Company shall keep proper books of record and account
in which full, true and correct entries shall be made of all material dealings
and transactions in relation to its business and activities and shall permit
representatives of the Holder at the Holder's expense to visit and inspect any
of its respective properties, to examine and make abstracts from any of its
respective books and records, not reasonably deemed confidential by the Company,
and to discuss its respective affairs, finances and accounts with its respective
officers and independent public accountants, all at such reasonable times and as
often as may reasonably be desired.
ARTICLE 6
REMEDIES
SECTION 6.1 Events of Default. "Event of Default" wherever used herein means any
one of the following events: (i) the Company shall default in the payment of
principal of or interest on this Debenture as and when the same shall be due and
payable and, in the case of an interest payment default, such default shall
continue for five (5) Business Days after the date such interest payment was
due, or the Company shall fail to perform or observe in any other covenant,
agreement, term, provision, undertaking or commitment under this Debenture, the
Conversion Warrants (as defined in the Securities Purchase Agreement), the
Securities Purchase Agreement or the Registration Rights Agreement and such
default shall continue for a period of ten (10) Business Days after the delivery
to the Company of written notice that the Company is in default hereunder or
thereunder; (ii) any of the representations or warranties made by the Company
herein, in the Securities Purchase Agreement, the Registration Rights Agreement
or in any certificate or financial or other written statements heretofore or
hereafter furnished by or on behalf of the Company in connection with the
execution and delivery of this Debenture, the Warrants, the Securities Purchase
Agreement or the Registration Rights Agreement shall be false or misleading in a
material respect on the Closing Date; (iii) under the laws of any jurisdiction
not otherwise covered by clauses (iv) and (v) below, the Company or any
Subsidiary (A) becomes insolvent or generally not able to pay its debts as they
become due, (B) admits in writing its inability to pay its debts generally or
makes a general assignment for the benefit of creditors, (C) institutes or has
instituted against it any proceeding seeking (x) to adjudicate it a bankrupt or
insolvent, (y) liquidation, winding-up, reorganization, arrangement, adjustment,
protection, relief or composition of it or its debts under any law relating to
bankruptcy, insolvency, reorganization or relief of debtors including any plan
of compromise or arrangement or other corporate proceeding involving or
affecting its creditors or (z) the entry of an order for relief or the
appointment of a receiver, trustee or other similar person for it or for any
substantial part of its properties and assets, and in the case of any such
official proceeding instituted against it (but not instituted by it), either the
proceeding remains undismissed or unstayed for a period of sixty (60) calendar
days, or any of the actions sought in such proceeding (including the entry of an
order for relief against it or the appointment of a receiver, trustee, custodian
or other similar official for it or for any substantial part of its properties
and assets) occurs or (D) takes any corporate action to authorize any of the
above actions; (iv) the entry of a decree or order by a court having
jurisdiction in the premises adjudging the Company or any Subsidiary a bankrupt
or insolvent, or approving as properly filed a petition seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company under the
Bankruptcy Code or any other applicable Federal or state law, or appointing a
receiver, liquidator, assignee, trustee or sequestrator (or other similar
official) of the Company or of any substantial part of its property, or ordering
the winding-up or liquidation of its affairs, and any such decree or order
continues and is unstayed and in effect for a period of sixty (60) calendar
days; (v) the institution by the Company or any Subsidiary of proceedings to be
adjudicated a bankrupt or insolvent, or the consent by it to the institution of
bankruptcy or insolvency proceedings against it, or the filing by it of a
petition or answer or consent seeking reorganization or relief under the
Bankruptcy Code or any other applicable federal or state law, or the consent by
it to the filing of any such petition or to the appointment of a receiver,
liquidator, assignee, trustee or sequestrator (or other similar official) of the
Company or of any substantial part of its property, or the making by it of an
assignment for the benefit of creditors, or the admission by it in writing of
its inability to pay its debts generally as and when they become due, or the
taking of corporate action by the Company in furtherance of any such action;
(vi) a final judgment or final judgments for the payment of money shall have
been entered by any court or courts of competent jurisdiction against the
Company and remains undischarged for a period (during which execution shall be
effectively stayed) of thirty (30) days, provided that the aggregate amount of
all such judgments at any time outstanding (to the extent not paid or to be
paid, as evidenced by a written communication to that effect from the applicable
insurer, by insurance) exceeds One Hundred Thousand Dollars ($100,000); (vii) it
