UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-QSB
--------------------------------------------------------------------------------
(Mark one)
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended: March 31, 2003
[X] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ______________ to _____________
--------------------------------------------------------------------------------
Commission File Number: 0-32379
American Ammunition, Inc.
---------------------------------------
(Exact name of small business issuer as specified in its charter)
California 91-2021594
-------------------------- ----------------------------
(State of incorporation) (IRS Employer ID Number)
3545 NW 71st Street, Miami, FL 33147
--------------------------------------
(Address of principal executive offices)
(305) 835-7400
--------------------------
(Issuer's telephone number)
--------------------------------------------------------------------------------
Check whether the issuer (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 [_]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: May 19, 2003: 58,696,522
Transitional Small Business Disclosure Format (check one): YES [_] NO [X]
American Ammunition, Inc.
Form 10-QSB for the Quarter ended March 31, 2003
Table of Contents
Page
Part I - Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 20
Item 3 Controls and Procedures 25
Part II - Other Information
Item 1 Legal Proceedings 25
Item 2 Changes in Securities 25
Item 3 Defaults Upon Senior Securities 27
Item 4 Submission of Matters to a Vote of Security Holders 27
Item 5 Other Information 27
Item 6 Exhibits and Reports on Form 8-K 28
Signatures 29
Certifications under Section 302 of Sarbanes-Oxley Act of 2002 27
Part I
Item 1 - Financial Statements
American Ammunition, Inc.
Consolidated Balance Sheets
March 31, 2003 and 2002
(Unaudited)
March 31, March 31,
2003 2002
------------- -------------
ASSETS
Current Assets
Cash on hand and in bank $ 597,778 $ 466,934
Accounts receivable - trade, net of
allowance for doubtful accounts of $-0- and $-0-, respectively 194,827 198,927
Inventory 409,940 619,449
Prepaid expenses 25,307 15,560
------------- -------------
Total Current Assets 1,224,852 1,300,870
------------- -------------
Property and Equipment - at cost
Manufacturing equipment 6,848,344 6,560,626
Office furniture and fixtures 58,528 50,856
Leasehold improvements 190,028 183,052
------------- -------------
7,096,900 6,794,534
Accumulated depreciation (3,558,507) (2,897,980)
------------- -------------
Net Property and Equipment 3,538,393 3,896,554
------------- -------------
Other Assets
Deposits and other 77,710 77,710
------------- -------------
TOTAL ASSETS $ 4,841,105 $ 5,275,134
============= =============
- Continued -
The financial information presented herein has been
prepared by management without audit by independent
certified public accountants.
The accompanying notes are an integral part of these consolidated financial
statements. 3
American Ammunition, Inc.
Consolidated Balance Sheets - Continued
March 31, 2003 and 2002
(Unaudited)
March 31, March 31,
2003 2002
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of leases payable $ 9,507 $ 8,365
Customer deposits 30,000 -
Accounts payable - trade 384,115 462,255
Working capital advance 200,000 -
Accrued expenses 18,709 37,501
Accrued dividends payable 14,000 -
------------- -------------
Total Current Liabilities 656,431 508,121
Long-Term Liabilities
Note payable to a bank - 950,000
Capital leases payable 5,572 15,340
------------- -------------
Total Liabilities 662,003 1,473,461
------------- -------------
Commitments and Contingencies
Convertible Debenture 215,000 -
------------- -------------
Mandatory Convertible Preferred Stock
32,000 and 45,600 shares issued and outstanding 160,000 228,000
------------- -------------
Stockholders' Equity
Preferred stock - $0.001 par value
20,000,000 shares authorized.
1,795,320 shares allocated to Series A - -
Common stock - $0.001 par value.
300,000,000 shares authorized.
58,696,522 and 51,642,276 shares issued and outstanding 58,697 51,642
Additional paid-in capital 17,710,578 15,324,105
Accumulated deficit (13,965,173) (11,802,074)
------------- -------------
Total Stockholders' Equity 3,804,102 3,573,673
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,841,105 $ 5,275,134
============= =============
The financial information presented herein has been
prepared by management without audit by independent
certified public accountants.
The accompanying notes are an integral part of these consolidated financial
statements. 4
American Ammunition, Inc.
