As filed with the Securities and Exchange Commission on January 14, 2005 An
Exhibit List can be found on page II-11. Registration No. 333-________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
-----------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
AMERICAN AMMUNITION, INC.
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(Name of small business issuer in its charter)
California 3990 91-2021594
--------------------------- ---------------------------- ----------------------
State or other Incorporation (Primary Standard Industrial (I.R.S. Employer
or Organization) Classification Code Number) Identification No.)
3545 NW 71st Street
Miami, Florida 33147
305-835-7400
---------------------------------------------
(Address and telephone number of principal executive offices
and principal place of business)
Andres F. Fernandez, Chief Executive Officer
AMERICAN AMMUNITION, INC.
3545 NW 71st Street
Miami, Florida 33147
305-835-7400
---------------------------------------------
(Name, address and telephone number of agent for service)
Copies to:
Gregory Sichenzia, Esq.
Stephen M. Fleming, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Flr.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: From time to time after this
Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
i
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
ii
CALCULATION OF REGISTRATION FEE
Title of each class of Amount to be Proposed Proposed Amount of
securities to be registered (1) maximum maximum registration fee
registered offering aggregate
price per offering price
share
-------------------------- --------------- ------------ ---------------- ----------------------
Common stock issuable
upon conversion of
debentures 42,861,322(2) $.16(3) $6,857,811.58 $807.16
Common Stock issuable
upon exercise of warrants 2,666,350(4) $1.00(5) $2,666,350.00 $313.83
Total 45,527,672 $1,120.99
-------------------------- --------------- ------------ ---------------- ----------------------
(1) Includes shares of our common stock, par value $0.001 per share, which may
be offered pursuant to this registration statement, which shares are issuable
upon conversion of convertible debentures and the exercise of warrants held by
the selling stockholder. In addition to the shares set forth in the table, the
amount to be registered includes an indeterminate number of shares issuable upon
conversion of the debentures and exercise of the warrants, as such number may be
adjusted as a result of stock splits, stock dividends and similar transactions
in accordance with Rule 416. The number of shares of common stock registered
hereunder represents 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 this registration statement, we calculated a good faith estimate of
the number of shares of our common stock that we believe will be issuable upon
conversion of the debentures and upon exercise of the warrants to account for
market fluctuations, and antidilution and price protection adjustments,
respectively. Should the conversion ratio result in our having insufficient
shares, we will not rely upon Rule 416, but will file a new registration
statement to cover the resale of such additional shares should that become
necessary. In addition, should a decrease in the exercise price as a result of
an issuance or sale of shares below the then current market price, result in our
having insufficient shares, we will not rely upon Rule 416, but will file a new
registration statement to cover the resale of such additional shares should that
become necessary.
(2) Includes a good faith estimate of the shares underlying convertible
debentures to account for market fluctuations.
(3) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, using the average
of the high and low price as reported on the Over-The-Counter Bulletin Board on
January 12, 2005, which was $.16 per share.
(4) Includes a good faith estimate of the shares underlying warrants exercisable
at $1.00 per share to account for antidilution and price protection adjustments.
(5) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933, using the exercise
price of $1.00.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
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PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED JANUARY 14, 2005
AMERICAN AMMUNITION, INC.
45,527,672 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholder of up to
45,527,672 shares of our common stock, including up to 42,861,322 shares of
common stock underlying convertible debentures and up to 2,666,350 issuable upon
the exercise of common stock purchase warrants. The convertible debentures are
convertible into the number of our shares of common stock equal to the principal
amount of the debentures being converted multiplied by 11, less the product of
the conversion price multiplied by ten times the dollar amount. The conversion
price for the convertible debentures is the lesser of (i) $1.00 or (ii) seventy
six percent of the average of the five lowest volume weighted average prices
during the twenty (20) trading days prior to the conversion. The selling
stockholder may sell common stock from time to time in the principal market on
which the stock is traded at the prevailing market price or in negotiated
transactions. The selling stockholder may be deemed underwriters of the shares
of common stock, which they are offering. We will pay the expenses of
registering these shares.
Our common stock is registered under Section 12(g) of the Securities
Exchange Act of 1934 and is listed on the Over-The-Counter Bulletin Board under
the symbol "AAMI". The last reported sales price per share of our common stock
as reported by the Over-The-Counter Bulletin Board on January 12, 2005, was
$.16.
Investing in these securities involves significant risks. See "Risk
Factors" beginning on page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _______, 2005.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by American
Ammunition, Inc., with the Securities and Exchange Commission. The selling
stockholders may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the sale
is not permitted.
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PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the notes to the financial
statements.
AMERICAN AMMUNITION, INC.
We acquired American Ammunition Inc. in September 2001 and since such
acquisition are engaged principally in the manufacture and sale of ammunition
for wholesale sales. We are an established small arms munitions manufacturer
with an existing distribution network. The ammunition market is dominated by
three major manufacturers, however, we believe we are poised to enter and impact
the growing ammunition market with our manufacturing equipment and techniques.
We are an approved Department of Defense contractor.
We began in 1983 as an assembler and re-loader of ammunition in several
calibers. As we grew, management realized that the only way to break into the
industry was to become a vertically integrated manufacturer. Our founders
invested heavily in research and development, equipment, and technology and
focused on increasing our market share. As a result, we continued manufacturing
our 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: 9 millimeter, .45 automatic, .380
automatic, .32 automatic, .40 Smith and Wesson, 38 Special, 30 carbine, 223
Remington, 38 Super, 32 Smith and Wesson Long, 44 Special and 44 Magnum. We have
identified these products as having the largest share of the market for the next
several years.
We have incurred losses and experienced negative operating cash flow since
our formation. For our fiscal years ended December 31, 2003 and 2002, we had a
net loss of $2,939,395 and $1,883,087, respectively. In addition, for the nine
months ended September 30, 2004, we had a net loss of $2,349,114. We expect to
continue to incur significant operating expenses as we maintain our current line
of ammunitions and continue research and development toward improving projectile
quality and performance. Our operating expenses have been and are expected to
continue to outpace revenues and result in significant losses in the near term.
We may never be able to reduce these losses, which will require us to seek
additional debt or equity financing.
Our principal executive offices are located at 3545 NW 71st Street, Miami,
Florida 33147 and our telephone number is (305) 835-7400. We are incorporated in
the State of California.
