U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _______________ to ________________
Commission File No.: 333-46160
American Ammunition, Inc.
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(Name of small business registrant in its charter)
California 91-2021594
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3545 NW 71st Street
Miami, FL 33147
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (305) 835-7400
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange
on which registered
None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
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(Title of class)
Copies of Communications Sent to:
Mintmire & Associates
265 Sunrise Avenue, Suite 204
Palm Beach, FL 33480
Tel: (561) 832-5696 - Fax: (561) 659-5371
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State registrant's revenues for its most recent fiscal year. $427,529
The aggregate market value of the voting common equity held by
non-affiliates as of March 27, 2002 was $13,352,834.84 based upon 50,327,056
shares outstanding of which 23,633,336 was held by non-affiliates and a share
price of $0.565. No non-voting common equity is outstanding.
PART I
Item 1. Description of Business
Business Development
Certain statements contained in this annual filing, including, without
limitation, statements containing the words "believes", "anticipates", "expects"
and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
Such factors include, among others, the following: international, national
and local general economic and market conditions: demographic changes; the
ability of the Company to sustain, manage or forecast its growth; the ability of
the Company to successfully make and integrate acquisitions; raw material costs
and availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Form 10-KSB and investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation
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to update any such factors or to publicly announce the result of any revisions
to any of the forward- looking statements contained herein to reflect future
events or developments.
American Ammunition, Inc. (the "Company") was incorporated on February 1,
2000 in the State of California as FirsTelevision.com. It subsequently changed
its corporate name to FBI Fresh Burgers International with a business plan of
marketing the concept of a national "fast food" restaurant chain to children and
young adults, with a menu of fresh burgers, fries and sandwiches.
On September 29, 2001, the Company, F&F Equipment, Inc. d/b/a American
Ammunition ("AA") and the individual shareholders of AA entered into a share
exchange agreement whereby the shareholders of AA exchanged 100% of the issued
and outstanding stock of AA for 21,000,000 post- forward split shares of
restricted common stock of the Company. AA then became a wholly-owned subsidiary
of the Company.
The acquisition of AA, on September 29, 2001, by the Company effected a
change in control and was accounted for as a "reverse acquisition" whereby AA is
the accounting acquiror for financial statement purposes. Accordingly, for all
periods subsequent to the September 29, 2001 change in control transaction, the
financial statements of the Company reflect the historical financial statements
of AA from its inception on October 4, 1983 and the operations of the Company
subsequent to September 29, 2001.
Concurrent with the September 29, 2001 reverse acquisition transaction, the
Company amended its Articles of Incorporation to change the Company's name to
American Ammunition, Inc. and modified the Company's capital structure to allow
for the issuance of up to 320,000,000 total equity shares consisting of
20,000,000 shares of preferred stock and 300,000,000 shares of common stock.
Both classes of stock have a par value of $0.001 per share.
On October 9, 2001, the Company effected a three (3) for one (1) forward
stock split. This action caused the then issued and outstanding shares to
increase from 2,990,400 to 8,971,200 on the action date. The effect of this
action is reflected in the accompanying financial statements as of the first day
of the first period presented.
AA was incorporated on October 4, 1983 under the laws of the State of
Florida. The Company was formed to engage principally in the "import, export,
retail & wholesale of firearms equipment, ammunition & other devices and for the
purpose of transacting any and/or all lawful business."
The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended (the "Act") and Rule 506 of Regulation D promulgated thereunder ("Rule
506") for recent issuances of its unregistered securities. In each instance,
such reliance was based upon the fact that (i) the issuance of the shares did
not involve a public offering, (ii) there were no more than thirty-five (35)
investors (excluding "accredited investors"), (iii) each investor who was not an
accredited investor either alone or with his purchaser representative(s) has
such knowledge and experience in financial and business matters that he is
capable of evaluating the merits and risks of the prospective investment, or the
issuer reasonably believes immediately prior to making any sale that such
purchaser comes within this description, (iv) the offers and sales were made in
compliance with Rules 501 and 502, (v) the
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securities were subject to Rule 144 limitations on resale and (vi) each of the
parties was a sophisticated purchaser and had full access to the information on
the Company necessary to make an informed investment decision by virtue of the
due diligence conducted by the purchaser or available to the purchaser prior to
the transaction (the "506 Exemption").
In March and May 2001, the Company issued an aggregate 496,200 post-reverse
split shares (165,400 pre-forward split shares) of common stock, pursuant to a
Registration Statement on Form SB-2, to various individuals providing
investment, financial and acquisition consulting services to the Company. These
transactions were cumulatively valued at approximately $165,400, which
approximates the "fair value" of the services provided. These amounts are
charged to operations in the accompanying pre-acquisition consolidated financial
statements.
In September 2001, the Company issued 2,625,000 post-reverse split shares
(875,000 pre- forward split shares) of common stock, pursuant to a Registration
Statement on Form SB-2, to six individuals providing investment and financial
consulting services to the Company. These transactions were cumulatively valued
at approximately $875,000, which approximates the "fair value" of the services
provided. These amounts are charged to operations in the accompanying pre-
acquisition consolidated financial statements.
In September 2001 the Company issued 21,000,000 shares of its common stock
to nineteen (19) shareholders of AA pursuant to a share exchange agreement. The
shares were valued at $3,998,650. The transaction resulted in AA becoming a
wholly owned subsidiary of the Company in a transaction that was treated as a
reverse merger for accounting purposes. Of such shares, the current officers and
directors of the Company were issued a total of 15,750,000 shares. For such
offering the Company relied upon the 506 Exemption.
In September and October 2001, the Company issued 222,600 shares of $5.00
Series A Convertible Preferred Stock valued at $1,113,000 through an ongoing
private placement. The Series A Convertible Preferred Stock provides for
cumulative dividends at a rate of 8% per year, payable quarterly, in cash or
shares of the Company's common stock at the Company's election. Each share of
Series A Convertible Preferred Stock is convertible into 11 shares of the
Company's common stock at any time after 6 months after the date of issuance and
prior to notice of redemption at the option of the holder, subject to
adjustments for customary anti-dilution events (the "Series A Convertible
Preferred Stock"). Of such shares, the Robert I. Escobio Family Trust acquired
2,000 shares. Mr. Escobio is a former director of the Company. For such
offering, the Company relied upon the 506 Exemption. All investors were
accredited.
In September 2001, a creditor, Key Packaging Company, agreed to convert
$10,000 of debt due from the Company into 2,000 shares of Series A Convertible
Preferred stock. For such offering, the Company relied upon the 506 Exemption.
In September 2001, a principal shareholder, Andres Fernandez, converted
$7,553,600 of unsecured debt due to him by the Company into 1,510,720 shares of
Series A Convertible Preferred Stock. Mr. Fernandez is a current officer and
director of the Company. For such offering, the Company relied upon the 506
Exemption.
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In December 2001, the Company issued 222,222 shares of its restricted
common stock to Forus Investments, Inc. ("Forus") in exchange for cancellation
of a debt by the Company in favor of Forus in the amount of $100,000. In March
2002, the Company issued an additional 277,777 shares of its restricted common
stock to Forus in exchange for cancellation of the remaining $100,000 principal
and $25,000 interest outstanding, thereby satisfying the note in full. For such
offering, the Company relied upon the 506 Exemption.
In December 2001, the Company issued 535,272 shares of its restricted
common stock to Olin Corporation ("Olin") in exchange for cancellation of a debt
by the Company in favor of Olin in the amount of $242,872.40. For such offering,
the Company relied upon the 506 Exemption.
See (b) "Business of Registrant" immediately below for a description of the
Company's business.
Business of Registrant
General
The Company changed its name to American Ammunition, Inc. on September 26,
2001 and currently is quoted on the OTC-BB under the symbol "AAMI".
On September 29, 2001, the Company entered into a Share Exchange Agreement
with AA whereby 100% of the shares of AA were acquired by the Company in
exchange for shares of the Company's common stock. A new Board of Directors
consisting of AA directors took control of the Company. AA is the sole operating
subsidiary of the Company after the effective date of the Share Exchange
Agreement.
The Company's principal executive offices are located at 3545 NW 71st
Street, Miami, Florida 33147; and its telephone number is (305) 835-7400.
The Company had minimal operations until September 2001 when it acquired AA
and since such acquisition is engaged principally in the manufacture and sale of
ammunition for retail and wholesale sales. American Ammo is an established small
arms munitions manufacturer with an existing distribution network. The
ammunition market is dominated by three major manufacturers; however, the
Company is poised to enter and impact the growing ammunition market with its
technologically advanced manufacturing equipment and techniques. The Company is
an approved Department of Defense contractor.
The Company began as an assembler and re-loader of ammunition in several
calibers. As the Company grew, management realized that the only way to break
into the industry was to become a vertically integrated manufacturer. Its
founders then invested heavily in research and development, equipment, and
technology and focused on increasing its market share. As a result, the Company
continued manufacturing its initial calibers along with special order ammunition
for the Department of Defense. Further streamlining of the operations resulted
in the manufacture of the current ammunition product line: 9mm, .45auto,
..380auto, .32auto, .40S&W, 38Spl, and 30carbine. Management has identified these
products as having the largest share of the market for the next several years.
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The Company's Equipment and Production Line Capabilities
American Ammo owns all the equipment necessary to take the raw material
from cup, lead, primer and powder, to the finished product - a finished, loaded
round. The process of manufacturing diverse calibers of ammunition is extremely
complex and requires tolerances of +/- .0005" to be maintained throughout the
process.
The Company's technology and the equipment enable it to produce a large
variety of handgun and rifle ammunition. American Ammo has a state of the art
machine shop and maintains its own testing and quality assurance equipment and
program. Ammunition is a performance - based product. Therefore, after the
manufacturing process is complete, the ammunition must comply with specific
protocols such as velocity, accuracy, and pressure. The Company purchases raw
materials in bulk and strives to take advantage of prepayment discounts to
produce significant savings in the manufacturing process. There are and have
been instances when discounts have been and may be missed due to cash flow
restrictions.
The Company is evaluating the addition of several products to its existing
production lines, including the addition of high speed projectile forming
machines to supplement the existing casting machines. This addition would
effectively double or triple projectile production capacity, while improving
projectile quality and performance. The Company also is making provisions to
increase other aspects of production capacity which would complement long term
goals of both production volume and product diversity.
On October 26, 2000, the Company's equipment and production lines were
appraised at $17,000,000.00 as the Fair Market Value, In-Place, In-Use for the
seven bullet manufacturing lines, machine shop and support equipment by Arnold
Stewart, ASA, 5761 NW 3th Avenue, Miami, Florida 33142. Such production includes
the metallurgical process of case making.
Business Strategy
American Ammo is an autonomous manufacturer of ammunition, with the
technology and equipment to take advantage of the growing market. It has
developed what it believes is an excellent reputation within the industry.
The barrier to entry into the ammunition market is extremely high; however,
American Ammo is an established small arms munitions manufacturer, with an
existing distribution network. The Company manufactures its ammunition by
creating most of the components itself. Its manufacturing equipment and
techniques are technologically advanced and the Company is poised to enter and
impact what it perceives as a growing market.