Consolidated Statements of Operations and Comprehensive Loss
Three months ended March 31, 2003 and 2002
(Unaudited)
Three months ended
March 31, 2003 March 31, 2002
-------------- --------------
Revenues - net of returns and allowances $ 608,437 $ 272,493
-------------- --------------
Cost of Sales
Materials, Direct Labor and other direct costs 381,600 259,767
Depreciation 164,319 157,697
-------------- --------------
Total Cost of Sales 675,105 417,464
-------------- --------------
Gross Profit (66,668) (144,971)
-------------- --------------
Operating Expenses
Research and development expenses - 2,048
Marketing and promotion expenses 9,932 550
Other operating expenses 211,149 42,145
Interest expense 11,720 43,974
Depreciation expense 886 2,566
-------------- --------------
Total Operating Expenses 233,687 91,283
-------------- --------------
Loss from Operations (300,355) (236,254)
Other Income (Expense) - -
-------------- --------------
Loss before Income Taxes (300,355) (236,254)
Provision for Income Taxes - -
-------------- --------------
Net Loss (300,355) (236,254)
Other Comprehensive Income - -
-------------- --------------
Comprehensive Loss $ (300,355) $ (236,254)
============== ==============
Loss per weighted-average share of common
stock outstanding, computed on net loss -
basic and fully diluted $ (0.01) $ (0.01)
============== ==============
Weighted-average number of
common shares outstanding 56,635,979 50,165,120
============== ==============
The financial information presented herein has been
prepared by management without audit by independent
certified public accountants.
The accompanying notes are an integral part of these consolidated financial
statements. 5
American Ammunition, Inc.
Consolidated Statements of Cash Flows
Three months ended March 31, 2003 and 2002
(Unaudited)
Three months ended
March 31, 2003 March 31, 2002
-------------- --------------
Cash flows from operating activities
Net loss for the year $ (300,355) $ (236,254)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization 165,205 160,263
Common stock issued for fees and services - 24,000
(Increase) Decrease in
Accounts receivable (163,539) (198,927)
Inventory (22,126) (304,708)
Prepaid expenses, deposits and other (5,916) (9,502)
Increase (Decrease) in
Accounts payable - trade (30,795) 29,213
Customer deposits (50,953) -
-------------- --------------
Net cash provided by (used in) operating activities (408,479) (535,915)
-------------- --------------
Cash flows from investing activities
Purchase of property and equipment (6,972) (91,562)
-------------- --------------
Net cash used in investing activities (6,972) (91,562)
-------------- --------------
Cash flows from financing activities
Cash received on working capital advance 200,000 -
Principal paid on long-term capital leases (2,269) (2,008)
Cash paid for debt and equity financing (16,000) -
Cash received from sale of common stock and warrant exercise 1,124,182 500,000
-------------- --------------
Net cash provided by financing activities 855,913 497,992
-------------- --------------
Increase (Decrease) in Cash 440,462 (129,485)
Cash at beginning of period 157,316 596,419
-------------- --------------
Cash at end of period $ 597,778 $ 466,934
============== ==============
Supplemental disclosure of interest and income taxes paid
Interest paid for the period $ 11,720 $ 1,072
============== ==============
Income taxes paid for the period $ - $ -
============== ==============
Supplemental disclosure of non-cash investing and financing activities
Conversion of debt and accrued interest
payable to a stockholder into common stock $ 125,000 $ 125,000
============== ==============
Conversion of convertible preferred stock
into common stock $ 45,000 $ -
============== ==============
Conversion of convertible debenture
into common stock $ 35,000 $ -
============== ==============
The financial information presented herein has been
prepared by management without audit by independent
certified public accountants.
The accompanying notes are an integral part of these consolidated financial
statements. 6
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
stockholders of F&F entered into an "Agreement For The Exchange Of Common Stock"
(Exchange Agreement) whereby the stockholders 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.(F&F) 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".
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.
7
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.
During interim periods, the Company follows the accounting policies set forth in
its annual audited financial statements filed with the U. S. Securities and
Exchange Commission on its Annual Report on Form 10-KSB for the year ended
December 31, 2002. The information presented within these interim financial
statements may not include all disclosures required by accounting principles
generally accepted in the United States of America and the users of financial
information provided for interim periods should refer to the annual financial
information and footnotes when reviewing the interim financial results presented
herein.