The Offering
Common stock offered
by selling
stockholder Up to 45,527,672 shares, including up to 42,861,322 shares
of common stock underlying convertible debentures in the
amount of $266,350 and up to 2,666,350 issuable upon the
exercise of common stock purchase warrants at an exercise
price of $1.00 per share, based on current market prices and
assuming full conversion of the convertible debentures and
the full exercise of the warrants (includes a good faith
estimate of the shares underlying convertible debentures to
account for market fluctuations). This number represents
39.20% of our then current outstanding stock.
Common stock to be
outstanding after
the offering Up to 122,934,602 shares
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Use of proceeds We will not receive any proceeds from the sale of the common
stock However, we will receive up to $2,666,350 upon
exercise of the warrants by the selling stockholder. We
expect to use the proceeds received from the exercise of the
warrants, if any, for general working capital purposes. We
received an aggregate of $500,000 in connection with the
issuance of the convertible debenture to the selling
stockholder. We used the $500,000 for the general working
capital purposes and the payment of professional fees.
Over-The-Counter
Bulletin Board
Symbol AAMI
----------------------------------
The above information regarding common stock to be outstanding after the
offering is based on 74,740,580 shares of common stock outstanding as of January
5, 2005 and assumes the subsequent conversion of our issued convertible
debentures and exercise of warrants by our selling stockholder.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with La Jolla Cove Investors, Inc. ("La Jolla") on October 4,
2002 for the sale of (i) $250,000 in convertible debentures and (ii) warrants to
buy 30,000,000 shares of our common stock. On March 13, 2003 and May 6, 2003, La
Jolla advanced an aggregate of $350,000 to our company which such funding was
allocated towards the principal balance of our convertible debentures. We
currently have $266,350 of our convertible debentures and 2,666,350 warrants
still outstanding. This prospectus relates to the resale of the common stock
underlying these convertible debentures and warrants.
The debentures bear interest at 8%, mature on June 30, 2006, and are
convertible into our common stock, at the selling stockholder's option. The
convertible debentures are convertible into the number of our shares of common
stock equal to the principal amount of the debentures being converted multiplied
by 11, less the product of the conversion price multiplied by 10 times the
dollar amount of the debenture. The conversion price for the convertible
debentures is the lesser of (i) $1.00 or (ii) seventy six percent of the average
of the five lowest volume weighted average prices during the twenty (20) trading
days prior to the conversion. Accordingly, there is in fact no limit on the
number of shares into which the debenture may be converted. However, in the
event that our market price is less than $.30, we will have the option to prepay
the debenture at 125% rather than have the debenture converted. In addition, the
selling stockholder is obligated to exercise the warrant concurrently with the
submission of a conversion notice by the selling stockholder. Currently, the
warrant is exercisable into 2,666,350 shares of common stock at an exercise
price of $1.00 per share.
In December 2004, we entered into an addendum to the convertible debenture
and warrant whereby we agreed to the following:
* the discount multiplier was reduced from eighty percent to seventy six
percent;
* within five business days after this registration statement being
declared effective, La Jolla is required to submit a debenture
conversion in the amount of $10,000 and every ten business days
thereafter La Jolla shall submit three additional debenture conversion
in the amount of $10,000 each;
* within five business days after this registration statement being
declared effective, La Jolla shall wire $400,000 to us as a prepayment
towards the exercise of its warrant; and
* immediately following the sale of all shares held by La Jolla in
connection with the debenture conversions in the aggregate amount of
$40,000, La Jolla shall wire $275,000 to us as a prepayment towards
the exercise of its warrant and shall submit a debenture conversion in
the amount of $6,250 on the first business day of each month until the
debenture is no longer outstanding.
The selling stockholder has contractually agreed to restrict its ability to
convert or exercise its warrants and
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receive shares of our common stock such that the number of shares of common
stock held by them and their affiliates after such conversion or exercise does
not exceed 4.9% of the then issued and outstanding shares of common stock. See
the "Selling Stockholders" and "Risk Factors" sections for a complete
description of the convertible debentures.
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
Risks Relating to Our Business:
We may never become profitable and continue as a going concern because we
have had losses since our inception.
We may never become profitable and continue as a going concern because we
have incurred losses and experienced negative operating cash flow since our
formation. We have incurred losses and experienced negative operating cash flow
since our formation. For our fiscal years ended December 31, 2003 and 2002, we
had a net loss of $2,939,395 and $1,883,087, respectively. In addition, for the
nine months ended September 30, 2004, we had a net loss of $2,349,114. We expect
to continue to incur significant operating expenses as we maintain our current
line of ammunitions and continue research and development toward improving
projectile quality and performance. Our operating expenses have been and are
expected to continue to outpace revenues and result in significant losses in the
near term. We may never be able to reduce these losses, which will require us to
seek additional debt or equity financing. If such financing is available you may
experience significant additional dilution.
There may exist an uncertainty as to our continuation as a going concern.
Our audited financial statements for the fiscal year ended December 31,
2003 reflect an accumulated deficit of approximately $16,629,044, since our
inception, working capital of approximately $2,027,824, and stockholders' equity
of $4,508,245.
Our auditor has not issued a going concern opinion on our financial
statements; however, our ultimate survivability is dependent upon our being able
to generate sufficient cash flows from operations to support its daily
operations as well as provide sufficient resources to retire existing
liabilities and obligations on a timely basis.
Short-term assets and investments income will be sufficient to meet our
operating expenses and capital expenditures through 2005. If we continue to
incur operating losses, we may not be able to fund continuing business
operations, which could lead to the limitation or closure of some or all of our
operations.
We may have to curtail our business if we cannot find adequate funding.
We currently have no legally binding commitments with any third parties to
obtain any material amount of additional equity or debt financing outside of the
financing with La Jolla. We need immediate funds and may not be able to obtain
any additional financing in the amounts or at the times that we may require the
financing or, if we do obtain any financing, that it would be on acceptable
terms because of the following:
* we have no assets to pledge as securit for the loan; and
* we are in poor financial condition - w maybe viewed as a high market
risk
As a result, we may not have adequate capital to implement future
expansions, maintain our current levels of operation or to pursue strategic
acquisitions. Our failure to obtain sufficient additional financing could result
in the delay or abandonment of some or all of our development, expansion and
expenditures, which could harm our business and the value of our common stock.