In management's opinion, the ammunition market has grown each year and it
appears that supply is not keeping up with demand, thus allowing for companies
like American Ammo to make a significant impact in sales through distributors in
commercial markets and in addition sales to government agencies, the military
and exports. American Ammo has been seeking additional capital
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to allow it to enlarge its operations to take advantage of its technological
capacities, equipment and the existing marketplace.
Marketing and Sales Distribution
American Ammo currently has agreements with sixteen (16) national
distributors throughout the United States to diversify its sales base. Ellett
Brothers, Inc. accounts for thirty-two percent (32%) and fifty-one percent (51%)
of the Company's total sales for fiscal year 2000 and 2001, respectively. The
Company plans to continue to aggressively pursue new customers through
promotions, advertising and trade shows. It intends to solicit original
equipment manufacturer subcontract work from the three (3) major manufacturers;
seek additional means of commercial distribution; seek further Department of
Defense and Law Enforcement contracts; solicit further Export sales; and
increase its dealings with Mass Merchandisers/Chain stores.
American Ammo has been certified by the United States Small Business
Administration as a "qualified HUBZone small business concern." Under this
program , small businesses can qualify for special set-aside contracts, get up
to a 10% edge in competitive contract bidding or even be the sole-source bidder
in some cases. The program's name signifies the effort to promote businesses in
"historically under-utilized business zones," generally blighted areas and its
purpose is to create jobs for those who live in such areas as well.
The Company also is aggressively marketing its unique manufacturing
flexibility to numerous DOD and commercial munitions manufacturers as
subcontractors allowing prime contractors to reap the benefits of its "HUBZone
certification", thereby allowing such prime contractors to comply with FAR
requirements for the use of "small and under-utilized minority business" in
fulfilling government contracts.
The Small Business Reauthorization Act of 1997 increased the overall
government agencies' procurement goals for small business to 23% and calls for
HUBZone contracts to increase from 1.5% of these procurements to 3% by 2003.
Pricing and Value
The Company strives to price its products competitively at a price lower
than any of the "big three" manufacturers (Remington, Federal, and Winchester).
The Company capitalizes on the fact that the "big three" have very large
corporate infrastructures and, in management's opinion, have to pay much higher
labor costs to their plant personnel. This pricing strategy permits the
distributor to purchase the Company's product, add a significant profit and sell
such product at a retail price that is lower than that at which the distributor
can purchase the competitors' product. The Company believes that this strategy
can have a significant impact on the market and increase the Company's market
share.
Advertising & Promotion
American Ammo intends to gear its advertising towards magazine and print
media, focused on the gun and ammo, handgun and shooting markets. It is believed
that such advertising will result
7
in greater name recognition among individual consumers. Currently, the Company's
sales are generated with very little advertising and it is believed that such
advertising could significantly improve retail/mass merchandiser sales and
increase market share.
Status of Publicly Announced Products and Services
Aircraft Bullet
The Company was assigned a serial number (60/325,046) from the U.S. Patent
and Trademark Office for its provisional patent application filed on September
26, 2001 for a bullet that will not pierce an aircraft fuselage but will
penetrate human soft tissue. The product has been specifically designed for use
inside the cabin of a commercial aircraft; however, it has additional
applications for use in nuclear power plants, at hazardous materials storage
facilities, and for home defense.
The Company departed completely from standard ballistics for the design of
this projectile to meet what American Ammo perceives as a growing and unfilled
need. Two of the basic design criteria in ballistics are penetration and
expansion of the projectile. In this design, these two factors have been
controlled to meet the specific requirements of weapons discharged inside an
aircraft cabin, while insuring fuselage integrity. This design is a new concept
in close quarter ammunition: a bullet capable of incapacitating an assailant
without damaging surrounding structure.
Design and material selection allows for the inverted expansion and aft
internal collapse of the projectile mass. Upon impact with the aircraft
fuselage, the bullet (projectile) internally collapses; therefore not allowing
for the transfer of kinetic energy forward or penetration above that required
for soft tissue penetration. Testing has been successful using test sections of
various commercial airliner fuselages as well as ballistic testing using both
ordinance gelatin and bovine tissue. This performance criterion is accomplished
without sacrificing the standard velocity and accuracy of the caliber being
used. A video of those tests can be viewed on the Company's website at
www.a-merc.com in the New Product Section. The Company believes that these
research and development efforts will provide a new product to the public safety
and security marketplace.
Competition
The Company faces competition from large, well-established companies with
considerably greater financial, marketing, sales and technical resources than
those available to the Company. Additionally, many of the Company's present and
potential competitors have capabilities that may allow such competitors to offer
its products at prices which may compete with the Company's products. The
Company's products could be made uneconomical by the introduction of new
products, changes affecting the cost of packaging and shipping, or marketing or
pricing actions by one or more of the Company's competitors. The Company's
business, financial condition or results of operations could be materially
adversely affected by one or more of such developments. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors or that competition will not have an material adverse
effect on the Company's business, financial condition or results of operations.
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The market for small arms ammunition is becoming increasingly competitive.
Companies such as Remington, Federal and Winchester are all better equipped,
more experienced and better financed than the Company.
For years the large manufacturers have supplied the component parts of the
manufacturing process to smaller companies to assemble and distribute. A company
making its own components, can produce and market a quality lower cost product.
This concept, coupled with technology and progressive and environmentally sound
manufacturing practices (i.e. cans and recycled plastic packaging), has resulted
in a quality, affordable product reaching the marketplace.
The U.S. Market for Firearms and Ammunition, Economic Analysis of Markets,
Manufacturers and Importers states that, "In 1999 sales for small arms and
handgun ammunition exceeded $10 billion. Only five (5) companies in the United
States shared 90% of the market. They include Olin Corporation's Winchester
Ammunition Division, Remington Arms and Federal Cartridge Company, Blount and
American Ammo."
The Company believes it is feasible to increase its production capacity by
50% to 100% over the next 3 years utilizing existing equipment by increasing
only labor, material and other incidental costs. Management bases this
prediction on the fact that the Company had reduced sales in fiscal 2001 due to
a lack of funding. The Company has already received significant bank and private
placement funding in fiscal 2002 (as of the date of this report) to ramp up
operations thereby significantly increasing its presence in the market.
The U.S. Market for Firearms and Ammunition, Economic Analysis of Markets,
Manufacturers and Importers states that, "Domestic consumption of commercial
ammunition exhibited strong growth rates between 1991 and 1996, much in the same
manner as the products in which they are used. In 1998 the United States Federal
Government purchased $1,687,658,000; U.S. Exports of small arms ammunition were
$1,618,000,000 and U.S. commercial consumption totaled $758,000,000."
Sources and Availability of Raw Materials
The Company manufactures its ammunition by creating most of the components
itself. The materials needed to produce the Company's ammunition products are
widely available from numerous third parties. No shortage of materials is
expected in the foreseeable future.
Dependence on one or few customers
The Company currently has agreements with sixteen national distributors
throughout the United States to diversify its sales base and plans to continue
to aggressively pursue new customers through promotions, advertising and trade
shows. It intends to solicit original equipment manufacturer subcontract work
from the three major manufacturers; seek additional means of commercial
distribution; seek further Department of Defense and Law Enforcement contracts;
solicit further Export sales; and increase its dealings with Mass
Merchandisers/Chain stores.
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Research and Development
The Company believes that research and development is an important factor
in its future growth. The small arms ammunition industry is closely linked to
the latest technological advances. Therefore, the Company must continually
invest in the technology to provide the best quality product to the public and
to effectively compete with other companies in the industry. No assurance can be
made that the Company will have sufficient funds to purchase technological
advances as they become available.
Patents, Copyrights and Trademarks
The Company intends to protect its original intellectual property with
patents, copyrights and/or trademarks as appropriate.
The Company's headstamp "A-MERC " was registered as a trademark on May
10,1994.
The Company was assigned a serial number (60/325,046) from the U.S. Patent
and Trademark Office for its provisional patent application filed on September
26, 2001 for a bullet that will not pierce an aircraft fuselage but will
penetrate human soft tissue.
Governmental Regulation
In accordance with the provisions of Title 1, Gun Control Act of 1968, and
the regulations issued thereunder [27 CFR Part 178], the Company is required to
be licensed to engage in the importing of firearms other than destructive
devices and as the manufacturer of ammunition for firearms. Such licensing is
subject to limitations in Chapter 44, Title 18, United States Code and the
regulations issued thereunder.
In accordance with these requirements, the Company carries two licenses
issued by the Department of Treasury, Bureau of Alcohol, Tobacco and Firearms:
License No. 1-59-025-06-3D 69152 for "06 - Manufacturer of Ammunition for
Firearms", which license expires on April 1, 2003; and
License No. 1-59-025-08-3D-69454 for "08-Importer of Firearm other than
Destructive Devices", which license expires on April 1, 2003.
In the event such licenses were not renewed for any reason, the Company
would be precluded from continuing its operations.
The Company is not aware of any other license requirements or government
regulation at a state or federal level specific to their business and believes
that it in full compliance with its existing licenses.
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Effect of Probable Governmental Regulation on the Business
The Company is not aware of any pending legislation at either the state or
federal level that would change the requirements under which it is licensed and
is not aware of any reason why the existing licenses cannot be renewed at their
expiration dates. There can be no assurance that legislation will not be
proposed and enacted at some time in the future that would preclude the Company
from continuing its operations. Should such legislation be enacted, and should
the Company be precluded from continuing its operations, it would have a
materially adverse effect upon the Company's business and future.
Cost and Effects of Compliance with Environmental Laws
As a manufacturer, the Company is subject to general local, state and
federal regulations governing environmental concerns. Management believes that
the Company has always been and continues to be in compliance with all such
laws.
Special precautions have been taken by the Company to ensure that adequate
ventilation exists for the portion of the Company's operations that utilize lead
and/or brass. Additionally, the Company's gunpowder supply is humidity and
temperature controlled in a secure facility.
Employees
At December 31, 2001, the Company employed thirty-seven (37) persons. None
of these employees are represented by a labor union for purposes of collective
bargaining. The Company considers its relations with its employees to be
excellent. The Company may employ additional personnel, as necessary, to
accommodate future sales and production requirements.
Item 2. Description of Property
The Company maintains its executive offices at 3545 NW 71st Street, Miami,
FL 33147. Its telephone number is (305) 835-7400 and its facsimile number is
(305) 694-0037.
The Company leases 24,000 square feet of warehouse space, owned by the
family of one of its officers and directors, Andres Fernandez, at a rate of
$3,931 per month plus applicable sales taxes. This equates to a rate per square
for of $2.71 per year. Management believes comparable rentals in the area
average about $4.50 per square foot. The Company is operating under a five-year
lease agreement expiring on October 31, 2003 that contains a clause that the
lease may be renewed for an additional ten (10) year period upon written
notification to the lessor no later than 120 days prior to the scheduled
expiration date at a rental rate based upon the fair market value for similar
space in a similar location at the time of renewal. This facility is used as the
Company's production facility and headquarters.