becomes unlawful for the Company to perform or comply with its obligations under
this Debenture, the Conversion Warrant, the Securities Purchase Agreement or the
Registration Rights Agreement in any respect; (viii) the Common Shares shall be
delisted from the NASDAQ OTCBB (the "Trading Market" or, to the extent the
Company becomes eligible to list its Common Stock on any other national security
exchange or quotation system, upon official notice of listing on any such
exchange or system, as the case may be, it shall be the "Trading Market") or
suspended from trading on the Trading Market, and shall not be reinstated,
relisted or such suspension lifted, as the case may be, within five (5) days or;
(ix) the Company shall default (giving effect to any applicable grace period) in
the payment of principal or interest as and when the same shall become due and
payable, under any indebtedness, individually or in the aggregate, of more than
One Hundred Thousand Dollars ($100,000);
SECTION 6.2 Acceleration of Maturity; Rescission and Annulment. If an Event of
Default occurs and is continuing, then and in every such case the Holder may, by
a notice in writing to the Company, rescind any outstanding Conversion Notice
and declare that all amounts owing or otherwise outstanding under this Debenture
are immediately due and payable and upon any such declaration this Debenture
shall become immediately due and payable in cash at a price of one hundred and
fifty percent (125%) of the Principal Amount thereof, together with all accrued
and unpaid interest thereon to the date of payment; provided, however, in the
case of any Event of Default described in clauses (iii), (iv), (v) or (vii) of
Section 6.1, such amount automatically shall become immediately due and payable
without the necessity of any notice or declaration as aforesaid.
SECTION 6.3 Late Payment Penalty. If any portion of the principal of or interest
on this Debenture shall not be paid within ten (10) days of when it is due, the
Discount Multiplier under this Debenture, and under all warrants granted by the
Company to the Holder, shall decrease by one percentage point (1%) for all
conversions of this Debenture and warrant exercises thereafter.
SECTION 6.4 Maximum Interest Rate. Notwithstanding anything herein to the
contrary, if at any time the applicable interest rate as provided for herein
shall exceed the maximum lawful rate which may be contracted for, charged, taken
or received by the Holder in accordance with any applicable law (the "Maximum
Rate"), the rate of interest applicable to this Debenture shall be limited to
the Maximum Rate. To the greatest extent permitted under applicable law, the
Company hereby waives and agrees not to allege or claim that any provisions of
this Note could give rise to or result in any actual or potential violation of
any applicable usury laws.
SECTION 6.5 Remedies Not Waived. No course of dealing between the Company and
the Holder or any delay in exercising any rights hereunder shall operate as a
waiver by the Holder.
ARTICLE 7
MISCELLANEOUS
SECTION 7.1 Notice of Certain Events. In the case of the occurrence of any event
described in Section 3.4 of this Debenture, the Company shall cause to be mailed
to the Holder of this Debenture at its last address as it appears in the
Company's security registry, at least twenty (20) days prior to the applicable
record, effective or expiration date hereinafter specified (or, if such twenty
(20) days' notice is not possible, at the earliest possible date prior to any
such record, effective or expiration date), a notice thereof, including, if
applicable, a statement of (y) the date on which a record is to be taken for the
purpose of such dividend, distribution, issuance or granting of rights, options
or warrants, or if a record is not to be taken, the date as of which the holders
of record of Common Stock to be entitled to such dividend, distribution,
issuance or granting of rights, options or warrants are to be determined or (z)
the date on which such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up is expected to become effective, and the
date as of which it is expected that holders of record of Common Stock will be
entitled to exchange their shares for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale transfer,
dissolution, liquidation or winding-up.
SECTION 7.2 Register. The Company shall keep at its principal office a register
in which the Company shall provide for the registration of this Debenture. Upon
any transfer of this Debenture in accordance with Articles 2 and 4 hereof, the
Company shall register such transfer on the Debenture register.
SECTION 7.3 Withholding. To the extent required by applicable law, the Company
may withhold amounts for or on account of any taxes imposed or levied by or on
behalf of any taxing authority in the United States having jurisdiction over the
Company from any payments made pursuant to this Debenture.
SECTION 7.4 Transmittal of Notices. Except as may be otherwise provided herein,
any notice or other communication or delivery required or permitted hereunder
shall be in writing and shall be delivered personally, or sent by telecopier
machine or by a nationally recognized overnight courier service, and shall be
deemed given when so delivered personally, or by telecopier machine or overnight
courier service as follows:
(1) if to the Company, to:
American Ammunition, Inc.
3545 NW 71st St.
Miami, FL 33147
Telephone: 305-835-7400
Facsimile: 305-694-0037
(2) if to the Holder, to:
La Jolla Cove Investors, Inc.