In the opinion of management, the accompanying interim financial statements,
prepared in accordance with the U. S. Securities and Exchange Commission's
instructions for Form 10-QSB, are unaudited and contain all material
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the financial condition, results of operations and cash flows of
the Company for the respective interim periods presented. The current period
results of operations are not necessarily indicative of results which ultimately
will be reported for the full fiscal year ending December 31, 2003.
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.
8
American Ammunition, Inc.
Notes to Consolidated Financial Statements - Continued
Note C - Summary of Significant Accounting Policies - Continued
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.
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 March 31, 2003 and 2002, 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 March 31, 2003 and 2002, 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 March 31, 2003 and 2002, and subsequent thereto, the Company had
no warrants and/or options outstanding.
9
American Ammunition, Inc.
Notes to Consolidated Financial Statements - Continued
Note C - Summary of Significant Accounting Policies - Continued
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
March 31, 2002 have been reclassified to conform to the Fiscal 2003
presentations.
Note D - 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.
Note E - Concentrations of Credit Risk
The Company maintains its cash accounts in a financial institution subject to
insurance coverage issued by the Federal Deposit Insurance Corporation (FDIC).
Under FDIC rules, the separate companies are each entitled to aggregate coverage
of $100,000 per account type per separate legal entity per financial
institution. During the three months ended March 31, 2003, the various operating
companies had deposits in a financial institution with credit risk exposures in
excess of statutory FDIC coverage. The Company has incurred no losses as a
result of any of these unsecured situations.
Note F - Inventory
As of March 31, 2003 and 2002, inventory consisted of the following components:
March 31, March 31,
2003 2002
------------------------
Raw materials $ 265,000 $ 166,759
Work in process 120,601 387,866
Finished goods 21,339 64,824
--------- ---------
Totals $ 406,940 $ 619,449
========= =========
10
American Ammunition, Inc.
Notes to Consolidated Financial Statements - Continued
Note G - Property and Equipment
Property and equipment consist of the following components:
March 31, March 31, Estimated
2003 2002 useful life
------------- ------------ -------------
Manufacturing equipment $ 6,848,344 $ 6,560,626 10 years
Office furniture and fixtures 58,528 50,856 7 years
Leasehold improvements 190,028 183,052 20 years
------------ ------------
7,096,900 6,794,534
Accumulated depreciation (3,558,507) (2,897,980)
------------ ------------
Net property and equipment $ 3,696,625 $ 3,896,554
============ ============
Total depreciation expense charged to operations for the three months ended
March 31, 2003 and 2002 was approximately $165,206 and $160,263. respectively.
Included in the amounts reflected in the accompanying balance sheet are the
following fixed assets on long-term capital leases:
March 31, March 31
2003 2002
----------------------------
Manufacturing and processing equipment $ 153,400 $ 153,400
Less accumulated depreciation (58,354) (43,014)
---------- ----------
$ 95,046 $ 110,386
========== ==========
Note H - Working Capital Advance
On March 13, 2003, La Jolla Cove Investors, Inc., the holder of the Company's
convertible debenture, advanced the Company an additional $200,000 for working
capital purposes. At La Jolla Cove's sole discretion, the $200,000 may be
allocated in any proportion to a) an increase in the principal amount of the
debenture and/or b) a prepayment for a future warrant exercise. As of March 31,
2003 and subsequent thereto, La Jolla has not made any election on the ultimate
allocation of the $200,000 working capital advance.
(Remainder of this page left blank intentionally)
11
American Ammunition, Inc.
Notes to Consolidated Financial Statements - Continued
Note I- Capital Leases Payable
Capital leases payable consist of the following as of March 31, 2003 and 2002,
respectively:
March 31, March 31,
2003 2002
-----------------------
Three capital leases, respectively, payable to various equipment
financing companies. Interest, at March 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. $ 15,709 $ 23,705
Less current maturities (9,507) (8,365)
--------- ---------
Long-term portion $ 5,572 $ 15,340
========= =========
Future maturities of capital leases payable are as follows:
Year ending
December 31 Amount
--------------------------
2003 $ 9,507
2004 7,841
-------
Totals $ 17,348
=======
Note I - Long-Term Debt Payable to a Bank
On June 28, 2001, in anticipation of the settlement of litigation with a
financial institution, the Company executed a $950,000 note payable to another
financial institution. This note bears 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.
During the first quarter of Fiscal 2003, the Company made additional principal
reductions of $100,000 and $350,000 fully retiring the outstanding debt.
12
American Ammunition, Inc.