5
Our competitive position may be harmed if we fail to respond to rapid
changes in the market for small arms ammunitions.
Our competitive position may be harmed if we fail to respond to rapid
changes in the market for small arms ammunitions. Our future success will depend
significantly on our ability to develop and market new products that keep pace
with technological developments and evolving industry standards for hand gun and
rifle ammunition. Our delay or failure to develop or acquire technological
improvements, adapt our products to technological changes or provide higher
quality product lines that appeals to our customers may cause us to lose
customers and may prevent us from generating revenue which could ultimately
cause us to cease operations.
Our revenues may decrease from production delays due to fire or explosive
incidents.
Our revenues may decrease from production delays due to fire or explosive
incidents. Our ammunition products, involve the manufacture and/or handling of a
variety of explosive and flammable materials. This manufacturing and/or handling
may result in incidents that will temporarily shut down or otherwise disrupt our
manufacturing, causing production delays and resulting in liability for
workplace injuries and fatalities. We cannot assure you that we will not
experience these types of incidents in the future or that these incidents will
not result in production delays, which can lead to a reduction in revenues.
We may incur substantial costs in complying with environmental laws and may
be subject to substantial liability resulting from the use of hazardous
substances or required cleanup of contaminated sites.
Our operations and use of real property are subject to a number of federal,
state and local environmental laws and regulations which, among other things,
require us to obtain permits to operate and to install pollution control
equipment and regulate the generation, storage, handling, transportation,
treatment and disposal of hazardous and solid wastes. Our operations, as well as
historical operations at our sites, also subject us to liability for the cleanup
of releases of hazardous substances. Environmental laws and regulations change
frequently, and it is difficult to predict whether and to what extent we may be
subject to liability for compliance with environmental laws and regulations.
Our business operations will be harmed if we are unable to obtain
additional funding.
Our business operations will be harmed if we are unable to obtain
additional funding outside of the La Jolla financing. We believe that our
available short-term assets, investment income and financing arrangement with La
Jolla will be sufficient to meet our operating expenses and capital expenditures
through the end of fiscal year 2005. We do not know if additional financing will
be available when needed, or if it is available, if it will be available on
acceptable terms. Insufficient funds may prevent us from implementing our
business strategy or may require us to delay, scale back or eliminate certain
contracts for the provision of our technology and products.
Our competitors may misappropriate our intellectual property because we
have only one trademark and two patents.
We attempt to protect our limited proprietary property through trademark,
trade secret, nondisclosure and confidentiality measures. Such protections,
however, may not preclude competitors from developing similar technologies. Any
inability to adequately protect our proprietary technology could harm our
ability to compete.
Our future success and ability to compete depends in part upon our
proprietary technology and our trademark, which we attempt to protect with a
combination of trademark and confidentiality procedures and contractual
provisions. These legal protections afford only limited protection and are
time-consuming and expensive to obtain and/or maintain. Further, despite our
efforts, we may be unable to prevent third parties from infringing upon or
misappropriating our intellectual property.
6
Risks Relating to Our Current Financing Arrangement:
There Are a large number of shares underlying our convertible debentures
and warrants that may be available for future sale and the sale of these shares
may depress the market price of our common stock.
As of Janaury 5, 2005, we had 74,740,580 shares of common stock issued and
outstanding and convertible debentures outstanding that may be converted into an
estimated 21,430,661 shares of common stock at current market prices, and
outstanding warrants to purchase 2,666,350 shares of common stock. In addition,
the number of shares of common stock issuable upon conversion of the outstanding
convertible debentures may increase if the market price of our stock declines.
All of the shares, including all of the shares issuable upon conversion of the
debentures and upon exercise of our warrants, may be sold without restriction.
The sale of these shares may adversely affect the market price of our common
stock.
The continuously adjustable conversion price feature of our convertible
debentures could require us to issue a substantially greater number of shares,
which will cause dilution to our existing stockholders.
Our obligation to issue shares upon conversion of our convertible
debentures is essentially limitless. The following is an example of the amount
of shares of our common stock that are issuable, upon conversion of our
convertible debentures (excluding accrued interest), based on market prices 25%,
50% and 75% below the market price, as of January 5, 2005 of $0.16.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 24% Issuable Stock
------ ----- ------ -------- -----
25% $.12 $.0912 29,462,048 28.27%
50% $.08 $.0608 45,524,822 37.85%
75% $.04 $.0304 93,713,145 55.63%
As illustrated, the number of shares of common stock issuable upon
conversion of our convertible debentures will increase if the market price of
our stock declines, which will cause dilution to our existing stockholders.
The continuously adjustable conversion price feature of our convertible
debentures may encourage investors to make short sales in our common stock,
which could have a depressive effect on the price of our common stock.
The convertible debentures are convertible into shares of our common stock
at a 24% discount to the trading price of the common stock prior to the
conversion. The significant downward pressure on the price of the common stock
as the selling stockholder converts and sells material amounts of common stock
could encourage short sales by investors. This could place further downward
pressure on the price of the common stock. The selling stockholder could sell
common stock into the market in anticipation of covering the short sale by
converting their securities, which could cause the further downward pressure on
the stock price. In addition, not only the sale of shares issued upon conversion
or exercise of debentures, warrants and options, but also the mere perception
that these sales could occur, may adversely affect the market price of the
common stock.
The issuance of shares upon conversion of the convertible debentures and
exercise of outstanding warrants may cause immediate and substantial dilution to
our existing stockholders.
The issuance of shares upon conversion of the convertible debentures and
exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. Although the selling stockholders
may not convert their convertible debentures and/or exercise their warrants if
such conversion or exercise would cause them to own more than 9.9% of
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our outstanding common stock, this restriction does not prevent the selling
stockholders from converting and/or exercising some of their holdings and then
converting the rest of their holdings. In this way, the selling stockholders
could sell more than this limit while never holding more than this limit. There
is no upper limit on the number of shares that may be issued which will have the
effect of further diluting the proportionate equity interest and voting power of
holders of our common stock, including investors in this offering.
In The Event That Our Stock Price Declines, The Shares Of Common Stock
Allocated For Conversion Of The Convertible Debentures and Registered Pursuant
To This Prospectus May Not Be Adequate And We May Be Required to File A
Subsequent Registration Statement Covering Additional Shares. If The Shares We
Have Allocated And Are Registering Herewith Are Not Adequate And We Are Required
To File An Additional Registration Statement, We May Incur Substantial Costs In
Connection Therewith.
