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, 2002
[_] 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
------------------------
(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. $1,409,364
The aggregate market value of the voting common equity held by non-affiliates as
of December 31, 2002 was $22,131,266.40 based upon 55,328,166 shares outstanding
of which 24,333,746 was held by non-affiliates and a share price of $0.40. No
non-voting common equity is outstanding.
2
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 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.
3
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 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 December 2001, concurrent with a modification in the holding period prior to
conversion, certain holders of the Series A Preferred Stock orally 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 prior to December 31, 2001. Due to the timing of the requisite
documentation, the clerical activities related to this conversion were not
completed until February 2002.
In February 2002, the Company converted $100,000 in short-term debt payable and
accrued interest of approximately $25,000 to an existing shareholder into
277,778 shares of restricted, unregistered common stock. This transaction was
consummated at a price of $0.45 per share, which approximates the discounted
"fair value" of the Company's common stock based on the quoted closing price of
the Company's common stock on the date of the respective transaction. The
Company utilizes a discount of approximately 50.0% on the quoted closing price
to value all transactions settled with restricted, unregistered common stock
issued pursuant to Rule 144 of the U. S. Securities and Exchange Commission.
This transaction paid in full all outstanding short-term debt.
4
In March 2002, in two separate transactions, the Company sold an aggregate
1,388,890 shares of restricted, unregistered common stock to two separate
investors for aggregate proceeds of approximately $500,000. Each sale was made
at a price of $0.36 per share, which approximates the discounted "fair value" of
the Company's common stock based on the quoted closing price of the Company's
common stock on the date of each respective transaction. These proceeds were
used to supplement operational working capital.
In March 2002, the Company issued 32,000 shares of restricted, unregistered
common stock to a member of the Company's Board of Directors for consulting
services related to the Company's reverse merger transaction and for various
marketing services. This transaction was valued at approximately $11,520, or
$0.36 per share, which approximates the discounted "fair value" of the Company's
common stock based on the quoted closing price of the Company's common stock on
the date of the respective transaction.
In March 2002, the Company issued 41,665 shares of restricted, unregistered
common stock to an unrelated party for shareholder and other public relation
services. This transaction was valued at approximately $15,000, or $0.36 per
share, which approximates the discounted "fair value" of the Company's common
stock based on the quoted closing price of the Company's common stock on the
date of the respective transaction.
In April and May 2002, the Company issued an aggregate 432,721 shares of
restricted, unregistered common stock to three creditors in settlement of
approximately $182,017 in open trade accounts payable. Each issuance was made at
a price of either $0.45 or $0.36 per share, which approximates the discounted
"fair value" of the Company's common stock based on the quoted closing price of
the Company's common stock on the date of each respective transaction.
In June 2002, the Company issued 347,223 shares of restricted, unregistered
common stock to an existing shareholder to reimburse said shareholder for his
payment of previously accrued legal fees associated with the bank related
litigation, which was concluded in June 2001, on behalf of the Company and for
other consulting services currently being provided by the shareholder. This
transaction was valued at approximately $125,000, or $0.36 per share, which
approximates the discounted "fair value" of the Company's common stock based on
the quoted closing price of the Company's common stock on the date of the
respective transaction.
In June 2002, the Company sold 277,778 shares of restricted, unregistered common
stock to an investor for aggregate proceeds of approximately $100,000. This sale
was made at a price of $0.36 per share, which approximates the discounted "fair
value" of the Company's common stock based on the quoted closing price of the
Company's common stock on the date of the respective transaction. The proceeds
of this transaction were used to supplement operational working capital.
During June, July and September 2002, the Company issued an aggregate 21,987
shares of restricted, unregistered common stock in payment of approximately
$10,400 in accrued dividends payable on the Company's outstanding Series A
Preferred Stock for the quarters ended December 31, 2001, March 31, 2002, June
30, 2002 and September 30, 2002.
5
In July 2002, the Company sold 384,615 shares of restricted, unregistered common
stock to an existing shareholder for cash proceeds of approximately $100,000.
This sale was made at a price of $0.26 per share, which approximates the
discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used to pay down an
equivalent portion of the Company's long-term note payable to a bank.
In August 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of $100,000. This sale
was made at a price of $0.26 per share, which was below the discounted "fair
value" of the Company's common stock based on the quoted closing price of the
Company's common stock on the date of the respective transaction. The
differential between the discounted "fair value" (approximately $0.29 per share)
and the selling price resulted in a charge to operations of approximately
$11,346 for compensation expense related to common stock issuances at less than
"fair value". The proceeds of this transaction were used to pay down an
equivalent portion of the Company's long-term note payable to a bank.
In August 2002, the Company sold 20,506 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$6,152. This sale was made at a price of $0.30 per share, which approximates the
discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used to directly retire a
trade account payable to a specific vendor.
In August 2002, the Company issued 24,999 shares of restricted, unregistered
common stock to an unrelated party for shareholder and other public relation
services. This transaction was valued at approximately $6,875, or $0.28 per
share, which approximates the discounted "fair value" of the Company's common
stock based on the quoted closing price of the Company's common stock on the
date of the respective transaction.
In September 2002, the Company sold 277,778 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$100,000. This sale was made at a price of $0.36 per share, which approximates
the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used to pay down an
equivalent portion of the Company's long-term note payable to a bank.
In September 2002, the Company sold 277,778 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$100,000. This sale was made at a price of $0.26 per share, which approximates
the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds from this transaction were used to support operational
working capital.
In September 2002, the Company sold 222,222 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$100,000. This sale was made at a price of $0.45 per share, which approximates
the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used to support operational
working capital.
6
On October 4, 2002, the Company issued an 8.0% Convertible Debenture (Debenture)
in the face amount of $250,000 and a Warrant which requires the Holder to
purchase shares of common stock equal to ten (10) times the number of shares of
common stock issued to the Holder on conversion of the Debenture. In no event
shall the number of shares issued under the Warrant exceed 30,000,000.
The Debenture bears interest at 8.0% and matures two years from the date of
issuance. The Debenture is convertible into common stock, at the option of the
Holder, at the lesser of $1.00 per share or 80.0% of the average of the 5 lowest
volume weighted average price days during the 20 trading days before, but not
including the date of the Holder's election to convert. The Warrant is
exercisable at the same price. The full principal amount of the Debenture is due
upon default, as defined in the Debenture agreement. The Debenture interest is
payable monthly in arrears commencing on November 15, 2002.
The Company is obligated to file a Registration Statement under the Securities
Act of 1933 to register the underlying conversion shares on either Form SB-2 or
S-3 and have said Registration Statement effective no later than 120 days after
October 4, 2002.
The Debenture Holder has contractually committed to convert not less than 5.0%
and not more than 10.0% of the original face value of the Debenture monthly
beginning the month after the effective date of the Registration Statement and
the Holder is required to concurrently exercise warrants and purchase shares of
common stock equal to ten (10) times the number of shares of common stock issued
to the Holder upon the respective mandatory conversion of the Debenture.
The Holder has further contractually agreed to restrict its ability to convert
the Debenture or exercise their warrants and receive shares of the Company's
common stock such that the number of shares held by the Holder and its
affiliates after such conversion or exercise does not exceed 4.99% of the then
issued and outstanding shares of common stock of the Company.
In the event an election to convert is made and the volume weighted average
price of the Company's common stock is below $0.30 per share, the Company shall
have the right to prepay any portion of the outstanding Debenture that was
elected to be converted, plus any accrued and unpaid interest, at 125.0%.
The Holder may demand repayment of the Debenture of 125.0% of the face amount
outstanding, plus all accrued and unpaid interest, in cash at any time prior to
the date that underlying Registration Statement under the Securities Act of 1933
has not been declared effective by the U. S. Securities and Exchange Commission
within 3 business days of such demand. If the repayment is accelerated, the
Company is also obligated to issue to the Holder 25,000 shares of common stock
and $10,000 cash for each 30 day period, or portion thereof, during which the
face amount, including interest thereon, remains unpaid with the cash payment to
increase to $15,000 for each 30 day period the balance remains unpaid after the
initial 90 day period.