Notes to Consolidated Financial Statements - Continued
Note J - 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.
In December 2002, the Company and the Debenture Holder amended the
above-referenced debenture and warrants as follows:
The number of common shares into which the debenture may be converted is equal
to the dollar amount of the debenture being converted multiplied by eleven,
minus the product of the conversion price, multiplied by ten times the dollar
amount of the debenture being converted, divided by the conversion price. The
conversion price is obtained by multiplying the average of the five (5) lowest
Volume Weighted Average Prices (VWAP) during the 20 trading days prior to the
date of conversion by the Discount Multiplier of 80%.
The warrants are exercisable at $1.00 per share for up to 2,500,000 shares. The
warrant holder is obligated to exercise the warrant concurrently with the
conversion of the debenture for a number of shares equal to ten times the dollar
amount of the debenture being converted.
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%.
13
American Ammunition, Inc.
Notes to Consolidated Financial Statements - Continued
Note J- Convertible Debenture - Continued
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
"Stockholders' 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 stockholder's equity
section for the par value and excess amount over the par value of the respective
shares issued.
As the warrant is non-detachable from the Debenture and requires simultaneous
exercise upon conversion of the Debenture, 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.
On March 19, 2003, the Debenture Holder elected to convert $35,000 in
outstanding Debenture principal into restricted, unregistered common stock. This
election caused the Company to issue 616,608 shares of restricted, unregistered
common stock to the Debenture Holder. Additionally, pursuant to the contract
terms, the Debenture Holder concurrently exercised a portion of the outstanding
Warrant to purchase 350,000 shares of the Company's restricted, unregistered
common stock for gross proceeds of $350,000.
Note K - 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.
14
American Ammunition, Inc.
Notes to Consolidated Financial Statements - Continued
Note K - Preferred Stock Transactions - Continued
In September 2001, the Company's principal stockholder converted approximately
$4,007,327 of unsecured debt and approximately $3,546,273 of cumulative and
unpaid accrued interest into 1,510,710 shares of Series A Preferred Stock.
In September 2001, a creditor of the Company agreed to convert approximately
$10,000 of trade accounts payable into 2,000 shares of Series A Preferred Stock.
In 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.
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.
In January 2003, three separate holders of 9,000 shares of Series A Preferred
Stock exercised their conversion rights and converted these shares of Series A
Preferred stock into 99,000 shares of restricted, unregistered common stock.
Note L - Common Stock Transactions
In February 2002, the Company converted $100,000 in short-term debt payable and
accrued interest of approximately $25,000 to an existing stockholder 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. 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.
15
American Ammunition, Inc.
Notes to Consolidated Financial Statements - Continued
Note L - Common Stock Transactions - Continued
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 stockholder 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 stockholder to reimburse said stockholder for his
cash payment on behalf of the Company of previously accrued legal fees
associated with the bank related litigation, which was concluded in June 2001,
and for other consulting services currently being provided by the stockholder.
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.
In July 2002, the Company sold 384,615 shares of restricted, unregistered common
stock to an existing stockholder 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 stockholder 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.
16
American Ammunition, Inc.
Notes to Consolidated Financial Statements - Continued
Note L - Common Stock Transactions - Continued
In August 2002, the Company sold 20,506 shares of restricted, unregistered
common stock to an existing stockholder 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 stockholder 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 stockholder 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 stockholder 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 stockholder 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 stockholder 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 stockholder 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 stockholder 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.
17
American Ammunition, Inc.
Notes to Consolidated Financial Statements - Continued
Note L - Common Stock Transactions - Continued
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.
In January 2003, the Company issued an aggregate 937,568 shares of restricted,
unregistered common stock for cash proceeds of approximately $324,182. These
sales were made at a price of either $0.23 or $0.36 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 for operating working
capital.
In February 2003, the Company issued 384,615 shares of restricted, unregistered
common stock for cash proceeds of approximately $100,000. 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 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 reduce the Company's outstanding long-term
debt.
In March 2003, the Company issued 972,222 shares of restricted, unregistered
common stock for cash proceeds of approximately $350,000. These sales were made
at a price of $0.36 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 reduce the Company's outstanding long-term
debt.
In March 2003, the Company issued an aggregate 966,608 shares of restricted,
unregistered common stock to the Holder of the Company's 8.0% Convertible
Debenture upon notice of conversion of $35,000 of outstanding principal and
exercise of a portion of the outstanding warrant to purchase 350,000 shares of
common stock. This transaction was valued at $385,000, or approximately $0.40
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 cash proceeds of this transaction
were used to provide working capital and support operations.