Based on our current market price and the potential decrease in our market
price as a result of the issuance of shares upon conversion of the convertible
debentures, we have made a good faith estimate as to the amount of shares of
common stock that we are required to register and allocate for conversion of the
convertible debentures. We have allocated and registered 42,861,322 shares to
cover the conversion of the convertible debentures. In the event that our stock
price decreases, the shares of common stock we have allocated for conversion of
the convertible debentures and are registering hereunder may not be adequate. If
the shares we have allocated to the registration statement are not adequate and
we are required to file an additional registration statement, we may incur
substantial costs in connection with the preparation and filing of such
registration statement.
If We Are Required for any Reason to Repay Our Outstanding Convertible
Debentures, We Would Be Required to Deplete Our Working Capital, If Available,
Or Raise Additional Funds. Our Failure to Repay the Convertible Debentures, If
Required, Could Result in Legal Action Against Us, Which Could Require the Sale
of Substantial Assets.
We entered into a Securities Purchase Agreement with La Jolla on October 4,
2002 for the sale of (i) $250,000 in convertible debentures and (ii) warrants to
buy 30,000,000 shares of our common stock. On March 13, 2003 and May 6, 2003, La
Jolla advanced an aggregate of $350,000 to our company which such funding was
allocated towards the principal balance of our convertible debentures. As of
January 5, 2005, $266,350 of the debenture remained outstanding. The convertible
debentures are due and payable, with 8% interest on June 30, 2006, unless sooner
converted into shares of our common stock. In addition, any event of default
could require the early repayment of the convertible debentures at a price equal
to 125% of the amount due under the debentures. We anticipate that the full
amount of the convertible debentures, together with accrued interest, will be
converted into shares of our common stock, in accordance with the terms of the
convertible debentures. If we are required to repay the convertible debentures,
we would be required to use our limited working capital and raise additional
funds. If we were unable to repay the debentures when required, the debenture
holders could commence legal action against us and foreclose on all of our
assets to recover the amounts due. Any such action would require us to curtail
or cease operations.
Risks Relating to Our Common Stock:
If We Fail to Remain Current on Our Reporting Requirements, We Could be
Removed From the OTC Bulletin Board Which Would Limit the Ability of
Broker-Dealers to Sell Our Securities and the Ability of Stockholders to Sell
Their Securities in the Secondary Market.
8
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
Our directors and executive officers beneficially own approximately 37.4%
of our stock; their interests could conflict with yours; significant sales of
stock held by them could have a negative effect on our stock price; stockholders
may be unable to exercise control.
As of January 5, 2005, our executive officers and directors, which
primarily includes the Ferenandez family, beneficially own approximately 37.4%
of our common stock. As a result, our executive officers and directors will have
significant influence to:
* elect or defeat the election of our directors;
* amend or prevent amendment of our articles of incorporation or bylaws;
* effect or prevent a merger, sale of assets or other corporate
transaction; and
* control the outcome of any other matte submitted to the stockholders
for vote.
As a result of their ownership and positions, our directors and executive
officers collectively are able to significantly influence all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. In addition, sales of significant amounts of
shares held by our directors and executive officers, or the prospect of these
sales, could adversely affect the market price of our common stock. Management's
stock ownership may discourage a potential acquirer from making a tender offer
or otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock
price.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
* that a broker or dealer approve a person's account for transactions in
penny stocks; and
* the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny
stock to be purchased.
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In order to approve a person's account for transactions in penny stocks,
the broker or dealer must:
* obtain financial information and investment experience objectives of
the person; and
* make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the
risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
* sets forth the basis on which the broker or dealer made the
suitability determination; and
* that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in
securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market
value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks
in both public offerings and in secondary trading and about the commissions
payable to both the broker-dealer and the registered representative, current
quotations for the securities and the rights and remedies available to an
investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by the selling stockholder. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
will receive the sale price of any common stock we sell to the selling
stockholder upon exercise of the warrants. We expect to use the proceeds
received from the exercise of the warrants, if any, for general working capital
purposes.
10
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol
"AAMI". For the periods indicated, the following table sets forth the high and
low bid prices per share of common stock. These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions.
Quarter Ended High ($) Low ($)
------------------------ ------------- --------------
December 31, 2004 .24 .15
September 30, 2004 .27 .17
June 30, 2004 .42 .17
March 31, 2004 .50 .27
December 31, 2003 .42 .22
September 30, 2003 .55 .37
June 30, 2003 .85 .42
March 31, 2003 .78 .53
December 31, 2002 .47 .38
September 30, 2002 .57 .31
June 30, 2002 .65 .36
March 31, 2002 .81 .33
------------------------ ------------- --------------
HOLDERS
As of January 5, 2005, we had 178 shareholders of record of our 74,740,580
outstanding shares of common stock. The number of record holders was determined
from the records of our transfer agent and does not include beneficial owners of
common stock whose shares are held in the names of various security brokers,
dealers, and registered clearing agencies. The transfer agent of our common
stock is Atlas Stock Transfer Corporation, 5899 South State Street, Salt Lake
City, Utah 84107.
DIVIDENDS
We have never declared or paid any cash dividends on our common stock. We
do not anticipate paying any cash dividends to stockholders in the foreseeable
future. In addition, any future determination to pay cash dividends will be at
the discretion of the Board of Directors and will be dependent upon our
financial condition, results of operations, capital requirements, and such other
factors as the Board of Directors deem relevant.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Some of the information in this Form SB-2 contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
* discuss our future expectations;
* contain projections of our future results of operations or of our
financial condition; and
* state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there
may be events in the future that we are not able to accurately predict or over
which we have no control. Our actual results and the timing of certain events
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors," "Business" and elsewhere in this prospectus. See "Risk Factors."
11
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 which unsuccessfully marketed a business plan concept of a
national "fast food" restaurant chain.
We are a holding company with two operating subsidiaries:
* F&F Equipment, Inc. ("F&F"); and
* Industrial Plating Enterprise Co.
F&F was incorporated on October 4, 1983 under the laws of the State of
Florida. F&F was formed to engage principally in the import, export, retail and
wholesale of firearms equipment, ammunition and other devices. F&F conducts its
business operations under the assumed name of "American Ammunition."