If the Holder does not elect to accelerate the Debenture, the Company shall
immediately issue and pay to the Holder 25,000 shares of common stock and
$10,000 cash for each 30 day period, or portion thereof, during which the face
amount, including interest thereon, remains unpaid with the cash payment to
increase to $15,000 for each 30 day period the balance remains unpaid after the
initial 90 day period.
7
Due to the contractually agreed mandatory conversion of this Debenture, the
Company has reflected this transaction in its balance sheet as a "mezzanine"
level debt obligation on its balance sheet, between "Total Liabilities" and
"Shareholders' Equity". Upon the respective mandatory conversion, the Company
will relieve the respective portion of the Debenture and the any related
accrued, but unpaid interest, and credit this amount to the respective "common
stock" and "additional paid-in capital" accounts in the shareholder's equity
section for the par value and excess amount over the par value of the respective
shares issued.
No value was assigned to the issued warrant. Upon exercise of the warrant, the
Company will record the issuance of the underlying shares as a new issuance of
common stock on the date of each respective exercise.
Concurrent with the execution of the Debenture agreement, the Company executed
an engagement letter with the Holder's counsel for legal representation with
regard to the preparation of the aforementioned Registration Statement under the
Securities Act of 1933.
In November 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$100,000. This sale was made at a price of $0.26 per share, which approximates
the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used to pay down an
equivalent portion of the Company's long-term note payable to a bank.
In December 2002, the Company sold an aggregate 120,170 shares of restricted,
unregistered common stock to an existing shareholder in three separate
transactions valued at an aggregate of approximately $31,244. These sales were
made at a price of $0.26 per share, which was in excess of the discounted "fair
value" of the Company's common stock on the date of each respective transaction.
The proceeds of this transaction were used to directly retire a trade account
payable to a specific vendor.
In December 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$100,000. This sale was made at a price of $0.26 per share, which was in excess
of the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used to pay down an
equivalent portion of the Company's long-term note payable to a bank.
In December 2002, the Company issued 55,000 shares of restricted, unregistered
common stock upon the exercise of 5,000 shares of outstanding Series A Preferred
Stock upon the exercise of the conversion option by the Holder of the Series A
Preferred Stock.
On February 28 and March 20, 2003, respectively, the Company made additional
principal reductions of $100,000 and $350,000 fully retiring the outstanding
debt.
8
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.
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
located in a "Right to Work" state where labor costs are relatively low and it
is therefore able to maintain low manufacturing costs.
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, 30carbine and .223 REM. Management has
identified these products as having the largest share of the market for the next
several years.
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.
9
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 to allow it to
enlarge its operations to take advantage of its technological capacities,
equipment and the existing marketplace.
Marketing and Sales Distribution
American Ammunition currently has agreements with nineteen (19) national
distributors throughout the United States in order to diversify its customer
base. Ellet Brothers, Inc. accounted for 51% and 42% of the Company's total
sales for fiscal year 2001 and 2002 respectively. Exports accounted for 25% of
the Company's total sales for fiscal year 2002. The Company has exported its
products to South America, the Caribbean and the Middle East. The Company has
also entered into an "Assured Payment Program" with a National Buying Syndicate
which represents 200 members with 1200 retail locations, and has begun shipping
to them in the first quarter of 2003. The agreement with this National Buying
Syndicate guarantees payment to the Company from all of individual members of
the syndicate. 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
10
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 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, ATK 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 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.
11
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.
Industrial Plating Enterprise Company
Industrial Plating Enterprise Company (IPE), a wholly owned subsidiary, is a
high volume "barrel plating" facility currently operating at approximately 30%
of its capacity. IPE is meeting all of the parent company's projectile plating
needs at this time. As the parent company's projectile plating requirement
grows, IPE will increase production to meet that need. IPE's innovative
hazardous materials and hazardous waste management and treatment system is fully
capable of meeting increased production requirements. IPE's management, intends
to explore adding additional metallization and coating processes to diversify
its services to the parent company as well as offering its services to other
industries with the eventual goal of generating revenue to the parent company.
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.
The market for small arms ammunition is becoming increasingly competitive.
Companies such as Remington, ATK 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, ATK and American Ammo."
12
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 nineteen (19) 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.
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.
13
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.
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 and its wholly-owned subsidiary are subject to
general local, state and federal regulations governing environmental concerns.
Management believes that the Company and its subsidiary have always been and
continue 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, 2002, the Company employed forty-five (45) 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.
14
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.
The wholly owned subsidiary, Industrial Plating Enterprise Company (IPE), is
fully operational and filling the immediate needs of projectile plating for the
parent company. IPE is located in a 5,000 square foot facility operating under a
5 year lease agreement expiring in March 2007 that contains a clause that the
lease may be extended for an additional 5 years 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. The monthly cost varies between $1,700 and $1913.36
throughout the lease. IPE is in full compliance with all Local, State and
Federal regulations in its operations.
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
01/01/2002-03/31/2002 0.81 0.33
04/01/2002-06/31/2002 0.65 0.36
07/01/2002 - 09/30/2002 0.57 0.31
10/01/2002 - 12/31/2002 0.47 0.38
15
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, 2002 the Company had one hundred twelve (112) shareholders of
record of its 55,328,166 outstanding shares of common stock, 33,733,598 of which
were restricted Rule 144 shares and 23,438,760 of which were free-trading. Of
the Rule 144 shares, 30,962,420 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.
Item 6. Management's Discussion and Analysis
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Caution Regarding Forward-Looking Information
Certain statements contained in this Registration Statement 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 Registration Statement 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.
16
Overview
We were incorporated on February 1, 2000 in the State of California as
FirsTelevision.com. We subsequently changed our 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, FBI Fresh Burgers, F&F Equipment, Inc. and the individual
shareholders of F&F entered into an "Agreement For The Exchange Of Common Stock"
whereby the shareholders of F&F exchanged 100% of the issued and outstanding
stock of F&F for 21,000,000 post-forward split shares of restricted,
unregistered common stock of FBI Fresh Burgers. F&F Equipment, Inc. then became
a wholly-owned subsidiary of FBI Fresh Burgers.
F&F Equipment, Inc. 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." F&F conducts its
business operations under the assumed name of "American Ammunition."
The acquisition of F&F Equipment, Inc., on September 29, 2001, by us 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, our financial statements reflect the historical financial
statements of F&F Equipment, Inc. from its inception on October 4, 1983 and the
operations of FBI Fresh Burgers subsequent to September 29, 2001.
Concurrent with the September 29, 2001 reverse acquisition transaction, we
amended our articles of incorporation to change our name to American Ammunition,
Inc. and modified our 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, we effected a three for one forward stock split. This action
caused the then issued and outstanding shares to increase from 2,990,400 to
8,971,200 on the effective date. The effect of this action is reflected in the
accompanying financial statements as of the first day of the first period
presented.
During the quarter ended March 31, 2002, management elected to focus its
efforts, capital resources and energies in streamlining production methods,
securing key sources of raw material and exploring the addition of equipment to
allow the Company to produce certain components of its manufacturing process
which are currently being outsourced to unrelated third parties.
In June 2002, American Ammunition, Inc. formed a wholly owned subsidiary,
Industrial Plating Enterprise Co., which started production on June 14, 2002.
Industrial Plating is a fully licensed and approved electrochemical
metallization facility with significant capacity for processing our line of
projectiles as well as other products and services while employing
environmentally sound water conservation and proven waste treatment techniques.
17
During the quarter ended September 30, 2002, the Company expanded its production
capability with the addition of a second production shift. Due to the necessary
lead times for hiring and training qualified personnel, the Company experienced
significant increases in direct labor, payroll taxes and other related expenses
during 2002. Management continues to anticipate events occurring in future
quarters including increased levels of expenditures for marketing, increased
product demand as a result of increased market exposure and the introduction of
new products under development.
Results of Operations
Year ended December 31, 2002 compared with the year ended December 31, 2001.
During the year ended December 31, 2002, we experienced aggregate net revenues
of approximately $1,409,000 as compared to approximately $428,000 for the year
ended December 31, 2001. The 2002 levels compare favorably to the 2000 revenue
levels of approximately $1,716,000.