Note M - 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.
18
American Ammunition, Inc.
Notes to Consolidated Financial Statements - Continued
Note N - Income Taxes
The components of income tax (benefit) expense for the three months ended March
31, 2003 and 2002, respectively, are as follows:
Three months ended
March 31, 2003 March 31, 2002
--------------------------------
Federal:
Current $ - $ -
Deferred - -
------- ------
- -
------- ------
State:
Current - -
Deferred - -
------- ------
- -
------- ------
Total $ - $ -
======= ======
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 three months ended March 31,
2003 and 2002, respectively, differed from the statutory federal rate of 34
percent as follows:
Three months ended
March 31, 2003 March 31, 2002
--------------------------------
Statutory rate applied to loss before income taxes $ (102,000) $ (80,325)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Other, including reserve for deferred tax asset 102,000 80,325
----------- -----------
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:
March 31, 2003 March 31, 2002
-------------- --------------
Deferred tax assets - long-term - net $ 2,000,000 $ 884,000
Less valuation allowance (2,000,000) (884,000)
-------------- --------------
Net Deferred Tax Asset $ - $ -
============== ==============
During the three months ended March 31, 2003 and 2002, respectively, the
valuation allowance increased by approximately $56,000 and $884,000.
19
Item 2 - Management's Discussion and Analysis or Plan of Operation
(1) 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.
(2) 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
stockholders of F&F entered into an "Agreement For The Exchange Of Common Stock"
whereby the stockholders 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."
20
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.
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.
(3) Results of Operations
Three months ended March 31, 2003 compared to Three months ended March 31, 2002
During the three months ended March 31, 2003, the Company experienced revenues
of approximately $608,000 as compared to approximately $272,000 for the first
three months ended March 31, 2002. The Company continues to experience positive
demand for the Company's products.
21
The Company experienced costs of goods sold of approximately $675,000 and
$417,000 for the three months ended March 31, 2003 and 2002, respectively. The
Company has recognized depreciation expense on production equipment of
approximately $164,000 and $158,000, 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 during 2002 allows us to produce certain components
which were previously outsourced to unrelated third parties.
For the three months ended March 31, 2003 and 2002, respectively, we have
generated a negative gross profit of approximately $(67,000), or (10.96%), and
approximately $(145,000), or (53.20%). 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.
The Company experienced nominal research and development expenses during the
three months ended March 31, 2003 and 2002 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 other product improvements.
Other general and administrative expenses increased from approximately $91,000
for the first three months of 2002 to approximately $211,000 for the first three
months of 2003 as a result of increased activity related to interest expense on
the Company's Convertible Debenture and Long-term Debt and increased rent and
operating expenses in the Company's IPE subsidiary.
(4) Liquidity and Capital Resources
As of March 31, 2003, December 31, 2002, and March 31, 2002, respectively, the
Company had working capital of approximately $568,000, $56,000, and $793,000.
The Company has generated (used) cash in operating activities of approximately
$(408,000), $(1,111,000) and $(536,000) during the three months ended March 31,
2003, the year ended December 31, 2002 and the three months ended March 31,
2002. The most significant use of cash during the quarter ended March 31, 2003
was related to the acquisition of materials for increased sales and the sale of
merchandise on "industry standard" credit terms causing an increase in accounts
receivable.
(5) 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% and matures two years from the date of issuance.
22
In December 2002, the Company and the Debenture Holder amended the
above-referenced debenture and warrants as follows:
The number of common shares into which the debenture may be converted is
equal to the dollar amount of the debenture being converted multiplied by
eleven, minus the product of the conversion price, multiplied by ten times the
dollar amount of the debenture being converted, divided by the conversion price.
The conversion price is obtained by multiplying the average of the five (5)
lowest Volume Weighted Average Prices (VWAP) during the 20 trading days prior to
the date of conversion by the Discount Multiplier of 80%.
The warrants are exercisable at $1.00 per share for up to 2,500,000 shares.
The warrant holder is obligated to exercise the warrant concurrently with the
conversion of the debenture for a number of shares equal to ten times the dollar
amount of the debenture being converted.
We are 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. We have filed a Form SB-2 with the U. S. Securities and Exchange
Commission and are in the review phase awaiting the Registration Statement being
deemed effective.