In June 2002, we 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 third quarter of 2003, our operations experienced the negative
impact of a lower than anticipated or budgeted purchases by Ellett Brothers, a
significant customer.
However, during this same time period, we entered into a strategic alliance
with Israel Military Industries ("IMI"), an entity owned by the State of Israel,
for the cross-production and sale of various small arms ammunition. We believe
that this alliance may greatly expand our catalog of products and assist in
utilizing existing production capacity.
In prior periods, we executed a private labeling agreement with Century
International Arms, Inc. ("Century"). Under this agreement, we were to produce
our standard catalog of small arms ammunition plus one specialty small arms
cartridge to Century's specifications for packaging in Century's designated
labeling. This agreement required no modifications to our production line and
did not require the addition of supplemental personnel or equipment. We made an
initial shipment under this agreement to Century during December 2003. In
early-January 2004, we began to experience problems with Century regarding
Century's compliance with their performance criteria under this agreement.
During the first quarter of 2004, Century defaulted on certain agreed- upon
payment schedules on merchandise sold during December 2003. In repayment of the
outstanding trade debt, we accepted unscheduled product returns as payment of
the trade debt. As a result of these issues, we recognized a charge to
operations of approximately $28,000 on our business activity with Century. The
returned merchandise was repackaged and is resalable by our company to other
customers. As of June 30, 2004, we cancelled this agreement and we are
contemplating litigation against Century for breach of contractual obligations
under this agreement.
Additionally, we have been awarded three separate contracts from various
departments of the U. S. Government. Each contract is for an initial term of one
year (commencing between April 24, 2003 and September 30, 2003) with four
successive individual one-year extension options, of which the first extension
period has been exercised. The contracts are summarized as follows:
Contract 1 U. S. Department of State. Minimum annual volume of approximately
100,000 rounds of military grade small arms ammunition. Maximum
annual volume of approximately 5,000,000 rounds. Maximum volume
may be increased at the discretion of the Contracting Officer and
respective utilization requirements. We have received firm orders
for 2,265,000 rounds of ammunition under this contract and have
approximately 1,265,000 rounds ready for shipment. The ammunition
under this contract will be subject to the strategic alliance
with IMI.
12
Contract 2 U. S. Department of Energy. This contract covers seven separate
products in our standard catalog of products. The U. S.
Department of Energy is obligated to purchase an aggregate of
4,549,000 rounds of ammunition under this contract.
Contract 3 U. S. Department of Homeland Security. This contract covers four
separate products being introduced to our catalog through the
strategic alliance with IMI and requires no modifications to our
production facilities or additions to the labor force. The
minimum annual volume is 1,000 rounds of each product and a
maximum annual volume of 9,600,000 rounds of two products and
36,000,000 of the remaining two products.
We have received purchase orders against these contracts; however, due to
delays in receiving the initial purchase orders and the unpredictability of
subsequent reorder cycles, we are unable to fully anticipate or predict the
future impact of these contracts. We remain in negotiation and to prepare bids
on other contracts from these and other U. S. Governmental agencies.
During the first quarter of 2004, we commenced a direct solicitation
program for our "dealer direct" sales program. As this endeavor has received a
very positive initial response from the qualified retail resellers of our
product, the announcement of this program had a significantly detrimental impact
on our relationship with wholesale distributors and, accordingly, had a
significant negative impact on first quarter 2004 sales. We continue to
experience increases in customer demand, order size and reorder quantities in
this program by smaller "single store" owner/operators of retail outlets selling
our products. During November 2004, we qualified our 1,000th dealer under this
program for direct sales and we anticipate that the overall Calendar 2004 sales
volume through the "dealer direct" program may well equal or exceed the sales
volumes generated by wholesale distributors in prior years.
Results of Operations
Nine months ended September 30, 2004 compared with the nine months ended
September 30, 2003
During the nine and three months ended September 30, 2004, we experienced
net revenues of approximately $1,712,000 and $862,000, respectively, as compared
to approximately $1,216,000 and $317,000 for the same respective periods of
2003.
During the first quarter of 2004, we commenced a direct solicitation
program for our "dealer direct" sales program. As this endeavor has received a
very positive initial response from the qualified retail resellers of our
product, the announcement of this program had a significantly detrimental impact
on our relationship with wholesale distributors and, accordingly, had a
significant negative impact on first quarter 2004 sales. We continue to
experience significant increases in customer demand, order size and reorder
quantities in this program by smaller "single store" owner/operators of retail
outlets selling our products.
13
During November 2004, we qualified ours 1,000th dealer under this program
for direct sales and we are anticipated that the overall Calendar 2004 sales
volume through the "dealer direct" program may well equal or exceed the sales
volumes generated by wholesale distributors in prior years.
We experienced costs of goods sold of approximately $2,435,000 for the nine
months ended September 30, 2004 as compared to approximately $2,209,000 for the
nine months ended September 30, 2003. Included in these amounts are
approximately $524,000 and $495,000, respectively, for depreciation expense on
manufacturing equipment and leasehold improvements on our production facility.
Management is of the opinion that the production labor force is stable and
able to maintain a constant standard of quality for future periods. We
experience variable costs in the area of material consumption and direct labor.
These depreciation levels are anticipated to remain fairly constant as
compared to the first quarter of 2004. Management has placed on order, and
placed initial deposits on, new manufacturing equipment to automate the product
packaging process and to add new quality assurance equipment on the production
line. These commitments aggregate approximately $450,000, of which the majority
has been expended through September 30, 2004.
Management, at this time, does not anticipate any further significant
capital equipment acquisitions.
Further, the addition of the Industrial Plating Enterprise Co. equipment
during 2003 allows us to produce certain components which were previously
outsourced to unrelated third parties.
For the nine month periods ended September 30, 2004 and 2003, respectively,
we have generated a negative gross profit of approximately $(723,000), or
(42.21%), and approximately $(993,000), or (81.66%).