We experienced costs of goods sold of approximately $2,457,000 for the year
ended December 31, 2002 as compared to approximately $1,385,000 for the year
ended December 31, 2001. We experience variable costs in the area of material
consumption and direct labor. We have recognized depreciation expense on
production equipment of approximately $653,000 and $629,000, respectively, in
the above cost of goods expense totals.
These depreciation levels are anticipated to remain fairly constant for future
periods as management does not anticipate any significant capital equipment
acquisitions in future periods. Further, the addition of the Industrial Plating
Enterprise Co. equipment allows us to produce certain components which were
previously outsourced to unrelated third parties.
For the year ended December 31, 2002 and 2001, respectively, we have generated a
negative gross profit of approximately $(1,047,000), or (74.31%), and
approximately $(957,000), or (223.84%). We anticipate that with continued demand
for our product, lower production costs being experienced from internally
generated plating activities and adequate liquidity, it will be able to generate
a positive gross profit in future periods. Further, based on production cost
information developed during the 4th quarter of 2002, management has developed a
new model for the pricing of its products to its customers. It is anticipated
that this model will allow management to better manage expense levels, control
labor costs and maximize revenue opportunities.
We experienced nominal research and development expenses of approximately $3,700
and $4,000, respectively, during the years ended December 31, 2002 and 2001,
principally related to the expansion of our product line to add a .223 caliber
round and the evolving 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 and other product
improvements.
18
Other general and administrative expenses decreased significantly from
approximately $845,000 for the year ended December 31, 2002 as compared to
approximately $1,806,433 for the year ended December 31, 2001. The most
significant reductions came in interest expense as a result of settling all
litigation with the Company's former lending institution, savings in the areas
of legal and professional fees and other general and administrative fees.
Included in our results of operations for both 2002 and 2001 are various
non-cash expenditure charges. During 2002, we experienced charges to operations
of approximately $11,500 for compensation expense related to common stock
issuances at less than "fair value". The calculation of these charges result
from our issuing common stock for either cash or services at valuations below
the closing quoted market price of our common stock (as discounted, as
applicable) and either the cash received or the value of the services provided
to us by third parties. During 2001, we experienced a charge of approximately
$1,208,000 for the amortization of the Beneficial Conversion Feature Discount on
our Preferred Stock. This charge results from the difference between the closing
quoted market price on our common stock and the equivalent converted price of
our Mandatory Convertible Preferred Stock which was sold and converted during
2001.
We recognized a net loss of approximately $(1,883,000) and $(3,216,577) for the
respective years ended December 31, 2002 and 2001, respectively, or $(0.04) and
$(0.11) per share.
Year ended December 31, 2001 compared with the year ended December 31, 2000.
Our operations were hampered during 2001 as a result of on-going litigation
between us and our financial lending institution. As we were unable to access
credit lines for working capital, we were unable to offer selling terms
comparable to our competitors and, accordingly, experienced a significant
reduction in sales from prior years. This litigation was settled during June
2001 and we 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, we experienced revenues of
approximately $428,000 as compared to approximately $1,716,000 for the year
ended December 31, 2000.
We experienced costs of goods sold of approximately $1,629,000 and $2,026,000
for the years ended December 31, 2001 and 2000, respectively. We experience
variable costs in the area of material consumption and direct labor. We
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 we are successful in our plans to expand production.
We have realized a gross profit of approximately ($1,201,000), or (280.97%) for
the year ended December 31, 2001 and approximately ($310,000), or (18.07%) for
the year ended December 31, 2000. We anticipate that with adequate liquidity, we
will be able to generate a positive gross profit during Calendar 2002.
We incurred nominal research and development expenses of approximately $3,800,
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 and Home Defense
Market.
19
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 our 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.
We 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 our 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 our common stock as of the sale date of the underlying
convertible preferred stock.
We 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.
Liquidity And Capital Resources
As of December 31, 2002 and 2001, respectively, we had working capital of
approximately $56,000 and $152,000. Our 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.
We have used cash in operating activities of approximately $1,236,000 and
$1,100,000 during the years ended December 31, 2002 and 2001, respectively.
The most significant use of cash in operations during the year ended December
31, 2002 was the rebuilding of our operations after the problems encountered
during 2001 while we were in litigation with our former primary lending
institution. We further used cash in building up our inventory in anticipation
of Calendar 2003 orders as communicated to us by our customer base.
We experience relatively consistent expenditure levels for executive and
administrative compensation, interest expense and depreciation expense. During
the third quarter of 2001, we renegotiated our working capital note in the
principal amount of $950,000. The note bore interest at the Wall Street Journal
published prime rate plus 2.0%. During 2002, we reduced the outstanding
principal on five (5) separate occasions to a balance of approximately $450,000.
The note payment terms were also modified as follows: payments of interest only
through January 28, 2004. Thereafter, starting on January 28, 2004, 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. As of
December 31, 2002, we owed $450,000 on this note.
The note is secured by virtually all of our 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, we anticipate
relatively stable interest expense, or declining levels, in future periods
depending on expansion and additional equipment financing requirements. We do
not anticipate the addition of significant additions to office and
administrative personnel.
On February 28 and March 20, 2003, respectively, the Company made additional
principal reductions of $100,000 and $350,000 fully retiring the outstanding
debt.
20
We anticipate that our improved liquidity position will continue to improve as
management is of the opinion that the production capacity is in place to support
all existing orders and accept existing inquiries which have previously been
denied due to the lack of production capacity and liquidity.
During the year ended December 31, 2002, we added approximately $387,000 in new
equipment, of which approximately $225,000 was acquired in our new wholly-owned
subsidiary, Industrial Plating Enterprise Co. This equipment allows us to
replace previously outsourced portions of our manufacturing process with
internally managed processes which resulted in cost savings to us and improve
turnaround time on this process.
Depending on future demand for our products, we may develop plans to increase
our production capability in the foreseeable future by 50% to 100%, as
influenced by the availability of manufacturing equipment on the open market and
product sales demand. This expansion, when undertaken, 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, we have no definitive
budgets or timetables for such expansion and this expansion, if any, will be
dependent upon market demand for our 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, we may
not be able to obtain additional funding or, that such funding, if available,
will not be obtained on terms favorable to or affordable by us.
Convertible Debenture
On October 4, 2002, we signed a Securities Purchase Agreement with La Jolla Cove
Investors, Inc. for the sale of a $250,000 8% convertible debenture and a
warrant to purchase up 30,000,000 shares of our common stock. The debenture
bears interest at 8%, matures in two years from the date of issuance, and is
convertible into our common stock, at the selling stockholder's option, at the
lesser of (i) $1.00 or (ii) 80% of the average of the five lowest volume
weighted average price days during the 20 trading days before but not including
the conversion date. The warrant may only be exercised concurrently with a
conversion of the debenture and then only for that number of shares of common
stock equal to 10 times the number of shares common stock issued to the
debenture holder on that conversion date. The exercise price of the warrant is
the lesser of (i) $1.00; or (ii) 80% of the average of the five lowest volume
weighted average price during the 20 trading days prior to the holder's election
to convert. See the "Selling Stockholders" section for a description of the
convertible debenture and warrant issued to the La Jolla Cove Investors, Inc.
We are obligated to file this Registration Statement under the Securities Act of
1933 to register the underlying conversion shares on either Form SB-2 or S-3 and
have said Registration Statement effective no later than 120 days after October
4, 2002.
La Jolla Cove Investors, Inc. (La Jolla) has contractually committed to convert
not less than 5.0% and not more than 10.0% of the original face value of the
Debenture monthly beginning the month after the effective date of the
Registration Statement and the Holder is required to concurrently exercise
warrants and purchase shares of common stock equal to ten (10) times the number
of shares of common stock issued to the Holder upon the respective mandatory
conversion of the Debenture.
21
La Jolla has further contractually agreed to restrict its ability to convert the
Debenture or exercise their warrants and receive shares of our common stock such
that the number of shares held by the Holder and its affiliates after such
conversion or exercise does not exceed 4.99% of the then issued and outstanding
shares of our common stock.
In the event an election to convert is made and the volume weighted average
price of our common stock is below $0.30 per share, we have the right to prepay
any portion of the outstanding Debenture that was elected to be converted, plus
any accrued and unpaid interest, at 125.0%.