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Item 3. Legal Proceedings
The Company is not a party to any pending litigation at this time nor is
any of its property subject to any pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II
Item 5. Market for Common Equity and Related Stockholder Matters.
a) Market Information.
The common stock of the Company currently is quoted on the Over the Counter
Bulletin Board under the symbol "AAMI" and has been since October 23, 2001.
Prior to that time, it was approved for trading under symbol "FBIB," although it
never traded under that symbol. The ask/high and bid/low information for each
quarter since October 23, 2001 are as follows:
Quarter Ask/High Bid/Low
--------------------- -------- --------
09/01/2001-12/31/2001 1.75 0.53
Please note that over-the-counter market quotations have been provided
herein. The quotations reflect inter-dealer prices, without retail markup,
mark-down or commission and may not represent actual transactions.
(b) Holders.
As of December 31, 2001 the Company had fifty-two (52) shareholders of
record of its 26,850,000 outstanding shares of common stock, 23,728,800 of which
are restricted Rule 144 shares and 3,121,200 of which are free-trading. Of the
Rule 144 shares, 0 shares have been held by affiliates of the Company for more
than one (1) year.
(c) Dividends.
The Company has never paid or declared any dividends on its common stock
and does not anticipate paying cash dividends in the foreseeable future.
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Item 6. Management's Discussion and Analysis
(a) Caution Regarding Forward-Looking Information
Certain statements contained in this annual filing, including, without
limitation, statements containing the words "believes", "anticipates", "expects"
and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
Such factors include, among others, the following: international, national
and local general economic and market conditions: demographic changes; the
ability of the Company to sustain, manage or forecast its growth; the ability of
the Company to successfully make and integrate acquisitions; raw material costs
and availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Form 10-KSB and investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
(b) Summary
American Ammunition, Inc. (AAI or Company) was incorporated on February 1,
2000 in the State of California as FirsTelevision.com. AAI subsequently changed
its corporate name to FBI Fresh Burgers International with a business plan of
marketing the concept of a national "fast food" restaurant chain to children and
young adults, with a menu of fresh burgers, fries and sandwiches. However, there
was no assurance that this business concept would be successful.
On September 29, 2001, the Company, F&F Equipment, Inc. (F&F) and the
individual shareholders of F&F entered into an "Agreement For The Exchange Of
Common Stock" (Exchange Agreement) whereby the shareholders of F&F exchanged
100.0% of the issued and outstanding stock of F&F for 21,000,000 post-forward
split shares of restricted, unregistered common stock of the Company. F&F
Equipment, Inc. then became a wholly-owned subsidiary of the Company.
The acquisition of F&F Equipment, Inc., on September 29, 2001, by the
Company effected a change in control and was accounted for as a "reverse
acquisition" whereby F&F Equipment, Inc. is the accounting acquiror for
financial statement purposes. Accordingly, for all periods subsequent to the
September 29, 2001 change in control transaction, the financial statements of
the Company reflect the historical financial statements of F&F Equipment, Inc.
from its inception on October 4, 1983 and the operations of the Company
subsequent to September 29, 2001.
Concurrent with the September 29, 2001 reverse acquisition transaction, the
Company amended its Articles of Incorporation to change the Company's name to
American Ammunition, Inc. and modified the Company's capital structure to allow
for the issuance of up to 320,000,000 total equity shares consisting of
20,000,000 shares of preferred stock and 300,000,000 shares of common stock.
Both classes of stock have a par value of $0.001 per share.
13
On October 9, 2001, the Company effected a three (3) for one (1) forward
stock split. This action caused the then issued and outstanding shares to
increase from 2,990,400 to 8,971,200 on the action date. The effect of this
action is reflected in the accompanying financial statements as of the first day
of the first period presented.
F&F Equipment, Inc.(Company) was incorporated on October 4, 1983 under the
laws of the State of Florida. The Company was formed to engage principally in
the "import, export, retail & wholesale of firearms equipment, ammunition &
other devices and for the purpose of transacting any and/or all lawful
business." The Company conducts its business operations under the assumed name
of "American Ammunition".
The Company and its subsidiary have a year-end of December 31 and uses the
accrual method of accounting.
All discussions in this section pertain to the historical operations of F&F
Equipment, Inc. as the accounting successor to the September
(c) Results of Operations
Year ended December 31, 2001 compared to Year ended December 31, 2000
The Company's operations were hampered during 2001 as a result of on-going
litigation between the Company and it's financial lending institution. As the
Company was unable to access credit lines for working capital, it was unable to
offer selling terms comparable to its competitors and, accordingly, experienced
a significant reduction in sales from prior years. This litigation was settled
during June 2001 and the Company negotiated a new working capital note with a
different financial institution which provided liquidity for the remainder of
2001.
During the year ended December 31, 2001, the Company experienced revenues
of approximately $428,000 as compared to approximately $1,716,000 for the year
ended December 31, 2000.
The Company experienced costs of goods sold of approximately $1,629,000 and
$2,026,000 for the years ended December 31, 2001 and 2000, respectively. The
Company experiences variable costs in the area of material consumption and
direct labor. The Company has recognized depreciation expense on production
equipment of approximately $629,000 and $617,000, respectively, in the above
cost of goods expense totals. These depreciation levels are anticipated to
remain fairly constant for future periods unless the Company is successful in
its plans to expand production.
Due to the lack of liquidity, the Company has been unable to reach its
break-even point. This situation has generated a negative gross profit of
approximately ($1,201,000), or (280.97%) for the year ended December 31, 2001
and approximately ($310,000), or (18.07%). The Company anticipates that with
adequate liquidity, it will be able to generate a positive gross profit during
Calendar 2002.
14
The Company experiences relatively consistent expenditure levels for
executive and administrative compensation, interest expense and depreciation
expense. The Company renegotiated its working capital note payable in June 2001.
This note bears interest at the Wall Street Journal published prime rate plus
2.0%. The new note has payment terms as follows: For the first year (through
June 28, 2002), interest only, payable monthly. Thereafter, starting on July 28,
2002, equal monthly payments of principal and interest shall be due until June
28, 2007 which payments shall represent the amount necessary to fully amortize
the remaining principal balance of the note. The monthly payments shall be
recalculated at the time of any change in the applicable interest rate. The note
is secured by virtually all of the Company's real and personal property. A
portion of the proceeds from the financing were used to pay the $550,000
required in the Settlement and Compromise Agreement. Accordingly, the Company
anticipates relatively stable interest expense, or declining levels, in future
periods depending on expansion and additional equipment financing requirements.
The Company does not anticipate the addition of significant additions to office
and administrative personnel.
The Company experienced nominal research and development expenses during
2001 related to the development of a new patent-pending projectile for use in
ammunition specifically for the public safety and security marketplace,
especially in the rapidly expanding U. S. Air Marshall program.
Due to the lack of liquidity in 2001 and prior years, the Company has not
developed an extensive marketing effort. Accordingly, expenditures in this area
have been nominal. Due to improved liquidity during the last 1/2 of 2001 and for
future periods, the Company anticipates, as internally generated funds are
available, to increase its marketing efforts to boost sales.
Other general and administrative expenses increased from approximately
$87,000 during Calendar 2000 to approximately $535,000 during Calendar 2001. The
majority of this increase was a result of professional and consulting fees
related to the Company's reverse acquisition transaction in September 2001, and
includes approximately $415,000 for non-cash charges related to fees and
services charged to operations which were paid with common stock.
The Company also experienced non-cash income (charges) to operations
resulting from a one-time gain of approximately $755,000 for the settlement of
the litigation with its former lending institution and approximately ($392,000)
in amortization of a beneficial conversion feature discount on preferred stock
with an equivalent post-conversion common stock price at an amount less than the
quoted closing market price of the Company's common stock as of the sale date of
the underlying convertible preferred stock.
The Company recognized a net loss of approximately $(2,212,000) and
$(1,216,000) for the years ended December 31, 2001 and 2000, respectively, or
$(0.08) and $(0.05) per share.
15
Year ended December 31, 2000 compared to Year ended December 31, 1999
During Calendar 2000, the Company began to incur liquidity problems as a
result of actions taken by its-then lending institution. The actions taken by
the lending institution led to litigation being filed by the Company against the
lending institution. The result of these problems was responsible for the
Company's revenues declining from approximately $2,914,000 in Calendar 1999 to
approximately $1,716,000 Calendar 2000.
The Company experienced costs of goods sold of approximately $2,026,000 and
$2,780,000 for the years ended December 31, 2000 and 1999, respectively. The
Company experiences variable costs in the area of material consumption and
direct labor. The Company has recognized depreciation expense on production
equipment of approximately $617,000 and $591,000, respectively, in the above
cost of goods expense totals. These depreciation levels are anticipated to
remain fairly constant for future periods unless the Company is successful in
its plans to expand production.
Due to the lack of liquidity, the Company has been unable to reach its
break-even point. This situation has generated a negative gross profit of
approximately $(310,000), or (18.07%) for the year ended December 31, 2001 and
approximately $106,000, or 3.64%.
The Company experiences relatively consistent expenditure levels for
executive and administrative compensation, interest expense and depreciation
expense. Interest expense during Calendar 1999 and 2000, respectively, was
related to various long-term capital leases for equipment and various debt
instruments which were cancelled in June 2001 as a result of aforementioned
litigation. The Company does not anticipate the addition of significant
additions to office and administrative personnel.
Due to the lack of liquidity in 2001 and prior years, the Company has not
developed an extensive marketing effort. Accordingly, expenditures in this area
have been nominal. Other general and administrative expenses declined during
Calendar 2000 from approximately $237,000 in Calendar 1999 to approximately
$87,000 during Calendar 2000.
The Company recognized a net loss of approximately $(1,216,000) and
$(862,000) for the years ended December 31, 2001 and 2000, respectively, or
$(0.05) and $(0.03) per share.
(d) Liquidity and Capital Resources
As of December 31, 2001, 2000 and 1999, respectively, the Company had
working capital of approximately $341,000, $(8,877,760) and $(7,956,000). The
Company's working capital position improved significantly in Calendar 2001 with
the settlement of litigation involving its outstanding debt to its-then
financial institution and the concurrent restructuring of working capital debt
into a long-term instrument.
The Company has generated (used) cash in operating activities of
approximately $(1,100,000), $18,000 and $405,000 during the years ended December
31, 2001, 2000 and 1999. The cash used in operating activities during 2001 was
offset with cash received in the sale of Class A Convertible Preferred Stock or
Common Stock. The Company anticipates that its improved liquidity position
during the last half of Calendar 2001 will allow for improved sales and,
accordingly, improved liquidity in future periods.