As previously reported, our research during the second quarter of 2004 has
revealed that the various governmental agencies which have issued purchase
contracts to us either purchased large quantities during the last 60 days of the
Federal Government's year ended September 30, 2003 or are experiencing
transitional purchasing problems or issues surrounding the reorganization of
various agencies into the Department of Homeland Security, with the related
issues of Congressional appropriations for funding the necessary expenditures of
these reorganized agencies. The actions of the third quarter proved this
research to be correct and we received several purchase order releases on our
contract with the Department of Homeland Security. The timing of Congressional
approval of the related appropriation bills to fund the various executive branch
departments of the United States of America continues to impact the timing and
release of purchase orders under our contracts as previously discussed.
We continue to anticipate that with the fulfillment of the government
contracts discussed above, continually expanding retail consumer demand for our
product line, lower production costs being experienced from internally generated
plating activities and adequate liquidity, we 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 and further refined during
2003, 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 had minimal costs allocated to research and development expenses during
either of the quarters ended September 30, 2004 and 2003.
Through the nine months ending September 30, 2004, we expended
approximately $368,000 in advertising and marketing expenses, principally in
developing and promoting our retail dealer direct program. We anticipate to
continue our marketing efforts in this area in future periods; however, the
volume and frequency of our expenditures may fluctuate as management allocates
available capital to these efforts.
14
Other general and administrative expenses increased by approximately
$57,000 from approximately $789,000 for the nine months ended September 30, 2003
as compared to approximately $846,000 for the nine months ended September 30,
2004. These increases are not identifiable by one specific area; however, relate
to general corporate expenses, office and administrative wages and salaries and
other related office overhead.
Included in our results of operations for the first nine months of 2004 are
certain non-cash expenditure charges to operations of approximately $356,000 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 Calendar
2003, we experienced a charge of approximately $94,000 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 2003.
We recognized a net loss of approximately $2,350,000 and $2,662,000 for the
respective three month periods ended September 30, 2004 and 2003, respectively,
or $0.03 and $0.04 per share.
Year ended December 31, 2003 compared with the year ended December 31, 2002
During the year ended December 31, 2003, we experienced aggregate net
revenues of approximately $1,985,000, with approximately $769,000 being realized
during the 4th quarter, as compared to approximately $1,409,000 for the year
ended December 31, 2002.
We experienced costs of goods sold of approximately $3,232,000 for the year
ended December 31, 2003 as compared to approximately $2,457,000 for the year
ended December 31, 2002. During 2003, we experienced negative trends off of our
standard production costs for material and labor due to difficulties in training
new employees and adding new products to our catalog. Management is of the
opinion that the production labor force is stable and able to maintain a
constant standard of quality for future periods. We experience variable costs in
the area of material consumption and direct labor. We have recognized
depreciation expense on production equipment of approximately $669,000 and
$653,000, 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, 2003 and 2002, respectively, we have
generated a negative gross profit of approximately $(1,247,000), or (62.82%),
and approximately $(1,047,000), or (74.31%). We anticipate that with the
fulfillment of the various private labeling agreements and government contracts
discussed above, continued retail consumer demand for our product line, lower
production costs being experienced from internally generated plating activities
and adequate liquidity, we 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 and further refined during 2003, 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
$4,000 and $3,700, respectively, during the years ended December 31, 2003 and
2002, principally related to the expansion of our product line.
Other general and administrative expenses increased by approximately
$282,000 from approximately $845,000 for the year ended December 31, 2002 as
compared to approximately $1,127,000 for the year ended
15
December 31, 2003. The most significant increases relate to advertising and
marketing expenses, office and administrative wages and salaries and overall
office overhead.
Included in our results of operations for both 2003 and 2002 2001 are
non-cash expenditure charges. During 2003 and 2002, respectively, we experienced
charges to operations of approximately $883,000 and $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 2003, we
experienced a charge of approximately $94,000 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 2003.
We recognized a net loss of approximately $(2,968,000) and $(1,883,000) for
the respective years ended December 31, 2003 and 2002, respectively, or $(0.05)
and $(0.04) per share.
Liquidity And Capital Resources
As of December 31, 2003 and 2002, respectively, we had working capital of
approximately $2,000,000 and $56,000. Our working capital position improved
significantly at December 31, 2003 due to the volume of shipments during the 4th
quarter to our customers and increases in inventory to support the pending U. S.
Government contracts.
We have used cash in operating activities of approximately $2,918,000 and
$1,236,000 during the years ended December 31, 2003 and 2002, respectively.
The most significant use of cash in operations during the year ended
December 31, 2003 was the production of inventory shipped on open account during
the 4th quarter and the increase in inventory levels to support the U. S.
Government contracts with shipments to commence during the 1st quarter of 2004.
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. This 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 were 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. At December 31, 2002, we
owed $450,000 on this note and retired the note in full during the first quarter
of 2003.
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 years ended December 31, 2003 and 2002, respectively, we added
approximately $289,000 and $387,000 in new equipment, of which approximately
$225,000 was acquired in 2002 for 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.
16
Depending on future demand for our products, we may develop plans to
increase our production capability in the foreseeable future by an additional
50% to 100%, as influenced by the availability of manufacturing equipment on the
open market and product sales demand. 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 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. (La Jolla) 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.
In December 2002, the Company and La Jolla, the Debenture and/or Warrant
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 were 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. Our Registration Statement on Form SB-2 was deemed effective by
the U. S. Securities and Exchange Commission on May 14, 2003 at 1:00 pm EDT.
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 is required
to concurrently exercise warrants and purchase shares of common stock equal to
ten times the number of shares of common stock issued to La Jolla 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 them or their 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 could have demanded 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 May 14, 2003, the date that underlying Registration Statement
under the Securities Act of 1933 was declared effective by the U. S. Securities
and Exchange Commission, within 3 business days of such demand. If the repayment
was accelerated, we were obligated to issue 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.
17
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 13, 2003 and May 6, 2003, La Jolla Cove Investors, Inc., the
holder of our convertible debenture, advanced our company an additional $200,000
and $150,000, respectively, for working capital purposes. During the second
quarter of 2003, La Jolla elected to allocate the entire $350,000 in additional
funding to the principal balance of the convertible debenture.
On various dates between May 7, 2003 and June 30, 2003, La Jolla elected to
convert an aggregate $75,135, through six separate transactions, in outstanding
Debenture principal into restricted, unregistered common stock. This election
caused the Company to issue 1,334,777 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 751,350 shares of our restricted, unregistered common stock for gross
proceeds of $751,350.