La Jolla may demand repayment of the Debenture of 125.0% of the face amount
outstanding, plus all accrued and unpaid interest, in cash at any time prior to
the date that underlying Registration Statement under the Securities Act of 1933
has not been declared effective by the U. S. Securities and Exchange Commission
within 3 business days of such demand. If the repayment is accelerated, we are
also obligated to issue to the Holder 25,000 shares of common stock and $10,000
cash for each 30 day period, or portion thereof, during which the face amount,
including interest thereon, remains unpaid with the cash payment to increase to
$15,000 for each 30 day period the balance remains unpaid after the initial 90
day period.
If La Jolla does not elect to accelerate the Debenture, the Company shall
immediately issue and pay La Jolla 25,000 shares of common stock and $10,000
cash for each 30 day period, or portion thereof, during which the face amount,
including interest thereon, remains unpaid with the cash payment to increase to
$15,000 for each 30 day period the balance remains unpaid after the initial 90
day period.
Due to the contractually agreed mandatory conversion of this Debenture, we have
reflected this transaction in our balance sheet as a "mezzanine" level debt
obligation on its balance sheet, between "Total Liabilities" and "Shareholders'
Equity". Upon the respective mandatory conversion, we will relieve the
respective portion of the Debenture and the any related accrued, but unpaid
interest, and credit this amount to the respective "common stock" and
"additional paid-in capital" accounts in the shareholder's equity section for
the par value and excess amount over the par value of the respective shares
issued.
No value was assigned to the warrant issued to La Jolla. Upon exercise of the
warrant, we will record the issuance of the underlying shares as a new issuance
of common stock on the date of each respective exercise.
Concurrent with the execution of the Debenture agreement, we executed an
engagement letter with La Jolla's counsel for legal representation with regard
to the preparation of this Registration Statement under the Securities Act of
1933.
22
Research and Development
We plan on significantly increasing our spending on research and development
activities during Calendar 2003. We believe 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, we anticipate
completing the design, development and introduction of our 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
us 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.
23
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
Set forth below are the names, ages, positions, with the Company and
business experiences of the executive officers and directors of the Company.
Name Age Position(s) with Company
--------------- --- -----------------------------------------
J.A. Fernandez, Sr. 66 Chairman of the Board and Director of Sales
Andres F. Fernandez 37 President and Chief Executive Officer
Emilio D. Jara 38 Vice-President of Operations, Secretary and Director
Amelia Fernandez 66 Vice President and Director
Maria A. Fernandez 43 Director
Len Hale 58 Director
24
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 66, currently serves as the Chairman of the Board and
Director or Sales. He has been employed by AA 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 37, 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 AA 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
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 38, 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 AA 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.
25
Amelia Fernandez, age 66, currently serves as Vice President and Director. Mrs.
Fernandez has served in each of these capacities since September 2001. She
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 AA 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 43, currently serves as a Director. Mrs. Fernandez has
served as a Director since September 2001. She has been 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.
Len Hale, age 58, 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 $6M. He also installed a marine
division, archery division and manufacturing divisions. He has served on
numerous boards and industry organizations, including the Board of Governors of
SAAMI (Sporting Arms and Ammunition Manufacturers Association) and the Board of
Governors of the National Shooting Sports Foundation.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
No Director, Officer, Beneficial Owner of more than ten percent (10%) of any
class of equity securities of the Company failed to file reports required by
Section 16(a) of the Exchange Act during the most recent fiscal year or prior
fiscal years.
26
Item 10. Executive Compensation
The following summary compensation table sets forth the aggregate cash
compensation paid or accrued by the Company to each of the Company's executive
officers and key employees for services rendered to the Company during the
Company's fiscal year ended 2002, 2001 and 2000 and all plan and non-plan
compensation awarded to, earned by or paid to certain designated executive
officers.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricte Securities LTIP All
Name and Annual d Stock Underlying Pay- Other
Principal Year Salary Bonus Compen- Award(s) Options/ outs Compen-
Position ($) ($) sation ($) ($) SARs (f) sation ($)
(1)
----------------- ------ -------- -------- ------------ ---------- ------------ -------- ----------
J.A. 2000 $59,202 $0 $0 $0 $0 $0 $0
Fernandez, Sr., 2001 $50,859 $0 $0 $0 $0 $0 $0
Chairman, 2002 $77,770 $0 $0 $0 $0 $0 $0
Director of
Sales
Andres F. 2000 $88,438 $0 $0 $0 $0 $0 $0
Fernandez, 2001 $74,290 $0 $0 $0 $0 $0 $0
President and 2002 $103,508 $0 $0 $0 $0 $0 $0
Chief Executive
Officer
Emilio D. 2000 $36,400 $0 $0 $0 $0 $0 $0
Jara, Vice- 2001 $42,500 $0 $0 $0 $0 $0 $0
President 2002 $43,000 $0 $0 $0 $0 $0 $0
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 2002 $64,598 $0 $0 $0 $0 $0 $0
President
and
Director
Maria A. 2000 $0 $0 $0 $0 $0 $0 $0
Fernandez, 2001 $0 $0 $0 $0 $0 $0 $0
Director 2002 $0 $0 $0 $0 $0 $0 $0
Len 2000 $0 $0 $0 $0 $0 $0 $0
Hale, 2001 $0 $0 $0 $0 $0 $0 $0
Director 2002 $0 $0 $0 $0 $0 $0 $0
27
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, 2002, 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 14,905,905 26.9%
3545 NW 71st Street
Miami, Florida 33147
Andres F. Fernandez(2) Common 11,293,115 20.4%
3545 NW 71st Street
Miami, Florida 33147
Amelia C. Fernandez Common 4,281,900 7.7%
3545 NW 71st Street
Miami, Florida 33147
Maria A. Fernandez (3) Common 259,500 0.5%
Fernandez Friedman Grossman
& Kohn PLLC
101 S. 5th Street
Suite 2400
Louisville, KY 40202-3115
Emilio D. Jara Common 54,000 0.1%
3545 NW 71st Street
Miami, Florida 33147
Len C. Hale Common 200,000 0.4%
Hale Consulting, LLC
3700 Jesse Court
Montgomery, AL 36106
All officers and directors
as a group (6 persons)(4) Common 30,994,420 56.0%
--------------------
(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.
28
(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) These do not include the 384,500 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.
(4) 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
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.
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:
29
Exhibit No. Description
---------- -------------------------------------
2.1 [1] Share Exchange Agreement Between FBI Fresh Burgers International and F&F
Equipment, Inc., dated September 29, 2001 (Incorporated by referenced to
our Form 8-K filed with the SEC on October 4, 2001).
3.1 [1] Articles of Incorporation (Incorporated by reference to our registration
statement on Form SB-2 filed with the SEC on September 20, 2000, File No.
333-4660).
3.2 [1] Certificate of Amendment of Articles of Incorporation
(Incorporated by referenced to our Form 8-K filed with the SEC on October 4, 2001).
3.4 [1] Certificate of Amendment of Articles of Incorporation (Incorporated by
reference to our registration statement on Form SB-2 filed with the SEC on
September 20, 2000, File No. 333-4660).
3.5 [1] Amended and Restated Bylaws (Incorporated by reference to our Form 10QSB for the
quarter ended September 30, 2001).
3.6 * Articles of Incorporation for Industrial Plating Enterprise Co., subsidiary of
American Ammunition, Inc.
3.7 * ByLaws of Incorporation for Industrial Plating Enterprise Co., subsidiary of
American Ammunition, Inc.
4.1 [1] Common Stock Purchase Warrant with La Jolla Cove Investors, Inc., dated
October 4, 2002.
4.2 [1] Convertible Debenture with La Jolla Cove Investors, Inc., dated October 4, 2002.
4.3 [1] Addendum with La Jolla Cove Investors, Inc., dated October 4, 2002.
4.4 [1] Letter Agreement with La Jolla Cove Investors, dated October 4, 2002.
4.5 [1] Registration Rights Agreement with La Jolla Cove Investors, dated October 4, 2002.
4.6 [2] Letter Agreement with La Jolla Cove, dated December 2002.
5.1 [2] Sichenzia Ross Friedman Ference LLP Opinion and Consent.
23.1 [2] Consent of accountants.
23.2 [2] Consent of legal counsel.