16
The Company has plans to increase its production capability in the
immediate future by 50% to 100%. Accordingly, this expansion will require
additional capital which is anticipated to be raised in various combinations of
capital leases, bank debt and/or equity offerings. At this time, the Company has
no definitive budgets or timetables for such expansion and this expansion, if
any, will be dependent upon market demand for the Company's products. Management
is of the opinion that sufficient demand will be present, as supported by new
product development and increased product marketing efforts, to justify this
expansion. However, there can be no assurance that the Company will be able to
obtain additional funding or, that such funding, if available, will be obtained
on terms favorable to or affordable by the Company.
(e) Product Research and Development
The Company believes that research and development activities will allow
for the development and introduction of new products into the ammunition
marketplace. Over the next 12 calendar months, the Company anticipates
completing the design, development and introduction of its new patent-pending
projectile for use in ammunition specifically for the public safety and security
marketplace, especially in the rapidly expanding U. S. Air Marshall program.
Management also believes that this projectile will have wide acceptance in the
home security and sport hunting markets.
Further, additional ammunition calibers and/or projectiles may be developed
by the Company depending upon market research, acceptance in the marketplace of
existing products and production capabilities. At this time, there are no
definitive plans for the further introduction of other new products into the
marketplace.
Item 7. Financial Statements
The required consolidated financial statements begin on page F-1 of this
document.
17
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
Consolidated Financial Statements
and
Independent Auditor's Report
December 31, 2001 and 2000
\
S. W. HATFIELD, CPA
certified public accountants
Use our past to assist your future sm
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
CONTENTS
Page
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Consolidated Balance Sheets
as of December 31, 2001 and 2000 (post-acquisition)
and December 31, 2000 (pre-acquisition) F-3
Consolidated Statement of Operations and Comprehensive Loss
for the years ended December 31 2001 and 2000 (post-acquisition) and
the period from February 1, 2000 (date of incorporation) through
December 31, 2000 (pre-acquisition) F-5
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 2001 and 2000 (post-acquisition) and
the period from February 1, 2000 (date of incorporation) through
December 31, 2000 (pre-acquisition) F-6
Consolidated Statement of Cash Flows
for the years ended December 31, 2001 and 2000 (post-acquisition) and
the period from February 1, 2000 (date of incorporation) through
December 31, 2000 (pre-acquisition) F-8
Notes to Consolidated Financial Statements F-10
S. W. HATFIELD, CPA
certified public accountants
Member: Texas Society of Certified Public Accountants
Press Club of Dallas
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
American Ammunition, Inc.
(formerly FBI Fresh Burgers International)
We have audited the accompanying consolidated balance sheets of American
Ammunition, Inc. (formerly FBI Fresh Burgers International) (a California
corporation) as of December 31, 2001 and 2000 (post-acquisition) and December
31, 2000 (pre-acquisition) and the related consolidated statements of operations
and comprehensive loss, changes in stockholders' equity and cash flows for each
of the two years ended December 31, 2001 and 2000 (post- acquisition) and the
period from February 1, 2000 (date of incorporation) through December 31, 2000
(pre- acquisition). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Ammunition,
Inc. (formerly FBI Fresh Burgers International, Inc) as of December 31, 2001 and
2000 (post-acquisition) and December 31, 2000 (pre-acquisition) and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the two years ended December 31, 2001 and 2000
(post-acquisition) and for the period from February 1, 2000 (date of
incorporation) through December 31, 2000 (pre-acquisition), in conformity with
generally accepted accounting principles generally accepted in the United States
of America.
S. W. HATFIELD, CPA
Dallas, Texas
March 12, 2002
Use our past to assist your future sm
(secure mailing address) (overnight delivery/shipping address)
P. O. Box 820395 9002 Green Oaks Circle, 2nd Floor
Dallas, Texas 75382-0395 Dallas, Texas 75243-7212
214-342-9635 (voice) (fax) 214-342-9601
800-244-0639 SWHCPA@aol.com
F-2
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(post-acquisition)(post-acquisition)(pre-acquisition)
December 31, December 31, December 31,
2001 2000 2000
-----------------------------------------------------
ASSETS
Current Assets
Cash on hand and in bank $ 596,419 $ 858 $ -
Accounts receivable - trade, net of
factored accounts of approximately
$-0- and $10,070 and allowance for
doubtful accounts of $-0- and $-0-, respectively - 60,415 -
Inventory 314,741 333,410 -
Prepaid expenses 9,458 - -
------------ -------------- ------------
Total Current Assets 920,618 394,683 -
------------ -------------- ------------
Property and Equipment - at cost or contributed value
Manufacturing equipment 6,470,064 6,365,802 -
Office furniture and fixtures 50,856 49,699 -
Leasehold improvements 182,052 181,814 -
------------ -------------- ------------
6,702,972 6,597,315 -
Accumulated depreciation (2,737,717) (2,097,881) -
------------ -------------- ------------
Net Property and Equipment 3,965,255 4,499,434 -
------------ -------------- ------------
Other Assets
Loan costs, net of accumulated amortization of
approximately $69,334, $23,778 and $-0-, respectively - 45,556 -
Investment in acquisition candidate - - 21,000
Deposits and other 74,310 59,712 -
------------ -------------- ------------
Total Other Assets 74,310 105,268 21,000
------------ -------------- ------------
TOTAL ASSETS $ 4,960,183 $ 4,999,385 $ 21,000
============ ============== ============
- Continued -
F-3
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, 2001 and 2000
(post-acquisition)(post-acquisition)(pre-acquisition)
December 31, December 31, December 31,
2001 2000 2000
-----------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Cash overdraft $ - $ 73,234 $ -
Notes payable to a bank - 1,143,381 -
Current maturities of leases payable 8,365 28,409 -
Accounts payable - trade 461,902 684,674 -
Accrued excise taxes payable 8,641 27,380 -
Accrued interest payable 1,000 3,308,038 -
Note payable to stockholder 100,000 4,007,327 -
------------ -------------- ------------
Total Current Liabilities 579,908 9,272,443 -
Long-Term Liabilities
Note payable to a bank 950,000 - -
Capital leases payable 17,348 79,875 -
------------ -------------- ------------
Total Liabilities 1,547,256 9,352,318 -
------------ -------------- ------------
Commitments and Contingencies
Mandatory Convertible Preferred Stock
45,600 shares issued and outstanding 228,000 - -
------------ -------------- ------------
Stockholders' Equity
Preferred stock - $0.001 par value
20,000,000 shares authorized.
1,795,320 shares allocated to Series A - - -
Common stock - $0.001 par value.
300,000,000 shares authorized.
49,975,614, 26,850,000 and 26,850,000
shares issued and outstanding 49,976 26,850 26,850
Additional paid-in capital 14,700,771 4,974,150 (3,900)
Accumulated deficit (11,565,820) (9,353,933) (1,950)
------------ -------------- ------------
Total Stockholders' Equity 3,184,927 (4,352,933) 21,000
------------ -------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,960,183 $ 4,999,385 $ 21,000
============ ============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Years ended December 31, 2001 and 2000 (post-acquisition)
and Period from February 1, 2000 (date of incorporation)
through December 31, 2000 (pre-acquisition)
(post-acquisition) (post-acquisition) (pre-acquisition)
Period from
February 1, 2000
Year ended Year ended through
December 31, December 31, December 31,
2001 2000 2000
-------------------------------------------------------
Revenues $ 427,529 $ 1,715,885 $ -
---------------- ---------------- ----------------
Cost of Sales
Materials 357,399 1,158,662 -
Direct Labor 260,012 210,707 -
Other direct costs and expenses 382,407 39,633 -
Depreciation 628,925 616,982 -
---------------- ---------------- ----------------
Total Cost of Sales 1,628,743 2,025,984 -
---------------- ---------------- ----------------
Gross Profit (1,201,214) (310,099) -
---------------- ---------------- ----------------
Operating Expenses
Research and development expenses 3,963 - -
Marketing and promotion expenses 4,043 4,609 -
Salaries, wages and related expenses 365,079 363,265 -
Other operating expenses 535,450 86,901 1,950
Interest expense 453,943 438,226
Depreciation expense 10,911 12,769 -
---------------- ---------------- ----------------
Total Operating Expenses 1,373,389 905,770 1,950
---------------- ---------------- ----------------
Loss from Operations (2,574,603) (1,215,869) (1,950)
Other Income (Expense)
Settlement of litigation 754,830 - -
Amortization of Beneficial Conversion
Feature Discount on Preferred Stock (392,114) - -
---------------- ---------------- ----------------
Loss before Income Taxes (2,211,887) (1,215,869) (1,950)
Provision for Income Taxes - - -
---------------- ---------------- ----------------
Net Loss (2,211,887) (1,215,869) (1,950)
Other Comprehensive Income - - -
---------------- ---------------- ----------------
Comprehensive Loss $ (2,211,887) $ (1,215,869) $ (1,950)
================ ================ ================
Loss per weighted-average share of common
stock outstanding, computed on net loss -
basic and fully diluted $ (0.08) $ (0.05) nil
================ ================ ================
Weighted-average number of
common shares outstanding 28,019,722 26,850,000 5,850,000
================ ================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2001 and 2000 (post-acquisition)
and Period from February 1, 2000 (date of incorporation)
through December 31, 2000 (pre-acquisition)
Mandatory Convertible
Preferred Stock Common Stock Additional
--------------------- ------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
-------------------------------------------------------------------------------------
Stock issued to founders
at formation - $ - 1,810,000 $ 1,810 $ - $ - $ 1,810
Effect of 3 for 1 forward split - - 3,620,000 3,620 (3,620) - -
Stock issued for services - - 140,000 140 - - 140
Effect of 3 for 1 forward split - - 280,000 280 (280) - -
Issuance of common stock for acquisition
of subsidiary - - 21,000,000 21,000 - - 21,000
Net loss for the year (pre-acquisition) - - - - - (1,950) (1,950)
---------- -------- ----------- --------- ----------- ------------ --------------
Balances at December 31, 2000
(pre-acquisition) - - 26,850,000 26,850 (3,900) (1,950) 21,000
Recapitalization due
to reverse merger with
F&F Equipment, Inc. - - - - 4,978,050 (8,136,114) (3,158,064)
Net loss for the year (post-acquisition) - - - - - (1,215,869) (1,215,869)
---------- -------- ----------- --------- ----------- ------------ --------------
Balances at December 31, 2000
(post-acquisition) - $ - 26,850,000 $ 26,850 $ 4,974,150 $(9,353,933) $ (4,352,933)
========== ======== =========== ========= =========== ============ ==============
- Continued -
F-6
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2001 and 2000 (post-acquisition)
and Period from February 1, 2000 (date of incorporation)
through December 31, 2000 (pre-acquisition)
Mandatory Convertible
Preferred Stock Common Stock Additional
--------------------- ------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
-------------------------------------------------------------------------------------
Balances at December 31, 2000
(post-acquisition) - $ - 26,850,000 $ 26,850 $ 4,974,150 $ (9,353,933) $ (4,352,933)
Issuance of common stock for
Consulting fees - pre-acquisition - - 124,400 125 124,275 - 124,400
Recapitalization due to reverse
merger with F&F Equipment, Inc. - - - - (124,400) - (124,400)
Consulting fees - post-acquisition - - 916,000 916 413,160 - 414,076
Effect of 3 for 1 forward split
on cumulative consulting fees - - 2,080,800 2,081 (2,081) - -
Cash - - 222,222 222 99,778 - 100,000
Settlement of accounts payable - - 535,272 535 240,337 - 240,872