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.
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.
23
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 "Stockholders'
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 stockholder's equity section for
the par value and excess amount over the par value of the respective shares
issued.
As the warrant is non-detachable from the Debenture and requires simultaneous
exercise upon conversion of the Debenture, 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, we executed an
engagement letter with La Jolla's counsel for legal representation with regard
to the preparation of the Registration Statement under the Securities Act of
1933 on Form SB-2.
On March 19, 2003, the Debenture Holder elected to convert $35,000 in
outstanding Debenture principal to restricted, unregistered common stock. This
election caused the Company to issue 616,608 shares of restricted, unregistered
common stock to the Debenture Holder. Additionally, pursuant to the contract
terms, the Debenture Holder concurrently exercised a portion of the outstanding
Warrant to purchase 350,000 shares of the Company's restricted, unregistered
common stock for gross proceeds of $350,000.
On March 13, 2003, La Jolla Cove Investors, Inc., the holder of the Company's
convertible debenture, advanced the Company an additional $200,000 for working
capital purposes. At La Jolla Cove's sole discretion, the $200,000 may be
allocated in any proportion to a) an increase in the principal amount of the
debenture and/or b) a prepayment for a future warrant exercise. As of March 31,
2003 and subsequent thereto, La Jolla has not made any election on the ultimate
allocation of the $200,000 working capital advance.
(6) 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.
24
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 3 - Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to
the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's President, Chief Executive and Chief
Financial Officer. Based upon that evaluation, the Company's President, Chief
Executive and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective. There have been no significant changes in
the Company's internal controls or in other factors, which could significantly
affect internal controls subsequent to the date the Company carried out its
evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding required disclosure.
Part II - Other Information
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
On or about January 6, 2003, the Company sold 104,254 shares of restricted,
unregistered common stock to Mobile Business Communications, Inc., an existing
stockholder, for cash proceeds of $24,078. This sale was made at a price of
$0.23 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 for operating working capital. The Company relied upon
Section 4(2) of the Securities Act of 1933 ('33 Act) because this transaction
did not involve a public offering and was, therefore, exempt from the
registration requirements of the '33 Act. No underwriters were used in
connection with this transaction.
25
On or about January 16, 2003, the Company sold an aggregate 833,334 shares of
restricted, unregistered common stock to Access Investments, Inc. and Kissimmul,
Inc., both existing stockholders, for cash proceeds of $300,000. This sale was
made at a price of $0.36 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 for operating working capital. The Company relied
upon Section 4(2) of the Securities Act of 1933 ('33 Act) because this
transaction did not involve a public offering and was, therefore, exempt from
the registration requirements of the '33 Act. No underwriters were used in
connection with this transaction.
On or about January 22, 2003, the Company issued an aggregate 6,343 shares of
restricted, unregistered common stock to six (6) separate holders of the
Company's Series A Preferred Stock in payment of $2,600 in accrued dividends
payable as of December 31, 2002. This transaction was made at a price of $0.41
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 Company relied upon Section 4(2) of
the Securities Act of 1933 ('33 Act) because this transaction did not involve a
public offering and was, therefore, exempt from the registration requirements of
the '33 Act. No underwriters were used in connection with this transaction.
On or about February 19, 2003, the Company sold 384,615 shares of restricted,
unregistered common stock to D. P. Martin & Associates, Inc. , an existing
stockholder, for cash proceeds of $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 partially payoff the outstanding balance of the
Company's long-term note payable to a bank. The Company relied upon Section 4(2)
of the Securities Act of 1933 ('33 Act) because this transaction did not involve
a public offering and was, therefore, exempt from the registration requirements
of the '33 Act. No underwriters were used in connection with this transaction.
On or about March 7, 2003, the Company received notice from three (3) holders of
it's Series A Preferred Stock whereby they converted an aggregate 9,000 shares
of Series A Preferred Stock into 99,000 shares of restricted, unregistered
common stock. The Company relied upon Section 4(2) of the Securities Act of 1933
('33 Act) because this transaction did not involve a public offering and was,
therefore, exempt from the registration requirements of the '33 Act. No
underwriters were used in connection with this transaction.