99.1 * Certification by Chief Executive Officer pursuant to 18 U.S.C. 1350.
99.2 * Certification by Chief Financial Officer pursuant to 18 U.S.C. 1350.
[1] Previously filed with the Company's Registration Statement on Form SB-2
filed October 24, 2002
[2] Previously filed with the Company's Registration Statement on Form SB-2
which was refiled in its entirety on January 6, 2003.
* Filed herewith
(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.
A report on Form 8-K was filed on October 21, 2002 reporting a Convertible
Debenture and a Warrant to La Jolla Cove Investors, Inc.
30
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 27, 2003 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
By: /s/ Len Hale
--------------------------------------------------------
Len Hale, 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 27, 2003
J.A. Fernandez, Sr. and Director of Sales
/s/ Andres F. Fernandez
---------------------- President and Chief March 27, 2003
Andres F. Fernandez Executive Officer
/s/ Emilio D. Jara
---------------------- Vice-President of Operations, March 27, 2003
Emilio D. Jara Secretary and Director
/s/ Amelia Fernandez
---------------------- Vice President and Director March 27, 2003
Amelia Fernandez
/s/ Maria A. Fernandez
---------------------- Director March 27, 2003
Maria A. Fernandez
/s/ Len Hale
---------------------- Director March 27, 2003
Len Hale
31
CERTIFICATIONS
I, Andres Fernandez, certify that:
1. I have reviewed this annual report on Form 10-KSB of American
Ammunition, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
exchange act rules 13a-14 and 15d- 14) for the registrant and have:
(a.) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b.) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "evaluation date"); and
(c.) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the evaluation date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a.) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
(b.) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 27, 2003
By: /s/ Andres Fernandez
---------------------------------------------
Andres Fernandez,
Chief Executive Officer or equivalent thereof
32
I, Andres Fernandez, certify that:
1. I have reviewed this annual report on form 10-KSB of American
Ammunition, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
exchange act rules 13a-14 and 15d- 14) for the registrant and have:
(a.) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b.) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "evaluation date"); and
(c.) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the evaluation date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a.) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
(b.) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 27, 2003
By: /s/ Andres Fernandez
---------------------------------------------
Andres Fernandez,
Chief Financial Officer or equivalent thereof
33
AMERICAN AMMUNITION, INC.
CONTENTS
Page
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Consolidated Balance Sheets
as of December 31, 2002 and 2001 F-3
Consolidated Statement of Operations and Comprehensive Loss
for the years ended December 31, 2002 and 2001 F-5
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 2002 and 2001 F-6
Consolidated Statement of Cash Flows
for the years ended December 31, 2002 and 2001 F-7
Notes to Consolidated Financial Statements F-9
F-1
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.
We have audited the accompanying consolidated balance sheets of American
Ammunition, Inc. (a California corporation) and Subsidiaries (Florida
corporations) as of December 31, 2002 and 2001 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, 2002 and 2001,
respectively. 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 audits 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 consolidated financial position of
American Ammunition, Inc. as of December 31, 2002 and 2001 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the two years ended December 31, 2002 and 2001, respectively,
in conformity with generally accepted accounting principles generally accepted
in the United States of America.
/s/ S.W. Hatfield, CPA
S. W. HATFIELD, CPA
Dallas, Texas
March 7, 2003 (except for Note J
as to which the date is March 20, 2003)
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.
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
December 31, December 31,
2002 2001
------------------------------------
ASSETS
Current Assets
Cash on hand and in bank $ 157,316 $ 596,419
Accounts receivable - trade, net of allowance for
doubtful accounts of $-0- and $-0-, respectively 31,288 -
Inventory 384,814 125,930
Prepaid expenses 19,391 9,458
------------ ------------
Total Current Assets 592,809 731,807
------------ ------------
Property and Equipment - at cost or contributed value
Manufacturing equipment 6,843,135 6,470,064
Office furniture and fixtures 58,528 50,856
Leasehold improvements 188,263 182,052
------------ ------------
7,089,926 6,702,972
Accumulated depreciation (3,393,301) (2,737,717)
------------ ------------
Net Property and Equipment 3,696,625 3,965,255
------------ ------------
Other Assets
Deposits and other 77,860 74,310
------------ ------------
TOTAL ASSETS $ 4,367,294 $ 4,771,372
============ ============
- Continued -
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
AMERICAN AMMUNITION, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, 2002 and 2001
December 31, December 31,
2002 2001
------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of leases payable $ 9,507 $ 8,365
Customer deposits 80,953 -
Accounts payable - trade 414,910 469,543
Accrued interest payable 18,709 1,000
Accrued dividends payable 12,600 -
Note payable to stockholder - 100,000
------------ ------------
Total Current Liabilities 536,679 579,908
Long-Term Liabilities
Note payable to a bank 450,000 950,000
Capital leases payable 7,841 17,348
------------ ------------
Total Liabilities 994,520 1,547,256
------------ ------------
Commitments and Contingencies
Mandatory Convertible Debenture 250,000 -
------------ ------------
Mandatory Convertible Preferred Stock
41,000 and 46,000 shares issued and outstanding 205,000 230,000
------------ ------------
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.
55,328,166 and 49,975,614 shares issued and outstanding 55,328 49,971
Additional paid-in capital 16,523,164 14,700,776
Accumulated deficit (13,660,718) (11,754,631)
------------ ------------
Total Stockholders' Equity 2,917,774 2,996,116
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,367,294 $ 4,771,372
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
AMERICAN AMMUNITION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Years ended December 31, 2002 and 2000
Year ended Year ended
December 31, December 31,
2002 2001
-------------------------------------
Revenues $ 1,409,364 $ 427,529
------------ ------------
Cost of Sales
Materials 1,041,553 428,909
Direct Labor 633,787 260,012
Other direct costs and expenses 128,371 66,664
Depreciation 652,943 628,925
------------ ------------
Total Cost of Sales 2,456,654 1,384,510
------------ ------------
Gross Profit (1,047,290) (956,981)
------------ ------------
Operating Expenses
Research and development expenses 3,662 3,963
Marketing and promotion expenses 23,453 4,043
Salaries, wages and related expenses 341,532 365,079
Other operating expenses 389,732 968,494
Interest expense 72,444 453,943
Depreciation expense 2,642 0,911
Compensation expense related to common stock
issuances at less than "fair value" 11,538 -
------------ ------------
Total Operating Expenses 845,003 1,806,433
------------ ------------
Loss from Operations (1,892,293) (2,763,414)
Other Income (Expense)
Other income (expense) 9,206
Settlement of litigation - 754,830
Amortization of Beneficial Conversion
Feature Discount on Preferred Stock - (1,207,993)
------------ ------------
Loss before Income Taxes (1,883,087) (3,216,577)
Provision for Income Taxes - -
------------ ------------
Net Loss (1,883,087) (3,216,577)
Other Comprehensive Income - -
------------ ------------
Comprehensive Loss $ (1,883,087) $ (3,216,577)
============ ============
Loss per weighted-average share of common stock outstanding,
computed on net loss - basic and fully diluted $ (0.04) $ (0.11)
============ ============
Weighted-average number of common shares outstanding 52,605,993 28,019,722
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
AMERICAN AMMUNITION, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2002 and 2001
Mandatory Convertible
Preferred Stock Common Stock Additional
------------------ ------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
-----------------------------------------------------------------------------------
Balances at January 1, 2001 - - 22,000,000 $ 22,000 $ 4,142,121 $ (8,518,054) $ (4,353,933)
Recapitalization due to reverse
acquisition transaction with
FBI Fresh Burgers International - - 4,850,000 4,850 (4,850) - -
Issuance of common stock for
Cash - - 222,222 222 99,778 - 100,000
Settlement of accounts payable - - 535,272 535 240,337 - 240,872
Consulting fees - - 3,121,200 3,122 410,954 - 414,076
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 (1,749,320)(8,746,600) 19,242,520 19,242 8,727,358 - 8,746,600
Net loss for the year - - - - - (3,216,577) (3,216,577)
---------- ---------- ----------- --------- ----------- ----------- ----------
Balances at December 31, 2001 46,000 230,000 49,971,214 49,971 14,678,776 (11,734,631) 2,994,116
Issuance of common stock for
Cash - - 4,470,805 4,471 1,469,462 - 1,473,933
Conversion of debt and accrued interest - - 277,777 278 124,722 - 125,000
Conversion of trade accounts payable - - 432,721 433 181,584 - 182,017
Consulting fees - - 98,664 98 33,297 - 33,395
Payment of preferred stock dividends - - 21,985 22 10,378 - 10,400
Conversion of Preferred Stock (5,000) (25,000) 55,000 55 24,945 - 25,000
Costs of acquiring convertible debenture - - - - - (20,000) (20,000)
Dividends declared on Preferred Stock - - - - - (23,000) (23,000)
Net loss for the year - - - - - (1,883,087) (1,883,087)
---------- ---------- ----------- --------- ----------- ----------- ----------