Private placement of Preferred Stock 284,600 1,423,000 - - - - -
Less costs of raising capital - - - - (144,915) - (144,915)
Beneficial Conversion Feature
Discount on Preferred Stock - - - - 1,207,993 - 1,207,993
Conversion of shareholder debt and
accrued interest into Preferred Stock 1,510,720 7,553,600 - - - - -
Conversion of Preferred Stock to
Common Stock (1,749,720) (8,748,600) 19,246,920 19,247 8,729,353 - 8,748,600
Adjustment of the unamortized
balance of Beneficial Conversion
Feature Discount as a result
of the exercise of conversion - - - - (816,879) - (816,879)
Net loss for the year (post-acquisition) - - - - - (2,211,887) (2,211,887)
---------- --------- ---------- --------- ----------- ------------ --------------
Balances at December 31, 2001
(post-acquisition) 45,600 $ 228,000 49,975,614 $ 49,976 $14,700,771 $(11,565,820)$ 3,184,927
========== ========= ========== ========= =========== ============ ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001 and 2000 (post-acquisition) and
Period from February 1, 2000 (date of incorporation)
through December 31, 2000 (pre-acquisition)
(post-acquisition) (post-acquisition) (pre-acquisition)
Period from
February 1, 2000
Year ended Year ended through
December 31, December 31, December 31,
2001 2000 2000
-------------------------------------------------------
Cash flows from operating activities
Net loss for the year $ (2,211,887) $ (1,215,869) $ (1,950)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 639,836 638,398 -
Gain on litigation settlement (754,830) - -
Common stock issued for fees and services 540,534 - 1,950
Accrued interest converted to preferred stock 240,440 - -
Amortization of conversion discount
on preferred stock 392,114 - -
(Increase) Decrease in
Accounts receivable 60,415 86,488 -
Inventory 18,669 (49,725) -
Prepaid expenses, deposits and other (24,056) (50,457) -
Increase (Decrease) in
Accounts payable - trade 18,100 335,427 -
Interest payable (1,000) 320,586 -
Excise taxes payable (18,739) (47,240) -
-------------- -------------- -------------
Net cash provided by (used in) operating activities (1,100,404) 17,608 -
-------------- -------------- -------------
Cash flows from investing activities
Purchase of property and equipment (105,657) (265,268) -
-------------- -------------- -------------
Net cash used in investing activities (105,657) (265,268) -
-------------- -------------- -------------
Cash flows from financing activities
Increase in cash overdraft 7,760 73,234 -
Cash received (paid) on short term loans - net (451,652) (14,583) -
Cash received on long-term loans 950,000 - -
Principal paid on long-term loans - (42,841) -
Principal paid on long-term capital leases (82,571) (24,749) -
Cash received on sale of Mandatory
Convertible Preferred Stock 1,423,000 - -
Cash received on sale of common stock 100,000 - -
Cash paid to acquire capital (144,915) - -
-------------- -------------- --------------
Net cash provided by financing activities 1,801,622 (8,939) -
-------------- -------------- --------------
INCREASE (DECREASE) IN CASH 595,561 (256,599) -
Cash at beginning of year 858 256,457 -
-------------- -------------- --------------
Cash at end of year $ 596,419 $ 858 $ -
============== ============== ==============
- Continued -
F-8
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001 and 2000 (post-acquisition) and
Period from February 1, 2000 (date of incorporation)
through December 31, 2000 (pre-acquisition)
(post-acquisition) (post-acquisition) (pre-acquisition)
Period from
February 1, 2000
Year ended Year ended through
December 31, December 31, December 31,
2001 2000 2000
-------------------------------------------------------
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 214,503 $ 108,993 $ -
================ ================ ================
Income taxes paid for the period $ - $ - $ -
================ ================ ================
Supplemental disclosure of non-cash
investing and financing activities
Conversion of debt and accrued interest
payable to a shareholder into preferred stock $ 7,553,600 $ - $ -
================ ================ ================
Payment of accounts payable with
issuance of common stock $ 240,872 $ - $ -
================ ================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Organization and Description of Business
American Ammunition, Inc. (AAI or Company) was incorporated on February 1, 2000
in the State of California as FirsTelevision.com. AAI subsequently changed its
corporate name to FBI Fresh Burgers International with a business plan of
marketing the concept of a national "fast food" restaurant chain to children and
young adults, with a menu of fresh burgers, fries and sandwiches. However, there
was no assurance that this business concept would be successful.
On September 29, 2001, the Company, F&F Equipment, Inc. (F&F) and the individual
shareholders of F&F entered into an "Agreement For The Exchange Of Common Stock"
(Exchange Agreement) whereby the shareholders of F&F exchanged 100.0% of the
issued and outstanding stock of F&F for 21,000,000 post-forward split shares of
restricted, unregistered common stock of the Company. F&F Equipment, Inc. then
became a wholly-owned subsidiary of the Company.
The acquisition of F&F Equipment, Inc., on September 29, 2001, by the Company
effected a change in control and was accounted for as a "reverse acquisition"
whereby F&F Equipment, Inc. is the accounting acquiror for financial statement
purposes. Accordingly, for all periods subsequent to the September 29, 2001
change in control transaction, the financial statements of the Company reflect
the historical financial statements of F&F Equipment, Inc. from its inception on
October 4, 1983 and the operations of the Company subsequent to September 29,
2001.
Concurrent with the September 29, 2001 reverse acquisition transaction, the
Company amended its Articles of Incorporation to change the Company's name to
American Ammunition, Inc. and modified the Company's capital structure to allow
for the issuance of up to 320,000,000 total equity shares consisting of
20,000,000 shares of preferred stock and 300,000,000 shares of common stock.
Both classes of stock have a par value of $0.001 per share.
On October 9, 2001, the Company effected a three (3) for one (1) forward stock
split. This action caused the then issued and outstanding shares to increase
from 2,990,400 to 8,971,200 on the action date. The effect of this action is
reflected in the accompanying financial statements as of the first day of the
first period presented.
F&F Equipment, Inc.(Company) was incorporated on October 4, 1983 under the laws
of the State of Florida. The Company was formed to engage principally in the
"import, export, retail & wholesale of firearms equipment, ammunition & other
devices and for the purpose of transacting any and/or all lawful business." The
Company conducts its business operations under the assumed name of "American
Ammunition".
The Company and its subsidiary have a year-end of December 31 and use the
accrual method of accounting.
The accompanying consolidated financial statements contain the accounts of
American Ammunition, Inc. (formerly FBI Fresh Burgers International) and its
wholly-owned subsidiary, F&F Equipment, Inc. All significant intercompany
transactions have been eliminated. The consolidated entities are collectively
referred to as "Company".
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-10
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note B - Summary of Significant Accounting Policies
1. Cash and cash equivalents
For Statement of Cash Flows purposes, the Company considers all cash on
hand and in banks, including accounts in book overdraft positions,
certificates of deposit and other highly-liquid investments with maturities
of three months or less, when purchased, to be cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing of
making bank deposits and releasing checks, in accordance with the Company's
cash management policies.
2. Accounts receivable
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers which are located throughout the United
States. Because of the credit risk involved, management has provided an
allowance for doubtful accounts which reflects its opinion of amounts which
will eventually become uncollectible. In the event of complete
non-performance, the maximum exposure to the Company is the recorded amount
of trade accounts receivable shown on the balance sheet at the date of
non-performance.
3. Inventory
Inventory consists of raw materials, work-in-process and finished goods
related to the production and sale of small arms ammunition. Inventory is
valued at the lower of cost or market using the first-in, first-out method.
4. Property, plant and equipment
Property and equipment are recorded at historical cost. These costs are
depreciated over the estimated useful lives of the individual assets using
the straight-line method, generally three to ten years.
Gains and losses from disposition of property and equipment are recognized
as incurred and are included in operations.
5 Loan costs
Amounts paid for origination fees related to loans payable are amortized
over the scheduled maturity of the corresponding debt.
6. Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. At December 31, 2001 and 2000, the deferred tax asset and deferred
tax liability accounts, as recorded when material to the financial
statements, are entirely the result of temporary differences. Temporary
differences represent differences in the recognition of assets and
liabilities for tax and financial reporting purposes, primarily accumulated
depreciation and amortization, allowance for doubtful accounts and vacation
accruals.
As of December 31, 2001 and 2000, the deferred tax asset related to the
Company's net operating loss carryforward is fully reserved. If these
carryforwards are not utilized, they will begin to expire in 2005.
F-11
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note B - Summary of Significant Accounting Policies - Continued
7. Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing the net income
(loss) by the weighted-average number of shares of common stock and common
stock equivalents (primarily outstanding options and warrants). Common
stock equivalents represent the dilutive effect of the assumed exercise of
the outstanding stock options and warrants, using the treasury stock
method. The calculation of fully diluted earnings (loss) per share assumes
the dilutive effect of the exercise of outstanding options and warrants at
either the beginning of the respective period presented or the date of
issuance, whichever is later. As of December 31, 2001 and 2000, the Company
had no warrants and/or options outstanding.
8. Advertising
The Company does not conduct any direct response advertising activities.
For non-direct response advertising, the Company charges the costs of these
efforts to operations at the first time the related advertising is
published.
Note C - Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximates fair value due to the short term nature of
these items and/or the current interest rates payable in relation to current
market conditions.
Note D - Inventory
As of December 31, 2001 and 2000, inventory consisted of the following
components:
(post-acquisition) (post-acquisition) (pre-acquisition)
December 31, December 31, December 31,
2001 2000 2000
-------------------------------------------------------
Raw materials $ 82,454 $ 109,467 $ -
Work in process 197,704 196,935 -
Finished goods 34,583 27,008 -
--------- ---------- --------
Totals $ 314,741 $ 333,410 $ -
========= ========== ========
(Remainder of this page left blank intentionally)
F-12
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note E - Property and Equipment
Property and equipment consist of the following components:
(post-acquisition)(post-acquisition)
December 31, December 31, Estimated
2001 2000 useful life
--------------------------------------------------
Manufacturing equipment $6,470,064 $6,365,802 10 years
Office furniture and fixtures 50,856 49,699 7 years
Leasehold improvements 182,052 181,814 20 years
--------- ---------
6,702,972 6,597,315
Accumulated depreciation (2,737,717) (2,097,881)
--------- ---------
Net property and equipment $3,965,255 $4,499,434
========= =========
Total depreciation expense charged to operations for the years ended December
31, 2001 and 2000 was approximately $639,836 and $629,751, respectively.