On or about March 13, 2003, the Company sold 486,111 shares of restricted,
unregistered common stock to Gala Enterprises, Ltd., an existing stockholder,
for cash proceeds of $175,000. This sale was made at a price of $0.36 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
partially payoff the outstanding balance of the Company's long-term note payable
to a bank. The Company relied upon Section 4(2) of the Securities Act of 1933
('33 Act) because this transaction did not involve a public offering and was,
therefore, exempt from the registration requirements of the '33 Act. No
underwriters were used in connection with this transaction.
26
On March 13, 2003, La Jolla Cove Investors, Inc., the holder of the Company's
convertible debenture, advanced the Company an additional $200,000 for working
capital purposes. At La Jolla Cove's sole discretion, the $200,000 may be
allocated in any proportion to a) an increase in the principal amount of the
debenture and/or b) a prepayment for a future warrant exercise. As of March 31,
2003 and subsequent thereto, La Jolla has not made any election on the ultimate
allocation of the $200,000 working capital advance.
On March 19, 2003, La Jolla Cove Investors, Inc., the holder of the Company's
convertible debenture, elected to convert $35,000 in outstanding Debenture
principal to restricted, unregistered common stock. This election caused the
Company to issue 616,608 shares of restricted, unregistered common stock to La
Jolla Cove Investors, Inc. Additionally, pursuant to the contract terms, La
Jolla Cove Investors, Inc. concurrently exercised a portion of the outstanding
Warrant to purchase 350,000 shares of the Company's restricted, unregistered
common stock for cash proceeds of $350,000.
On or about March 20, 2003, the Company sold 486,111 shares of restricted,
unregistered common stock to Gala Enterprises, Ltd., an existing stockholder,
for cash proceeds of $175,000. This sale was made at a price of $0.36 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
completely retire the outstanding balance of the Company's long-term note
payable to a bank. The Company relied upon Section 4(2) of the Securities Act of
1933 ('33 Act) because this transaction did not involve a public offering and
was, therefore, exempt from the registration requirements of the '33 Act. No
underwriters were used in connection with this transaction.
Item 3 - Defaults on Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
On May 14, 2003, the Company's Registration Statement under the Securities Act
of 1933 on Form SB-2 was deemed effective by the U. S. Securities and Exchange
Commission. This document registered an aggregate 14,687,500 shares of our
common stock which are issuable upon conversion of our 8.0% Convertible
Debenture, with an outstanding balance of approximately $215,000 at the
effective date, and the exercise of the attached warrants by the selling
stockholder, La Jolla Cove Investors, Inc. We also registered such additional
shares of common stock as may be issued as a result of the anti-dilution
provisions contained in such securities. The number of shares of common stock
27
registered hereunder represented a good faith estimate by us of the number of
shares of common stock issuable upon conversion of the debentures and upon
exercise of the warrants. For purposes of estimating the number of shares of
common stock to be included in the Registration statement, we calculated 200% of
the number of shares of our common stock issuable upon conversion of the
debentures. Should the conversion ratio result in our having insufficient
shares, we will be required to file a new Registration Statement to cover the
resale of such additional shares should that become necessary.
Item 6 - Exhibits and Reports on Form 8-K
Exhibits
99.1 Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
None
--------------------------------------------------------------------------------
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
American Ammunition, Inc.
Dated: May 19, 2003 /s/ Andres Fernandez
------------------------------------
Andres Fernandez
President, Chief Executive Officer
Chief Financial Officer and Director
28
Certification
In connection with the Quarterly Report of American Ammunition, Inc.
(Registrant) on Form 10-QSB for the quarter ended March 31, 2003, as filed with
the Securities and Exchange Commission, on the date hereof, I, Andres Fernandez,
Chief Executive and Chief Financial Officer of the Company, certify to the best
of my knowledge, pursuant to 18 USC 1350, as adopted pursuant to ss.302 of the
Sarbanes-Oxley Act of 2002, that:
1. I have reviewed this Quarterly Report on Form 10-QSB of American Ammunition,
Inc. for the quarter ended March 31, 2003.
2. Based on my knowledge, this Quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly 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 Quarterly Report;
4. The registrant's other certifying officers, if any, 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 Quarterly 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
Quarterly Report (the "Evaluation Date"); and
c.) presented in this Quarterly 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, if any, 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; and
6. The Registrant's other certifying officers, if any, and I have indicated in
this Quarterly 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.
/s/ Andres Fernandez Dated: May 19, 2003
--------------------
Andres Fernandez
Chief Executive Officer and
Chief Financial Officer
29