Balances at December 31, 2002 41,000 $ 205,000 55,328,166 $ 55,328 $ 16,523,164 $(13,660,718) $ 2,917,774
========== ========= ========== ========= ========== =========== =========
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
AMERICAN AMMUNITION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002 and 2001
Year ended Year ended
December 31, December 31,
2002 2001
-------------------------------------
Cash flows from operating activities
Net loss for the year $ (1,883,087) $ (3,216,577)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 655,585 639,836
Gain on litigation settlement - (754,830)
Common stock issued for fees and services 33,395 540,534
Accrued interest converted to preferred stock - 240,440
Amortization of conversion discount on preferred stock - 1,207,993
Accrued interest converted to common stock 24,000 -
Compensation expense related to common stock
issuances at less than "fair value" 11,538 -
(Increase) Decrease in
Accounts receivable (31,288) 60,415
Inventory (258,884) 207,480
Prepaid expenses, deposits and other (13,483) (24,056)
Increase (Decrease) in
Accounts payable and accrued liabilities 126,384 (639)
Interest payable 18,709 (1,000)
Customer deposits 80,953 -
------------- -------------
Net cash provided by (used in) operating activities (1,236,178) (1,100,404)
------------- -------------
Cash flows from investing activities
Purchase of property and equipment (386,955) (105,657)
------------- -------------
Net cash used in investing activities (386,955) (105,657)
------------- -------------
Cash flows from financing activities
Increase in cash overdraft - 7,760
Cash received (paid) on short term loans - net - (451,652)
Cash received on long-term loans - 950,000
Principal paid on long-term loans (500,000) -
Principal paid on long-term capital leases (8,365) (82,571)
Cash received on sale of Mandatory Convertible Preferred Stock - 1,423,000
Cash received on issuance of Mandatory Convertible Debenture 250,000 -
Cash received on sale of common stock 1,462,395 100,000
Cash paid to acquire capital (20,000) (144,915)
------------- -------------
Net cash provided by financing activities 1,184,030 1,801,622
------------- -------------
INCREASE (DECREASE) IN CASH (439,103) 595,561
Cash at beginning of year 596,419 858
------------- -------------
Cash at end of year $ 157,316 $ 596,419
============= =============
- Continued -
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
AMERICAN AMMUNITION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31, 2001 and 2000
Year ended Year ended
December 31, December 31,
2002 2001
-----------------------------------
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 29,735 $ 214,503
============= =============
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
============= =============
Conversion of debt and prior period accrued
interest into common stock $ 101,000 $ -
============= =============
Payment of accounts payable with
issuance of common stock $ 182,017 $ 240,872
============= =============
Payment of accrued dividends on preferred
stock with common stock $ 10,400 $ -
============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
F-8
AMERICAN AMMUNITION, INC.
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.
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. 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".
In June 2002, American Ammunition, Inc. formed a wholly owned subsidiary,
Industrial Plating Enterprise Co. (IPE), which started production on June 14,
2002. IPE is a fully licensed and approved state of the art electrochemical
metallization facility with enormous capacity for processing the Company's line
of projectiles as well as other products and services while employing
environmentally sound water conservation and proven waste treatment techniques.
The facility meets or exceeds all current environmental requirements and enjoys
the "conditionally exempt small quantity generator" status for State and Federal
regulations.
Note B - Preparation of Financial Statements
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, the historical financial statements of the Company are
those of F&F Equipment, Inc. from it's inception and those of the consolidated
entity subsequent to the September 29, 2001 transaction date.
The Company and its subsidiaries follow the accrual basis of accounting in
accordance with accounting principles generally accepted in the United States of
America and have adopted a year-end of December 31 for all entities.
F-9
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note B - Preparation of Financial Statements - Continued
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
Management further acknowledges that it is solely responsible for adopting sound
accounting practices, establishing and maintaining a system of internal
accounting control and preventing and detecting fraud. The Company's system of
internal accounting control is designed to assure, among other items, that 1)
recorded transactions are valid; 2) valid transactions are recorded; and 3)
transactions are recorded in the proper period in a timely manner to produce
financial statements which present fairly the financial condition, results of
operations and cash flows of the Company for the respective periods being
presented
For segment reporting purposes, the Company operated in only one industry
segment during the periods represented in the accompanying financial statements
and makes all operating decisions and allocates resources based on the best
benefit to the Company as a whole.
The accompanying consolidated financial statements contain the accounts of
American Ammunition, Inc. (formerly FBI Fresh Burgers International) and its
wholly-owned subsidiaries, F&F Equipment, Inc. and Industrial Plating Enterprise
Co. All significant intercompany transactions have been eliminated. The
consolidated entities are collectively referred to as "Company".
Note C - 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 and Revenue Recognition
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.
The Company ships all product on an FOB-Plant basis. Accordingly, revenue
is recognized by the Company at the point at which an order is shipped at a
fixed price, collection is reasonably assured, the Company has no remaining
performance obligations and no right of return by the purchaser exists.
F-10
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note C - Summary of Significant Accounting Policies - Continued
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. Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. At December 31, 2002 and 2001, 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, 2002 and 2001, 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.
6. 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 September 30, 2002 and 2001, and
subsequent thereto, the Company had no warrants and/or options outstanding.
7. Advertising costs
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.
8. Reclassifications
Certain amounts in the accompanying financial statements for the quarter
ended September 30, 2001 have been reclassified to conform to the Fiscal
2002 presentations.
F-11
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note D - Correction of an Error
During Management's review of the Company's internal control structure, it was
noted that the Company continues to realize a negative gross profit and that the
inventory valuation calculations for the recorded carrying cost of inventory on
the balance sheet as of December 31, 2001 had not been properly calculated using
the "lower of cost or market" method by recognizing a targeted gross profit
percentage based on Management's best estimate. This error created an
overstatement in the inventory carrying value at December 31, 2001 and an
understatement in cost of goods sold for the year ended December 31, 2001.
The effect of any and all changes are reflected in the accompanying financial
statements as of the respective date of each transaction and the effect of the
corrections are summarized below by fiscal period and cumulatively.
Year ended Cumulative
December 31, effect of
2001 changes
------------ ----------
Net Loss, as previously reported $(3,028,766)
Effect of the correction of an error
Recalculation of the carrying value
of inventory at December 31, 2001 (187,811) $(187,811)
Total effect of changes on
Loss from Operations and Net Loss (187,811) (187,811)
Net Loss, as restated $(3,216,577) $(187,811)
=========== ===========
Earnings per share, as previously reported $(0.11)
Total effect of changes - $ -
=========== ===========
Earnings per share, as restated $(0.11)
===========
Note E - 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.
Interest rate risk is the risk that the Company's earnings are subject to
fluctuations in interest rates on either investments or on debt and is fully
dependent upon the volatility of these rates. The Company does not use
derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company's earnings are subject to
fluctuations in interest rates or foreign exchange rates and are fully dependent
upon the volatility of these rates. The company does not use derivative
instruments to moderate its exposure to financial risk, if any.
F-12
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note F - Inventory
As of December 31, 2002 and 2001, inventory consisted of the following
components:
December 31, December 31,
2002 2001
----------- -----------
Raw materials $ 149,824 $ 82,454
Work in process 116,216 24,232
Finished goods 118,774 19,244
Totals $ 384,814 $ 125,930
======== ========
Note G - Property and Equipment
Property and equipment consist of the following components:
December 31, December 31, Estimated
2002 2001 useful life
----------- ----------- -----------
Manufacturing equipment $6,843,135 $6,470,064 10 years
Office furniture and fixtures 58,528 50,856 7 years
Leasehold improvements 188,263 182,052 20 years
7,089,926 6,702,972
Accumulated depreciation (3,393,301) (2,737,717)
Net property and equipment $3,696,625 $3,965,255
========= =========
Total depreciation expense charged to operations for the years ended December
31, 2002 and 2001 was approximately $655,585 and $639,836, respectively.