Included in the amounts reflected in the accompanying balance sheet are the
following fixed assets on long-term capital leases:
(post-acquisition) (post-acquisition)
December 31, December 31,
2001 2000
--------------------------------
Manufacturing and processing equipment $153,400 $153,400
Less accumulated depreciation (39,179) (23,839)
-------- --------
$114,221 $129,561
======= =======
Note F - Notes payable to a Bank
Notes payable to a Bank consist of the following at December 31, 2001 and 2000,
respectively:
(post-acquisition) (post-acquisition)
December 31, December 31,
2001 2000
-------------------------------------
$200,000 line of credit payable to a bank. Interest at the
Bank's prime rate plus 1.50% or 2.00%, respectively. (11.00
% at December 31, 2000). Interest payable monthly. Advances
and accrued, but unpaid, interest mature on the 60th day
following funding. Agreement is renegotiable annually on the
anniversary date in November of each calendar year.
Collateralized by all accounts receivable, inventory and
fixed assets of the Company and the personal guaranty of the
Company's President. $ - $ 200,000
F-13
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note F - Notes payable to a Bank - Continued
Notes payable to a Bank consist of the following at December 31, 2001 and 2000,
respectively:
(post-acquisition) (post-acquisition)
December 31, December 31,
2001 2000
-------------------------------------
$250,000 installment note payable to a bank. Interest at the
Wall Street Journal published prime rate plus 2.0% (11.00%
at December 31, 2000). Payable in monthly installments of
approximately $2,083, plus accrued interest. Final payment
due in December 2009. Collateralized by all accounts
receivable, inventory and fixed assets of the Company, the
personal guaranty of the Company's President and a mortgage
on the Company's corporate offices and manufacturing
facility owned by the Company's stockholder. - 235,417
$738,090 (originally $1,000,000) installment note payable to
a bank. Interest at the Wall Street Journal published prime
rate plus 2.50% (11.0% at December 31, 2000). Payable in
monthly installments of approximately $7,530, plus accrued
interest. Final payment due in March 2008. Collateralized by
all accounts receivable, inventory and fixed assets of the
Company and the personal guaranty of the Company's
President. - 707,964
------------- --------------
Total notes payable to a bank $ - $ 1,200,805
============= ===============
As of December 31, 2000, the Company was operating under a bank approved
moratorium on the payment of principal and interest on all of the above listed
notes payable. During 2001, the Company and its President commenced litigation
against the lending institution and , on June 29, 2001, the Company and the Bank
executed a Settlement and Compromise Agreement whereby all loans and debts of
the Company to the Bank were settled and cancelled for a one-time cash payment
of $550,000. Accordingly, due to the circumstances surrounding the final
settlement and retirement of these loans, they were classified as "current" on
December 31, 2000 in the accompanying consolidated balance sheets. The source of
funds for the $550,000 settlement came from a new $950,000 note payable to
another financial institution.
As a result of this settlement, the Company recognized a one-time gain on the
settlement of approximately $754,830.
F-14
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note G - Capital Leases Payable
Capital leases payable consist of the following as of December 31, 2001 and
2000, respectively:
(post-acquisition) (post-acquisition)
December 31, December 31,
2001 2000
-------------------------------------
Three and six capital leases, respectively, payable to
various equipment financing companies. Interest, at December
31, 2001, ranging between 11.37% and 14.05%. Payable in
aggregate monthly installments of approximately $935,
including accrued interest, as of December 31, 2001. Final
maturities occur between September 2004 and December 2004.
Collateralized the underlying leased manufacturing
equipment. $ 25,713 $ 108,284
Less current maturities (8,365) (28,409)
------------- --------------
Long-term portion $ 17,348 $ 79,875
============= ==============
Future maturities of capital leases payable are as follows:
Year ending
December 31 Amount
------------------------
2002 $ 8,365
2003 9,507
2004 7,841
------
Totals $25,713
======
Note H - Loan payable to Stockholder
(post-acquisition) (post-acquisition)
December 31, December 31,
2001 2000
-------------------------------------
$4,007,327 note payable to the Company's stockholder.
Interest at 8.0%. Principal and accrued interest payable at
maturity. Maturity at December 31 annually and automatically
renews for an equivalent annual period unless called by the
Stockholder at least 90 days prior to maturity. Unsecured.
Converted to preferred stock during 2001.
$ - $ 4,007,327
============= ==============
F-15
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note I - Long-Term Debt Payable to a Bank
On June 28, 2001, in anticipation of the settlement of litigation with a
financial institution, the Company executed a new $950,000 note payable to
another financial institution. This new note bears interest at the Wall Street
Journal published prime rate plus 2.0%. The new note has payment terms as
follows: For the first year (through June 28, 2002), interest only, payable
monthly. Thereafter, starting on July 28, 2002, equal monthly payments of
principal and interest shall be due until June 28, 2007 which payments shall
represent the amount necessary to fully amortize the remaining principal balance
of the note. The monthly payments shall be recalculated at the time of any
change in the applicable interest rate. The note is secured by virtually all of
the Company's real and personal property. A portion of the proceeds from the
financing were used to pay the $550,000 required in the Settlement and
Compromise Agreement.
Note J - Preferred Stock Transactions
In September and October 2001, the Company issued 222,600 shares of $5.00 Series
A Convertible Preferred Stock (Series A Preferred Stock) for total proceeds of
approximately $1,113,000 through an ongoing private placement. The Series A
Convertible Preferred Stock provides for cumulative dividends at a rate of 8.0%
per year, payable quarterly, in cash or shares of the Company's common stock at
the Company's election. Each share of Series A Preferred Stock is convertible
into 11 shares of the Company's common stock at any time after 6 months of the
date of issue and prior to the notice of redemption at the option of the holder,
subject to adjustments for customary anti- dilution events.
In September 2001, the Company's principal shareholder converted approximately
$4,007,327 of unsecured debt and approximately $3,546,273 of cumulative and
unpaid accrued interest into 1,510,710 shares of Series A Preferred Stock.
In September 2001, a creditor of the Company agreed to convert approximately
$10,000 of trade accounts payable into 2,000 shares of Series A Preferred Stock.
In February 2002, certain holders of the Series A Preferred Stock notified the
Company of their intent to exercise the conversion features on 1,749,720 issued
and outstanding shares of Series A Preferred Stock into 19,246,920 shares of
common stock. Due to the timing of the conversion in relation to the Company's
year-end and the first available date for such conversion, the effect of the
conversion exercise is reflected in the accompanying financial statements as if
the conversion had occurred on December 31, 2001.
In conjunction with the issuance of certain shares of the Series A Preferred
Stock, certain shares were issued with an equivalent per share value of common
stock below the ending quoted market price of the Company's common stock on the
issue date. This difference created a Beneficial Conversion Feature Discount of
approximately $1,207,993. This discount was then amortized over the unexpired
time period between the date of issue of the eligible shares and the initial
eligible conversion date. Approximately $392,114 was amortized to operations and
the unamortized balance was reclassified to additional paid-in capital on
December 31, 2001 as a result of the February 2002 conversion exercise.
F-16
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Common Stock Transactions
Concurrent with the September 29, 2001 reverse acquisition transaction, the
Company amended its Articles of Incorporation to change the Company's name to
American Ammunition, Inc. and modified the Company's capital structure to allow
for the issuance of up to 320,000,000 total equity shares consisting of
20,000,000 shares of preferred stock and 300,000,000 shares of common stock.
Both classes of stock have a par value of $0.001 per share.
On October 9, 2001, the Company effected a three (3) for one (1) forward stock
split. This action caused the then issued and outstanding shares to increase
from 2,990,400 to 8,971,200 on the action date. The effect of this action is
reflected in the accompanying financial statements as of the first day of the
first period presented.
In February 2000, the Company issued 5,430,000 post-forward split shares
(1,810,000 pre-forward split shares) of restricted, unregistered common stock to
its founders for administrative services and services related to the development
and implementation of the Company's business plan, in effect at the time. These
transactions were cumulatively valued at approximately $1,810, which
approximates the "fair value" of the services provided. These amounts are
charged to operations in the accompanying pre-acquisition consolidated financial
statements.
In June 2000, the Company issued 420,000 post-forward split shares (140,000
pre-forward split shares) of restricted, unregistered common stock to two
unrelated individuals for services related to the implementation of the
Company's business plan, in effect at the time. These transactions were
cumulatively valued at approximately $140, which approximates the "fair value"
of the services provided. These amounts are charged to operations in the
accompanying pre-acquisition consolidated financial statements.
In March and May 2001, the Company issued an aggregate 496,200 post-reverse
split shares (165,400 pre-forward split shares) of common stock, pursuant to a
Registration Statement on Form SB-2, to various individuals providing
investment, financial and acquisition consulting services to the Company. These
transactions were cumulatively valued at approximately $165,400, which
approximates the "fair value" of the services provided. These amounts are
charged to operations in the accompanying pre-acquisition consolidated financial
statements.
In September 2001, the Company issued 2,625,000 post-reverse split shares
(875,000 pre-forward split shares) of common stock, pursuant to a Registration
Statement on Form SB-2, to six individuals providing investment and financial
consulting services to the Company. These transactions were cumulatively valued
at approximately $875,000, which approximates the "fair value" of the services
provided. These amounts are charged to operations in the accompanying
pre-acquisition consolidated financial statements.
In September 2001, the Company issued an aggregate 21,000,000 post-forward split
shares of restricted, unregistered common stock to the shareholders of F&F
Equipment, Inc. in exchange for 100.0% of the issued and outstanding stock of
F&F Equipment, Inc. F&F Equipment, Inc. became a wholly-owned subsidiary of the
Company as a result of this transaction.
In December 2001, the Company issued 222,222 shares of post-forward split shares
of restricted, unregistered common stock to an unrelated entity in exchange for
the cancellation of $100,000 of short-term debt. In March 2002, the Company
issued an additional 277,777 shares of restricted, unregistered common stock in
payment for $100,000 in short-term debt payable and $25,000 in agreed-upon
interest payable to a shareholder, thereby satisfying all outstanding short-term
debt in full.
F-17
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Common Stock Transactions - Continued
In December 2001, the Company issued 535,272 shares of restricted, unregistered
common stock to a creditor in settlement of approximately $242,872 in open trade
accounts payable.
Note L - Related Party Transactions
The Company leases its corporate office and manufacturing facility from its
controlling stockholder under a long- term operating lease agreement. The lease
requires a monthly payment of approximately $3,931, plus applicable sales taxes.
Further, the Company is responsible for all utilities and maintenance expenses.
The lease expires on October 31, 2003 and contains a clause that the lease may
be renewed for an additional ten year period upon written notification to the
lessor no later than 120 days prior to the scheduled expiration date at a rental
rate based upon the fair value for similar space in a similar location.
On January 1, 1998, the Company's controlling stockholder contributed various
manufacturing equipment to the Company. This transaction was valued at an
agreed-upon value of approximately $5,000,000, which was substantially less than
original founders cost. As of October 25, 2000, in conjunction with a proposed
sale-leaseback transaction, the Company received an independent appraisal on its
manufacturing equipment with an appraised value of approximately $17,000,000 at
a utilization rate of 90,000,000 rounds of small-arms ammunition produced per
annual period.