During the period from July 1, 2003 through September 30, 2003, we issued
an aggregate 2,902,129 shares of common stock, in 15 separate transactions, to
La Jolla in exchange for the redemption of approximately $93,500 in outstanding
debenture balance and approximately $935,000 in cash from the exercise of the
affiliated warrant. Where the closing price of our common stock was in excess of
the respective price per share on the respective transaction date, we recognized
a charge to operations for "compensation expense related to common stock
issuances at less than "fair value". The cumulative effect of transactions where
the transaction price, as established in the Debenture Agreement, was less than
the closing price on the date of the respective transactions resulted in a
cumulative charge to operations of approximately $317,539 during this time
period.
In October 2003, we issued an aggregate 1,659,847 shares of common stock,
in three separate transactions, in exchange for the redemption of approximately
$40,000 in outstanding debenture balance and approximately $400,000 in cash from
the exercise of the affiliated warrant. Where the closing price of the Company's
common stock was in excess of the respective price per share on the respective
transaction date, the Company recognized a charge to operations for
"compensation expense related to common stock issuances at less than "fair
value". The cumulative effect of transactions where the transaction price, as
established in the Debenture Agreement, was less than the closing price on the
date of the respective transactions resulted in a cumulative charge to
operations of approximately $146,189 during this time period.
18
In December 2004, we entered into an addendum to the convertible debenture
and warrant whereby we agreed to the following:
* the discount multiplier was reduced from eighty percent to seventy six
percent;
* within five business days after this registration statement being
declared effective, La Jolla is required to submit a debenture
conversion in the amount of $10,000 and every ten business days
thereafter La Jolla shall submit three additional debenture conversion
in the amount of $10,000 each;
* within five business days after this registration statement being
declared effective, La Jolla shall wire $400,000 to us as a prepayment
towards the exercise of its warrant; and
* immediately following the sale of all shares held by La Jolla in
connection with the debenture conversions in the aggregate amount of
$40,000, La Jolla shall wire $275,000 to us as a prepayment towards
the exercise of its warrant and shall submit a debenture conversion in
the amount of $6,250 on the first business day of each month until the
debenture is no longer outstanding.
Research and Development
Depending on the demand for new product lines and the refinement of our
production processes under our production agreement with IMI for the
cross-production and sale of various small arms ammunition, we may or may not
incur increased spending on research and development activities during Calendar
2004.
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.
19
BUSINESS
We had minimal operations until September 2001, when we acquired American
Ammunition Inc. and since such acquisition are engaged principally in the
manufacture and sale of ammunition for retail and wholesale sales. We are an
established small arms munitions manufacturer with an existing distribution
network. The ammunition market is dominated by three major manufacturers,
however, we believe we are poised to enter and impact the growing ammunition
market with our manufacturing equipment and techniques. In addition, we are an
approved Department of Defense contractor.
We began as an assembler and re-loader of ammunition in several calibers.
As we grew, management realized that the only way to break into the industry was
to become a vertically integrated manufacturer. Our founders invested heavily in
research and development, equipment, and technology and focused on increasing
our market share. As a result, we continued manufacturing our 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: 9 millimeter, .45 automatic, .380 automatic, .32
automatic, .40 Smith and Wesson, 38 Special, 30 carbine, 223 Remington, 38
Super, .44 Special, 32 Smith and Wesson Long, 44 special and 44 magnum. We have
also added .44 Magnum, .308, .50 AE and .50 caliber manufacture in Israel and
shipped to the Company for distribution under the Company's brand name. We have
identified these products as having the largest share of the market for the next
several years.
We sell our products into both domestic and foreign markets. At this time,
our domestic sales are made to both private sector entities and governmental
agencies, principally Federal. Our international sales are, at this time, made
solely to foreign governments, principally for military use. During Calendar
2003 and 2002, our sales were approximately 93.8% and 100.0% domestic and
approximately 6.2% and 0.0% international. We anticipate the international
governmental portion of our business to grow in future periods; however, we do
not anticipate our international business to outgrow our domestic sales.
Our principal executive offices are located at 3545 NW 71st Street, Miami,
Florida 33147 and our telephone number is (305) 835-7400.
Equipment and Production Line Capabilities
We own all the equipment necessary to take the raw material from cup, lead,
primer and powder, to the finished product, a loaded round of ammunition. The
process of manufacturing diverse calibers of ammunition is extremely complex and
requires tolerances of +/- .0005" to be maintained throughout the process.
Our technology and equipment enable us to produce a large variety of
handgun and rifle ammunition. We have a machine shop and maintains our 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. We purchase raw materials in bulk and strive 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.
We are evaluating the addition of several products to our 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. We also are making provisions to increase
other aspects of production capacity, which would complement long term goals of
both production volume and product diversity.
In 2003 and 2004 we acquired equipment which will allow us to expand our
production capacity in areas which they have traditionally been slower than
other areas of our manufacturing process. The acquisition of additional presses,
for example, has helped us to balance out our assembly line process so that all
portions of our projectiles are manufactured in time with each other. We hope
this will cut our manufacturing and labor costs and as a result, make us more
efficient at producing small arms ammunition.
We also recently acquired laser gauging computer equipment for the purpose
of improving and automating quality control processes. This newly acquired
equipment, when added to the production line, will automatically eject bad
projectiles from the assembly line. This should further improve the final
products we produce and cut labor costs associated with manual inspection of
product.
20
Business Strategy
We are an autonomous manufacturer of ammunition, with the technology and
equipment to take advantage of the growing market.
The barrier to entry into the ammunition market is extremely high, however,
we are an established small arms munitions manufacturer, with an existing
distribution network. We manufacture our ammunition by creating most of the
components ourselves.
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 Ammunition to make a significant impact in sales through
distributors in commercial markets and in addition sales to government agencies,
the military and exports. We have been seeking additional capital to allow us to
enlarge our operations to take advantage of our technological capacities,
equipment and the existing marketplace.
Marketing and Sales Distribution
Traditionally, we have had a domestic sales network of distributors and
sales representatives. In the past, Ellett Brothers, Inc. accounted for large
portions of our total sales for fiscal year 2001, 2002 and even 2003. However,
in first quarter 2004, we launched our Dealer Direct Program and hired Paul
Goebel as its National Sales Manager. In doing so, we completely revamped the
way we distribute and sell our products domestically.