Included in the amounts reflected in the accompanying balance sheet are the
following fixed assets on long-term capital leases:
December 31, December 31,
2001 2000
----------- -----------
Manufacturing and processing equipment $ 153,400 $ 153,400
Less accumulated depreciation (54,519) (39,179)
$ 98,881 $ 114,221
======== ========
F-13
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note H - Notes payable to a Bank
During 2001, the Company was operating under a bank approved moratorium on the
payment of principal and interest on all notes payable and the Company and its
President commenced litigation against the lending institution. 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. 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 the June 29, 2001 transaction, the Company recognized a one-time
gain on the settlement of approximately $754,830 on the settlement date.
Note I - Capital Leases Payable
Capital leases payable consist of the following as of December 31, 2002 and
2001, respectively:
December 31, December 31,
2002 2001
----------- -----------
Three capital leases, respectively, payable to various
equipment financing companies. Interest, at December 31,
2002, ranging between 11.37% and 14.05%. Payable in
aggregate monthly installments of approximately $935,
including accrued interest, as of December 31, 2002. Final
maturities occur between September 2004 and December 2004.
Collateralized the underlying leased manufacturing
equipment. $ 17,348 $ 25,713
Less current maturities (9,507) (8,365)
Long-term portion $ 7,841 $ 17,348
======= ======
Future maturities of capital leases payable are as follows:
Year ending
December 31 Amount
----------- --------
2003 $ 9,507
2004 7,841
Totals $ 17,348
======
(Remainder of this page left blank intentionally)
F-14
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note J - 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 $950,000 note payable to another
financial institution. The note bore interest at the Wall Street Journal
published prime rate plus 2.0%.
During Calendar 2002, the Company made five (5) lump-sum principal reductions of
$100,000 each (or an aggregate of $500,000) to the outstanding balance on this
note. As of December 31, 2002, the Company owed $450,000 on this note. Upon each
lump-sum payment, the Company executed a modification to the payment terms on
the note.
At December 31, 2002, the note payment terms were as follows: payments of
interest only beginning July 28, 2003 through January 28, 2004. Thereafter,
starting on January 28, 2004, 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.
On February 28 and March 20, 2003, respectively, the Company made additional
principal reductions of $100,000 and $350,00 fully retiring the outstanding
debt.
Note K - Convertible Debenture
On October 4, 2002, the Company issued an 8.0% Convertible Debenture (Debenture)
in the face amount of $250,000 and a Warrant which requires the Holder to
purchase shares of common stock equal to ten (10) times the number of shares of
common stock issued to the Holder on conversion of the Debenture. In no event
shall the number of shares issued under the Warrant exceed 30,000,000.
The Debenture bears interest at 8.0% and matures two years from the date of
issuance. The Debenture is convertible into common stock, at the option of the
Holder, at the lesser of $1.00 per share or 80.0% of the average of the 5 lowest
volume weighted average price days during the 20 trading days before, but not
including the date of the Holder's election to convert. The Warrant is
exercisable at the same price. The full principal amount of the Debenture is due
upon default, as defined in the Debenture agreement. The Debenture interest is
payable monthly in arrears commencing on November 15, 2002.
The Company is obligated to file a Registration Statement under the Securities
Act of 1933 to register the underlying conversion shares on either Form SB-2 or
S-3 and have said Registration Statement effective no later than 120 days after
October 4, 2002.
The Debenture Holder has contractually committed to convert not less than 5.0%
and not more than 10.0% of the original face value of the Debenture monthly
beginning the month after the effective date of the Registration Statement and
the Holder is required to concurrently exercise warrants and purchase shares of
common stock equal to ten (10) times the number of shares of common stock issued
to the Holder upon the respective mandatory conversion of the Debenture.
The Holder has further contractually agreed to restrict its ability to convert
the Debenture or exercise their warrants and receive shares of the Company's
common stock such that the number of shares held by the Holder and its
affiliates after such conversion or exercise does not exceed 4.99% of the then
issued and outstanding shares of common stock of the Company.
F-15
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Convertible Debenture - Continued
In the event an election to convert is made and the volume weighted average
price of the Company's common stock is below $0.30 per share, the Company shall
have the right to prepay any portion of the outstanding Debenture that was
elected to be converted, plus any accrued and unpaid interest, at 125.0%.
The Holder may demand repayment of the Debenture of 125.0% of the face amount
outstanding, plus all accrued and unpaid interest, in cash at any time prior to
the date that underlying Registration Statement under the Securities Act of 1933
has not been declared effective by the U. S. Securities and Exchange Commission
within 3 business days of such demand. If the repayment is accelerated, the
Company is also obligated to issue to the Holder 25,000 shares of common stock
and $10,000 cash for each 30 day period, or portion thereof, during which the
face amount, including interest thereon, remains unpaid with the cash payment to
increase to $15,000 for each 30 day period the balance remains unpaid after the
initial 90 day period.
If the Holder does not elect to accelerate the Debenture, the Company shall
immediately issue and pay to the Holder 25,000 shares of common stock and
$10,000 cash for each 30 day period, or portion thereof, during which the face
amount, including interest thereon, remains unpaid with the cash payment to
increase to $15,000 for each 30 day period the balance remains unpaid after the
initial 90 day period.
Due to the contractually agreed mandatory conversion of this Debenture, the
Company has reflected this transaction in its balance sheet as a "mezzanine"
level debt obligation on its balance sheet, between "Total Liabilities" and
"Shareholders' Equity". Upon the respective mandatory conversion, the Company
will relieve the respective portion of the Debenture and the any related
accrued, but unpaid interest, and credit this amount to the respective "common
stock" and "additional paid-in capital" accounts in the shareholder's equity
section for the par value and excess amount over the par value of the respective
shares issued.
No value was assigned to the issued warrant. Upon exercise of the warrant, the
Company will record the issuance of the underlying shares as a new issuance of
common stock on the date of each respective exercise.
Concurrent with the execution of the Debenture agreement, the Company executed
an engagement letter with the Holder's counsel for legal representation with
regard to the preparation of the aforementioned Registration Statement under the
Securities Act of 1933.
Note L - Preferred Stock Transactions
In September, October and November 2001, the Company sold an aggregate 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
initially 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 December 2001, at the request of the holders
of the Series A Preferred Stock, the Company and the individual holders modified
the holding period for conversion to allow for conversion in December 2001.
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.
F-16
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note L - Preferred Stock Transactions - Continued
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 December 2001, concurrent with a modification in the holding period prior to
conversion, certain holders of the Series A Preferred Stock orally 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 prior to December 31, 2001. Due to the timing of the requisite
documentation, the clerical activities related to this conversion were not
completed until February 2002.
In conjunction with the Series A Preferred Stock, certain shares were sold after
the Company's common stock was approved for trading by the National Association
of Securities Dealers on the OTC Bulletin Board in October 2001. The shares of
Series A Preferred Stock sold subsequent to this date had an equivalent per
share value of common stock below the ending quoted market price of the
Company's common stock on their respective issue dates. 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 eligible conversion date, as amended. All
of the shares sold subsequent to the initial trading date were converted in
December 2001 and, accordingly, the approximate $1,207,993 in Beneficial
Conversion Feature Discount was fully amortized to operations. As the Company's
common stock did not have any trading activity prior to the October 2001
approval for trading and the first posted price for the Company's common stock
on October 23, 2001, and there was no available equivalent per share value for
the shares of Series A Preferred Stock, no Beneficial Conversion Feature
Discount was generated on Series A Preferred Stock sold prior to the initial
trading date.
In December 2002, a holder of 5,000 shares of Series A Preferred Stock exercised
his conversion rights and converted these shares of Series A Preferred Stock
into 55,000 shares of restricted, unregistered common stock.