Note M - Income Taxes
The components of income tax (benefit) expense for the years ended December 31,
2001 and 2000, respectively, are as follows:
(post-acquisition) (post-acquisition)
Year ended Year ended
December 31, December 31,
2001 2000
-------------------------------------
Federal:
Current $ - $ -
Deferred - -
------- ------
- -
------- ------
State:
Current - -
Deferred - -
------- ------
- -
------- ------
Total $ - $ -
======= ======
As of December 31, 2001, the Company has a net operating loss carryforward of
approximately $5,800,000 to offset future taxable income. Subject to current
regulations, components of this carryforward will begin to expire in 2003. The
amount and availability of the net operating loss carryforwards may be subject
to limitations set forth by the Internal Revenue Code. Factors such as the
number of shares ultimately issued within a three year look-back period; whether
there is a deemed more than 50 percent change in control; the applicable
long-term tax exempt bond rate; continuity of historical business; and
subsequent income of the Company all enter into the annual computation of
allowable annual utilization of the carryforwards.
F-18
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note M - Income Taxes - Continued
The Company's income tax expense (benefit) for the years ended December 31, 2001
and 2000, respectively, differed from the statutory federal rate of 34 percent
as follows:
(post-acquisition) (post-acquisition)
Year ended Year ended
December 31, December 31,
2001 2000
--------------------------------------
Statutory rate applied to loss before income taxes $ (752,000) $ (413,000)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Other, including reserve for deferred tax asset 752,000 413,000
-------------- -------------
Income tax expense $ - $ -
============== =============
Temporary differences, consisting primarily of statutory differences in the
depreciable lives for property and equipment, between the financial statement
carrying amounts and tax bases of assets and liabilities give rise to deferred
tax assets and liabilities as of December 31, 2001 and 2000, respectively:
(post-acquisition) (post-acquisition)
Year ended Year ended
December 31, December 31,
2001 2000
--------------------------------------
Deferred tax assets - long-term
Net operating loss carryforwards $ 1,980,000 $ 1,230,000
Deferred tax liabilities - long-term
Statutory depreciation differences (250,000) (280,000)
------------- -------------
1,730,000 950,000
Less valuation allowance (1,730,000) (950,000)
------------- -------------
Net Deferred Tax Asset $ - $ -
============= ==============
During the years ended December 31, 2001 and 2000, respectively, the valuation
allowance increased (decreased) by approximately $780,000 and $(70,000).
F-19
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note N - Contingencies
In May 1998, the Company entered into a $500,000 accounts receivable factoring
facility with its then financial institution. The facility provided for the
purchase of various trade accounts receivable by the bank from the Company at
80.0% of the face value of the underlying invoice. The Company paid a discount
fee of 1.5% for invoices settled between 1 and 30 days of invoice date, 3.0% for
invoices settled between 31 and 60 days of invoice date and an additional 1.5%
for each additional 30 days thereafter. All accounts receivable invoices were
factored with full recourse to the Company and the Company bears all credit risk
associated with the factored invoices. At December 31, 2000 the Company was at
risk for approximately $10,070 of factored invoices. The Company experienced no
losses related to the factoring agreement. This Agreement was terminated in
conjunction with the execution of the Settlement and Compromise Agreement on
June 29, 2001.
Note O - Significant Customers
During the years ended December 31, 2001 and 2000, respectively, the Company had
a single customer responsible for approximately 51% and 32% of total sales.
There were no other customers responsible for more than 10.0% of total net sales
during 2001 and 2000, respectively.
F-20
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
On January 29, 2002 the Company notified its accountants, Roger G. Castro,
CPA that they were being dismissed as the Company's independent auditors. The
stated reasons were that the Registrant wanted to retain the auditor of its
wholly-owned subsidiary, needed to consolidate the audits of the parent and
subsidiary to comply with SEC requirements and did not want to engage the
services of more than one (1) auditor. The Company's Board of Directors made the
decision to change accountants.
During the Registrant's past two (2) fiscal years and during any subsequent
interim period preceding the date of dismissal, the Company has had no
disagreements with Roger G. Castro, CPA on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure.
The report of Roger G. Castro, CPA on the financial statements for the past
two (2) fiscal years did not contain an adverse opinion nor a disclaimer of
opinion nor was the report qualified or modified as to uncertainty, audit scope
or accounting principles.
On January 29, 2002 the Company provided Roger G. Castro, CPA with a copy
of this disclosure and requested that it furnish a letter to the Company,
addressed to the SEC, stating that it agreed with the statements made herein or
the reasons why it disagreed. On January 29, 2002, the Company received a letter
from Roger G. Castro, CPA that it agreed with the statements contained herein.
On January 29, 2002, the Company engaged the firm of S.W. Hatfield, CPA,
P.O. Box 820392, Dallas, TX 75382 as the Company's independent auditors. Such
appointment was accepted by S.W. Hatfield, President of the firm. Prior to such
engagement, the Registrant had not consulted S.W. Hatfield, CPA on any prior
matters, including any matters relative to the application of accounting
principles or any subject of disagreement with Roger G. Castro, CPA.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
(a) Set forth below are the names, ages, positions, with the Company and
business experiences of the executive officers and directors of the Company.
36
Name Age Position(s) with Company
--------------- ----- -----------------------------------------
J.A. Fernandez, Sr. 65 Chairman of the Board and Director of Sales
Andres F. Fernandez 36 President and Chief Executive Officer
Emilio D. Jara 37 Vice-President of Operations, Secretary and Director
Amelia Fernandez 65 Vice President and Director
Maria A. Fernandez 42 Director
Len Hale 57 Director
All directors hold office until the next annual meeting of the Company's
shareholders and until their successors have been elected and qualify. Officers
serve at the pleasure of the Board of Directors. The officers and directors will
devote such time and effort to the business and affairs of the Company as may be
necessary to perform their responsibilities as executive officers and/or
directors of the Company.
Family Relationships
J.A. Fernandez, Sr. and Amelia Fernandez are the father and mother of
Andres and Maria Fernandez. There are no other family relationships between or
among the executive officers and directors of the Company.
Business Experience
J. A. Fernandez, Sr., age 65, currently serves as the Chairman of the Board
and Director or Sales. He has been employed by the Company since its inception
in 1983. Mr. Fernandez is the patriarch of what began as a family business and
is responsible for the sales activities of the Company. Mr. Fernandez has over
40 years experience in diverse industries including aerospace, advanced polymer
manufacturing, munitions, mining and processing of gemstones and metal ores and
has utilized such experience for the growth and development of the Company. He
is fluent in Spanish.
Andres Fernandez, age 36, currently serves as President and Chief Executive
Officer. Mr. Fernandez has served in each of these capacities since September
2001. He has been employed by the company for over a decade. Mr. Fernandez is
responsible for day to day operations and has been a driving force behind the
Company and its success in becoming a vertically integrated manufacturer. He
studied physics and calculus at St. Thomas University, FL and at the University
of Miami, FL. He is a licensed pilot, having graduated from the American
Institute of Aeronautics, FL, and received his certificate as a private pilot
(fixed wing) as well as private helicopter (rotary)in 1989. In 1989, Mr.
Fernandez graduated from the Institute of Public Service (Pan Am), GA as a
tactical rappel instructor. In 1990, he graduated from Omni Explosives, TN with
a specialty in
37
tactical explosives. Mr. Fernandez was certified by the Florida Department of
Law Enforcement Academy in special operations/entry techniques in 1990. He has
served as a tactical advisor to U.S. Treasury Department, Bureau of Alcohol,
Tobacco, and Firearms, U.S. Customs Service, and the Florida Department of Law
Enforcement. He has received numerous commendations and letters of appreciation.
He also served on the Board of Veterans Affairs (Hialeah , FL) from 1990 to
1991. He is fluent in Spanish.
Emilio Jara, age 37, currently serves as Vice President of Operations,
Secretary and a Director. Mr. Jara has served in each of these capacities since
September 2001. He has been employed with the Company since 1988. He has been an
integral part of the Company's technological growth. His abilities have
contributed to the Company's research and development and subsequent increase in
the number of production lines. Mr. Jara is extremely well versed in
metallurgical and ballistic issues. He studied business administration at
Miami-Dade Community College (1984/1985). In 1989, he graduated from the
Institute of Public Service (Pan Am), GA as a Tactical Rappel Instructor. In
1990, Mr. Jara graduated from Omni Explosives, TN with a specialty in Tactical
Explosives. He is fluent in Spanish.
Amelia Fernandez, age 65, currently serves as Vice President and Director.
Mrs. Fernandez has served in each of these capacities since September 2001. he
graduated from Conservatorio Falcon (1950), and the National Conservatory of
Music in Havana, Cuba in 1952. Mrs. Fernandez holds the degrees of Professor of
Piano and Professor of Solmization Theory. She is an accomplished classical
pianist, opera singer and artist. As a diamond importer and wholesaler, she
completed and graduated from numerous Gemological Institute of America courses,
including the diamond and colored stone courses. She achieved success as a
jewelry designer for a select group of buyers, both corporate and individual.
She has managed, owned and operated several business enterprises in the
competitive world of wholesale and retail diamonds and precious stones. She has
been employed by the Company since 1986 as its Office Manager and Human
Resources Coordinator, including the research and development of training
manuals and procedures for the selection of personnel. She is fluent in Spanish.
Maria A. Fernandez, age 42, currently serves as Director. Mrs. Fernandez
has served as a Director since September 2001. She is the managing partner at
Fernandez Friedman Grossman & Kohn PLLC. since May 1998. Prior to that date, she
was a partner at Taustine Post Sotsky Berman Fineman & Kohn. She concentrates
her legal practice in the areas of estate planning, probate and administration.
She also practices in the areas of Medicaid and disability planning, corporate
and individual taxation and Corporate law, with an emphasis in closely held
corporations. She is a graduate of the University of Miami, FL (Bachelor of
Business Administration and Master of Professional Accounting) and the Brandeis
School of Law at the University of Louisville, KY. Ms. Fernandez is licensed to
practice in Kentucky and Florida. She has lectured in the areas of estate
planning and probate, Medicaid planning and elder law. She is a member of the
Louisville, Florida, Kentucky and American Bar Associations and is fluent in
Spanish. Ms. Fernandez is the past President of the Women Lawyers Association of
Jefferson County, Kentucky and current Board Member of the Louisville Bar
Association. A Graduate of the Kentucky Women's Leadership Network, she is
active in various civic organizations and is on the board of several non-profit
corporations.