7817 Herschel Avenue, Suite 200
La Jolla, California 92037
Telephone: 858-551-8789
Facsimile: 858-551-0987
Each of the Holder or the Company may change the foregoing address by notice
given pursuant to this Section 7.4.
SECTION 7.5 Attorneys' Fees. Should any party hereto employ an attorney for the
purpose of enforcing or construing this Agreement, or any judgment based on this
Agreement, in any legal proceeding whatsoever, including insolvency, bankruptcy,
arbitration, declaratory relief or other litigation, the prevailing party shall
be entitled to receive from the other party or parties thereto reimbursement for
all reasonable attorneys' fees and all reasonable costs, including but not
limited to service of process, filing fees, court and court reporter costs,
investigative costs, expert witness fees, and the cost of any bonds, whether
taxable or not, and that such reimbursement shall be included in any judgment or
final order issued in that proceeding. The "prevailing party" means the party
determined by the court to most nearly prevail and not necessarily the one in
whose favor a judgment is rendered.
SECTION 7.5 Governing Law. This Debenture shall be governed by, and construed in
accordance with, the laws of the State of California (without giving effect to
conflicts of laws principles). With respect to any suit, action or proceedings
relating to this Debenture, the Company irrevocably submits to the exclusive
jurisdiction of the courts of the State of California sitting in San Diego and
the United States District Court located in the City of San Diego and hereby
waives, to the fullest extent permitted by applicable law, any claim that any
such suit, action or proceeding has been brought in an inconvenient forum.
Subject to applicable law, the Company agrees that final judgment against it in
any legal action or proceeding arising out of or relating to this Debenture
shall be conclusive and may be enforced in any other jurisdiction within or
outside the United States by suit on the judgment, a certified copy of which
judgment shall be conclusive evidence thereof and the amount of its
indebtedness, or by such other means provided by law.
SECTION 7.6 Headings. The headings of the Articles and Sections of this
Debenture are inserted for convenience only and do not constitute a part of this
Debenture. SECTION 7.7 Payment Dates. Whenever any payment hereunder shall be
due on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day.
SECTION 7.8 Binding Effect. Each Holder by accepting this Debenture agrees to be
bound by and comply with the terms and provisions of this Debenture. SECTION 7.9
No Stockholder Rights. Except as otherwise provided herein, this Debenture shall
not entitle the Holder to any of the rights of a stockholder of the Company,
including, without limitation, the right to vote, to receive dividends and other
distributions, or to receive any notice of, or to attend, meetings of
stockholders or any other proceedings of the Company, unless and to the extent
converted into shares of Common Stock in accordance with the terms hereof.
SECTION 7.10 Facsimile Execution. Facsimile execution shall be deemed originals.
IN WITNESS WHEREOF, the Company has caused this Debenture to be signed by
its duly authorized officer on the date of this Debenture.
American Ammunition, Inc.
By:
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Title:
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A-1
EXHIBIT A
[DEBENTURE CONVERSION NOTICE]
TO: American Ammunition, Inc.
The undersigned owner of this 8 % Convertible Debenture due October ___,
2004 (the "Debenture") issued by American Ammunition, Inc.(the "Company") hereby
irrevocably exercises its option to convert $__________ Principal Amount of the
Debenture [and accrued and unpaid interest thereon to the date of this Notice]
into shares of Common Stock in accordance with the terms of the Debenture. The
undersigned hereby instructs the Company to convert the portion of the Debenture
specified above into shares of Common Stock Issued at Conversion in accordance
with the provisions of Article 3 of the Debenture. The undersigned directs that
the Common Stock and certificates therefor deliverable upon conversion, the
Debenture reissued in the Principal Amount not being surrendered for conversion
hereby, [the check or shares of Common Stock in payment of the accrued and
unpaid interest thereon to the date of this Notice,] together with any check in
payment for fractional Common Stock, be registered in the name of and/or
delivered to the undersigned unless a different name has been indicated below.
All capitalized terms used and not defined herein have the respective meanings
assigned to them in the Debenture. The conversion pursuant hereto shall be
deemed to have been effected at the date and time specified below, and at such
time the rights of the undersigned as a Holder of the Principal Amount of the
Debenture set forth above shall cease and the Person or Persons in whose name or
names the Common Stock Issued at Conversion shall be registered shall be deemed
to have become the holder or holders of record of the Common Shares represented
thereby and all voting and other rights associated with the beneficial ownership
of such Common Shares shall at such time vest with such Person or Persons.
Date and time: __________________
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By: ___________________________
Title: _________________________
Fill in for registration of Debenture: Please print name and address (including
ZIP code number):