Note M - 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. The effect of this action is reflected in the accompanying financial
statements as of the first day of the first period presented.
In September 2001, the Company issued an aggregate 21,000,000 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 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note M - Common Stock Transactions
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.
In February 2002, the Company converted $100,000 in short-term debt payable and
accrued interest of approximately $25,000 to an existing shareholder into
277,778 shares of restricted, unregistered common stock. This transaction was
consummated at a price of $0.45 per share, which approximates the discounted
"fair value" of the Company's common stock based on the quoted closing price of
the Company's common stock on the date of the respective transaction. The
Company utilizes a discount of approximately 50.0% on the quoted closing price
to value all transactions settled with restricted, unregistered common stock
issued pursuant to Rule 144 of the U. S. Securities and Exchange Commission.
This transaction paid in full all outstanding short-term debt.
In March 2002, in two separate transactions, the Company sold an aggregate
1,388,890 shares of restricted, unregistered common stock to two separate
investors for aggregate proceeds of approximately $500,000. Each sale was made
at a price of $0.36 per share, which approximates the discounted "fair value" of
the Company's common stock based on the quoted closing price of the Company's
common stock on the date of each respective transaction. These proceeds were
used to supplement operational working capital.
In March 2002, the Company issued 32,000 shares of restricted, unregistered
common stock to a member of the Company's Board of Directors for consulting
services related to the Company's reverse merger transaction and for various
marketing services. This transaction was valued at approximately $11,520, or
$0.36 per share, which approximates the discounted "fair value" of the Company's
common stock based on the quoted closing price of the Company's common stock on
the date of the respective transaction.
In March 2002, the Company issued 41,665 shares of restricted, unregistered
common stock to an unrelated party for shareholder and other public relation
services. This transaction was valued at approximately $15,000, or $0.36 per
share, which approximates the discounted "fair value" of the Company's common
stock based on the quoted closing price of the Company's common stock on the
date of the respective transaction.
In April and May 2002, the Company issued an aggregate 432,721 shares of
restricted, unregistered common stock to three creditors in settlement of
approximately $182,017 in open trade accounts payable. Each issuance was made at
a price of either $0.45 or $0.36 per share, which approximates the discounted
"fair value" of the Company's common stock based on the quoted closing price of
the Company's common stock on the date of each respective transaction.
In June 2002, the Company issued 347,223 shares of restricted, unregistered
common stock to an existing shareholder to reimburse said shareholder for his
payment of previously accrued legal fees associated with the bank related
litigation, which was concluded in June 2001, on behalf of the Company and for
other consulting services currently being provided by the shareholder. This
transaction was valued at approximately $125,000, or $0.36 per share, which
approximates the discounted "fair value" of the Company's common stock based on
the quoted closing price of the Company's common stock on the date of the
respective transaction.
In June 2002, the Company sold 277,778 shares of restricted, unregistered common
stock to an investor for aggregate proceeds of approximately $100,000. This sale
was made at a price of $0.36 per share, which approximates the discounted "fair
value" of the Company's common stock based on the quoted closing price of the
Company's common stock on the date of the respective transaction. The proceeds
of this transaction were used to supplement operational working capital.
F-18
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note M - Common Stock Transactions - Continued
In July 2002, the Company sold 384,615 shares of restricted, unregistered common
stock to an existing shareholder for cash proceeds of approximately $100,000.
This sale was made at a price of $0.26 per share, which approximates the
discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used to pay down an
equivalent portion of the Company's long-term note payable to a bank.
In August 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of $100,000. This sale
was made at a price of $0.26 per share, which was below the discounted "fair
value" of the Company's common stock based on the quoted closing price of the
Company's common stock on the date of the respective transaction. The
differential between the discounted "fair value" (approximately $0.29 per share)
and the selling price resulted in a charge to operations of approximately
$11,346 for compensation expense related to common stock issuances at less than
"fair value". The proceeds of this transaction were used to pay down an
equivalent portion of the Company's long-term note payable to a bank.
In August 2002, the Company sold 20,506 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$6,152. This sale was made at a price of $0.30 per share, which approximates the
discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used to directly retire a
trade account payable to a specific vendor.
In August 2002, the Company issued 24,999 shares of restricted, unregistered
common stock to an unrelated party for shareholder and other public relation
services. This transaction was valued at approximately $6,875, or $0.28 per
share, which approximates the discounted "fair value" of the Company's common
stock based on the quoted closing price of the Company's common stock on the
date of the respective transaction.
In September 2002, the Company sold 277,778 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$100,000. This sale was made at a price of $0.36 per share, which approximates
the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used to pay down an
equivalent portion of the Company's long-term note payable to a bank.
In September 2002, the Company sold 277,778 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$100,000. This sale was made at a price of $0.26 per share, which approximates
the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds from this transaction were used to support operational
working capital.
In September 2002, the Company sold 222,222 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$100,000. This sale was made at a price of $0.45 per share, which approximates
the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used to support operational
working capital.
In November 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$100,000. This sale was made at a price of $0.26 per share, which approximates
the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used to pay down an
equivalent portion of the Company's long-term note payable to a bank.
F-19
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note M - Common Stock Transactions - Continued
In December 2002, the Company sold an aggregate 120,170 shares of restricted,
unregistered common stock to an existing shareholder in three separate
transactions valued at an aggregate of approximately $31,244. These sales were
made at a price of $0.26 per share, which was in excess of the discounted "fair
value" of the Company's common stock on the date of each respective transaction.
The proceeds of this transaction were used to directly retire a trade account
payable to a specific vendor.
In December 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$100,000. This sale was made at a price of $0.26 per share, which was in excess
of the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used to pay down an
equivalent portion of the Company's long-term note payable to a bank.
In December 2002, the Company issued 55,000 shares of restricted, unregistered
common stock upon the exercise of 5,000 shares of outstanding Series A Preferred
Stock upon the exercise of the conversion option by the Holder of the Series A
Preferred Stock.
During June, July and September 2002, the Company issued an aggregate 21,987
shares of restricted, unregistered common stock in payment of approximately
$10,400 in accrued dividends payable on the Company's outstanding Series A
Preferred Stock for the quarters ended December 31, 2001, March 31, 2002, June
30, 2002 and September 30, 2002.
Note N - 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.
Note O - Income Taxes
The components of income tax (benefit) expense for the years ended December 31,
2002 and 2001, respectively, are as follows:
Year ended Year ended
December 31, December 31,
2002 2001
----------- ------------
Federal:
Current $ - $ -
Deferred - -
- -
State:
Current - -
Deferred - -
- -
Total $ - $ -
====== ======
F-20
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note O - Income Taxes - Continued
As of December 31, 2002, the Company has a net operating loss carryforward of
approximately $6,600,000 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.
The Company's income tax expense (benefit) for the years ended December 31, 2002
and 2001, respectively, differed from the statutory federal rate of 34 percent
as follows:
Year ended Year ended
December 31, December 31,
2002 2001
----------- ------------
Statutory rate applied to loss before income taxes $ (640,000) $(1,094,000)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Other, including reserve for deferred tax asset 640,000 1,094,000
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, 2002 and 2001, respectively:
Year ended Year ended
December 31, December 31,
2002 2001
----------- ------------
Deferred tax assets - long-term
Net operating loss carryforwards $ 2,244,000 $ 1,615,000
Deferred tax liabilities - long-term
Statutory depreciation differences (250,000) (250,000)
1,994,000 1,365,000
Less valuation allowance (1,994,000) (1,365,000)
Net Deferred Tax Asset $ - $ -
========== ===========
During the years ended December 31, 2002 and 2001, respectively, the valuation
allowance increased by approximately $629,000 and $815,000.
F-21
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note P - 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. This Agreement was terminated in
conjunction with the execution of the Settlement and Compromise Agreement on
June 29, 2001.
Note Q - Significant Customers
During the year ended December 31, 2002, the Company had two separate customers
responsible for an aggregate of approximately 66.0% (43.2% and 22.8%,
respectively) of total sales. There were no other customers responsible for more
than 10.0% of total net sales during 2002.
During the year ended December 31, 2001, the Company had a single customer
responsible for an aggregate of approximately 51.0% of total sales. There were
no other customers responsible for more than 10.0% of total net sales during
2001.
F-22