38
Len Hale, age 57, currently serves as a Director. Mr. Hale has served as a
Director since September 2001. He is the President of Hale Consulting, LLC in
Montgomery, AL, a management consulting firm focusing on sales, marketing and
management systems. Mr. Hale has more than 20 years experience as a proven
leader in the firearms industry. From 1995-1998, he served as group president of
Blount International, Inc. (AL). As president of this public manufacturing
company consisting of 10 sporting goods brands, he oversaw a $300 million plus
operation with three (3) division Presidents and increased sales from $84M to in
excess of $300M through internal growth and acquisitions, improved operating
income and return on capital employed. From 1990-1995, Mr. Hale served as
Executive Vice-President and Chief Operating Officer of Ellett Brothers,
Inc.(SC) Under his leadership, sales improved from $69M to $160 M and profits
grew from a negative profit to in excess of $6M. He also installed a marine
division, archery division and manufacturing divisions. He has served on
numerous boards and industry organizations, including the Board of Governors of
SAAMI (Sporting Arms and Ammunition Manufacturers Association) and the Board of
Governors of the National Shooting Sports Foundation.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
No Director, Officer, Beneficial Owner of more than ten percent (10%) of
any class of equity securities of the Company failed to file reports required by
Section 16(a) of the Exchange Act during the most recent fiscal year or prior
fiscal years.
Item 10. Executive Compensation
The following summary compensation table sets forth the aggregate cash
compensation paid or accrued by the Company to each of the Company's executive
officers and key employees for services rendered to the Company during the
Company's fiscal year ended 2001 and 2000 and all plan and non-plan compensation
awarded to, earned by or paid to certain designated executive officers.
39
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricte Securities LTIP All
Name and Annual d Stock Underlying Pay- Other
Principal Year Salary Bonus Compen- Award(s) Options/ outs Compen-
Position ($) ($) sation ($) ($) SARs (f) sation ($)
(1)
----------------- ------ -------- -------- ------------ ---------- ------------ -------- ----------
Artem 2000 $ -0- $-0- $-0- $805 $-0- $-0- $-0-
Gotov, 2001 $ -0- $-0- $-0- $-0- $-0- $-0- $-0-
former
President
Stephen H. 2000 $ -0- $-0- $-0- 0 $-0- $-0- $-0-
Durland, 2001 $ 21,000 $-0- $-0- 47,502 $-0- $-0- $-0-
former
Chief
Financial
Officer and
former
Director
Emilio D. 2000 $36,400 $-0- $-0- $-0- $-0- $-0- $-0-
Jara, Vice- 2001 $42,500 $-0- $-0- $-0- $-0- $-0- $-0-
President
of
Operations,
Secretary
and
Director
Amelia 2000 $59,202 $-0- $-0- $-0- $-0- $-0- $-0-
Fernandez, 2001 $59,923 $-0- $-0- $-0- $-0- $-0- $-0-
Vice
President
and
Director
(1) Mr. Gotov resigned as an executive officer in September 2001 and Mrs.
Fernandez and Mr. Jara were appointed executive officers at that time. Mr.
Durland resigned recently.
40
Compensation of Directors
The Company has no standard arrangements for compensating the directors of
the Company for their attendance at meetings of the Board of Directors.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of December 31, 2001,
regarding the ownership of the Company's common stock by each shareholder known
by the Company to be the beneficial owner of more than five percent (5%) of its
outstanding shares of common stock, each director and all executive officers and
directors as a group. Except as otherwise indicated, each of the shareholders
has sole voting and investment power with respect to the share of common stock
beneficially owned.
Name and Address of Title of Amount and Nature of Percent of
Beneficial Owner Class Beneficial Owner Class
------------------------------------------------------------------------------------------------
J.A. Fernandez, Sr. Common 5,569,200 18.58%
3545 NW 71st Street
Miami, Florida 33147
Andres F. Fernandez (2) Common 20,889,820 41.53%
3545 NW 71st Street
Miami, Florida 33147
Amelia C. Fernandez Common 4,281,900 14.29%
3545 NW 71st Street
Miami, Florida 33147
Maria A. Fernandez (4) Common 840,000 2.80%
Fernandez Friedman Grossman
& Kohn PLLC
101 S. 5th Street
Suite 2400
Louisville, KY 40202-3115
Emilio D. Jara Common 504,000 1.68%
3545 NW 71st Street
Miami, Florida 33147
Len C. Hale Common 168,000 0.56%
Hale Consulting, LLC
3700 Jesse Court
Montgomery, AL 36106
All officers and directors
as a group (7 persons) (5) Common 26,693,720 53.04%
--------------------
41
(1) J.A. Fernandez, Sr. and Amelia C. Fernandez are husband and wife and the
parents of Andres F. Fernandez and Maria A. Fernandez. Some or all of the
securities owned by the individual Fernandez family members may be
aggregated together and/or ownership imputed to one another.
(2) In addition to his common stock, in September 2001, Andres Fernandez
converted unsecured indebtedness of the Company to him in the amount of
$7,553,600 for 1,510,720 shares of $5.00 Series A Convertible Preferred
Stock. The Series A Convertible Preferred Stock provides for cumulative
dividends at the rate of 8% per year, payable quarterly, in cash or shares
of the Company's common stock at the Company's election. Each share of
Series A Convertible Preferred Stock is convertible, at the option of the
holder, into eleven (11) shares of the Company's common stock at any time
after six (6) months from the date of issuance and prior to notice of
redemption, subject to adjustments for customary anti-dilution events. In
February 2002, certain holders of the Series A Preferred Stock, including
Andres F. Fernandez, notified the Company of their intent to exercise the
conversion features on 1,749,720 issued and outstanding shares of Series A
Preferred Stock into 19,246,920 shares of common stock. Andres F. Fernandez
converted 1,510,720 shares of such Preferred Stock into 16,617,920 shares
of restricted common stock of the Company. Due to the timing of the
conversion in relation to the Company's year-end and the first available
date for such conversion, the effect of the conversion exercise is
reflected in this report as well as the accompanying financial statements
as if the conversion had occurred on December 31, 2001.
(3) Mr. Durland, the Company's former CFO and Director, acquired 100,000 shares
of the Company's common stock under the Registration Statement filed on
Form SB2 effective February 28, 2001.
(4) These do not include the 945,000 shares Maria Fernandez holds as a Trustee
for an entity in which neither she nor any of the other Officer or Director
is the beneficial owner.
(5) Except as noted above, each of the Officers and Directors received all of
their other shares as part of the Share Exchange whereby the Company
acquired AA in September 2001.
Item 12. Certain Relationships and Related Transactions
Mr. Durland acquired 100,000 shares of the Company's common stock under
the Registration Statement filed on Form SB2 effective February 28, 2001.
In September 2001 the Company issued 21,000,000 shares of its common stock
to nineteen (19) shareholders of AA pursuant to a share exchange agreement. The
shares were valued at $3,998,650. The transaction resulted in AA becoming a
wholly owned subsidiary of the Company in a transaction that was treated as a
reverse merger for accounting purposes. Of such shares, the current officers and
directors of the Company were issued a total of 15,750,000 shares. For such
offering the Company relied upon the 506 Exemption.
In September and October 2001, the Company issued 222,600 shares of $5.00
Series A Convertible Preferred Stock valued at $1,113,000 through an ongoing
private placement. The Series A Convertible Preferred Stock provides for
cumulative dividends at a rate of 8% per year, payable quarterly, in cash or
shares of the Company's common stock at the Company's election. Each share of
Series A Convertible Preferred Stock is convertible into 11 shares of the
Company's common stock at any time after 6 months after the date of issuance and
prior to notice of redemption at the
42
option of the holder, subject to adjustments for customary anti-dilution events
(the "Series A Convertible Preferred Stock"). Of such shares, the Robert I.
Escobio Family Trust acquired 2,000 shares. Mr. Escobio is a former director of
the Company. For such offering, the Company relied upon the 506 Exemption.
In September 2001, a principal shareholder, Andres Fernandez, converted
$7,553,600 of unsecured debt due to him by the Company into 1,510,720 shares of
Series A Convertible Preferred Stock. Mr. Fernandez is a current officer and
director of the Company. For such offering, the Company relied upon the 506
Exemption.
Item 13. Exhibits and Reports on Form 8-K.
(a) The exhibits required to be filed herewith by Item 601 of Regulation
S-B, as described in the following index of exhibits, are incorporated herein by
reference, as follows:
Exhibit No. Exhibit Name
----------- ---------------------
2.1 [2] Share Exchange Agreement between FBI Fresh Burgers International and F&F
Equipment, Inc. dated September 29, 2001.
3(i).1 [1] Articles of Incorporation (formerly Exhibit 3.1).
3(i).2 [1] Amendment to Articles of Incorporation (formerly Exhibit 3.2).
3(i).3 [2] Amendment to Articles of Incorporation.
3(ii).1 [1] Bylaws (formerly Exhibit 3.4).
3(ii).2 [3] Amended Bylaws
4.1 [1] Form of Common Stock Certificate.
5.1 [1] Opinion of Kenneth G. Eade (including consent).
6.1 [1] Specimen of Stock Certificate.
16.1 [4] Letter on change of certifying accountant pursuant to Regulation
SK Section 304(a)(3).
23.1 [1] Consent of Roger G. Castro, Independent Certified Public Accountant
23.2 [1] Consent of Kenneth G. Eade (filed as part of Exhibit 5.1).
----------------
[1] Previously filed with the Company's Registration Statement on Form SB-2 on
September 20, 2000 (Registration Number 333-46160).
43
[2] Previously filed with the Company's Current Report on Form 8-K on October
4, 2001.
[3] Previously filed with the Company's Form 10-QSB for the Quarter ended
September 30, 2001.
[4] Previously filed with the Company's Current Report on Form 8-K on January
29, 2002.
* Filed herein.
(b) A report on Form 8-K was filed on October 4, 2001 reporting the Share
Exchange conducted between the Company, F&F Equipment, Inc. and the shareholders
of F&F Equipment, Inc. on September 29, 2001.
A report on Form 8-K was filed on January 29, 2002 reporting a change in
the Registrant's Certifying Accountant.
44
SIGNATURES
In accordance with Section 13 and 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
American Ammunition, Inc.
(Registrant)
Date: March 29, 2002 By: /s/J.A. Fernandez, Sr.
--------------------------------------------------------
J.A. Fernandez, Sr., Chairman and Director of Sales
By: /s/Andres F. Fernandez
--------------------------------------------------------
Andres F. Fernandez, President and CEO
By: /s/Emilio D. Jara
--------------------------------------------------------
Emilio D. Jara, V.P. of Operations,
Secretary and Director
By: /s/Amelia Fernandez
--------------------------------------------------------
Amelia Fernandez, V.P. and Director
By: /s/Maria A. Fernandez
--------------------------------------------------------
Maria A. Fernandez, Director
Pursuant to the requirements of the Exchange Act, this report has been
signed by the following persons in the capacities and on the dates indicated.
Signature Title Date
/s/J.A. Fernandez, Sr.
---------------------- Chairman of the Board March 29, 2002
J.A. Fernandez, Sr. and Director of Sales
/s/Andres F. Fernandez
---------------------- President and Chief March 29, 2002
Andres F. Fernandez Executive Officer
/s/Emilio D. Jara
---------------------- Vice-President of Operations, March 29, 2002
Emilio D. Jara Secretary and Director
/s/Amelia Fernandez
---------------------- Vice President and Director March 29, 2002
Amelia Fernandez
/s/Maria A. Fernandez
---------------------- Director March 29, 2002
Maria A. Fernandez
45