In essence, we cut out the "middle man" distributor by offering our
products directly to and soliciting orders directly from the 66,000 licensed
dealers in the United States. In doing this, we may offer our products to
dealers cheaper than dealers would otherwise obtain them from distributors,
while increasing our profit margins as well. It also eliminates a second freight
charge from the distributor to the dealer, as product is shipped directly from
the manufacturer to the dealer.
Our marketing strategy consists of several new key features to attract
dealers directly to our company, rather than to a distributor. First, we are
offering "net 60" day credit terms to smaller dealers, who would ordinarily be
forced to pay for product up front. We have developed a screening process for
qualifying these smaller dealers on an individual basis. Although offering net
60 credit terms to dealers results in increased risk to our company in our
account receivables as compared to payment in advance, we have exponentially
diversified our receivables (and therefore our credit risk) from 13 main
distributors to potentially thousands of individual dealers.
Secondly, we now offer free freight (shipping) to dealers on certain orders
which exceed a specified amount. Shipping of small arms ammunition has always
been a large portion of the cost passed to consumers as the product is heavy and
requires extra care in shipping. We have determined that we can ship our
products at a reduced rate in quantity and offers free shipping as an incentive
on qualified orders. As previously, explained, a second freight charge has also
been avoided by eliminating the distributor from the transaction.
Additionally, our increasing automation and dealer direct program have
considerably sped up the time we take to provide a dealer with demanded product.
Our management has become aware of an unfulfilled need of dealers to be provided
with almost instant gratification when demand at retail establishments
increases. Many dealers have communicated with our company complaining that we
took their distributors too long to provide them with additional product supply
when demand dictated. We believe that our new distribution strategy complimented
with recent automation has cut the time it takes a dealer to receive our
products by more than half.
We only recently upgraded our website to include e-commerce capacity,
wherein licensed dealers who are pre-registered with our company can order
online direct from us. Sales in this manner are slow, but we are hopeful that as
we steer dealers who currently order from us to the site, we will further
automate the way in which dealers place product orders from our company.
We plan to continue to aggressively pursue new customers through
promotions, advertising and trade shows. We intend 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.
21
We have been certified by the United States Small Business Administration
as a "qualified HUBZone small business concern." Under this program, small
businesses can qualify for special set-aside contracts, get up to a 10% edge in
competitive contract bidding or even be the sole-source bidder in some cases.
The program's name signifies the effort to promote businesses in "historically
under-utilized business zones," generally blighted areas and its purpose is to
create jobs for those who live in such areas as well.
We are marketing our manufacturing flexibility to numerous Department of
Defense and commercial munitions manufacturers as subcontractors allowing prime
contractors to reap the benefits of our "HUBZone certification", thereby
allowing such prime contractors to comply with Federal Acquisition 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 called for
HUBZone contracts to increase from 1.5% of these procurements to 3% by 2003.
Pricing and Value
We have been able to price our products competitively at a price lower than
any of the "big three" manufacturers, Remington, ATK, and Winchester. We
capitalize 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 our product, add significant profit and sell such product at a retail
price that is lower than that at which the distributor can purchase the
competitors' product.
Advertising & Promotion
We intend to gear our advertising towards magazine and print media, focused
on the gun and ammunition, handgun and shooting markets. We believe that such
advertising will result in greater name recognition among individual consumers.
Currently, our sales are generated with very little advertising and we believe
that advertising could significantly improve retail/mass merchandiser sales and
increase market share.
Status of Publicly Announced Products and Services
Israeli Military Industries Ltd.
We have developed a relationship with Israeli Military Industries Ltd.
("IMI"), whereby we work together on individual projects. To date, we have
primarily focused their cooperation on federal contracts and on our dealer
direct program. In such contracts, projectiles manufactured by IMI have been
assembled by our company under IMI's strict quality control requirements.
The joint venture has benefited our company in several ways. First and
foremost, IMI has a distinct following as a result of offering very high quality
products of the course of many years. Associating our name with IMI's history
has added value to our brand and reputation in the small arms ammunition
industry. Second, IMI manufactures different calibers and products than us,
thereby increasing the catalogue of items we may offer to our dealers. IMI
produces commercial ammunition, similar to our company. However, we also
specialize in the production of law enforcement and military grade ammunition,
which we currently do not have the production capability to produce on our own.
Lastly, on past and current cooperation initiatives, IMI has shipped projectiles
and materials for assembly at no cost to our company, thereby saving us the time
value of such costs were we to have produced such items or purchased such raw
materials ourselves.
Triton
On February 10, 2004, we executed a non-binding letter of intent to acquire
the assets of Triton Ammunition Corporation ("Triton"). Such assets include
machinery, raw materials and intellectual property rights. Triton will convey
patents and licenses for the Hi-Vel and Quik-Shok lines of ammunition. For such
assets, we are obligated to issue shares of our restricted common stock valued
at $1,400,000 based upon the average closing market price for the five trading
days ending on the third trading day immediately prior to closing on the
22
definitive agreement. The letter of intent is subject to further due diligence
and expired if a definitive agreement was not executed on or before February 21,
2004, however the LOI has since been extended.
We believe that with the acquisition of certain Triton specialty ammunition
and its partnership with IMI on certain ventures, we will be able to offer an
increased product line to our dealers.
ECO-AMMO(TM)
We are now manufacturing and distributing ECO-AMMO(tm). It is a lead-free
projectile with reduced lead pollutants sometimes referred to as "green" ammo.
ECO-AMMO is ideal for indoor ranges since it disintegrates upon impact and
therefore does not ricochet. We have been acquiring and developing technology to
market this environmentally friendly ammunition for some time. The advent of the
dealer direct program enables the product to be distributed at a lower cost and
should open up the market to more consumers.
Aircraft Bullet
We were assigned a serial number (60/325,046) from the U.S. Patent and
Trademark Office for our 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, we have additional applications for use
in nuclear power plants, at hazardous materials storage facilities, and for home
defense.
We departed completely from standard ballistics for the design of this
projectile to meet what American Ammunition perceives as a growing and unfilled
need. Two of the basic design criteria in ballistics are penetration and
expansion of the projectile. In this design, these two factors have been
controlled to meet the specific requirements of weapons discharged inside an
aircraft cabin, while insuring fuselage integrity. This design is a new concept
in close quarter ammunition: a bullet capable of incapacitating an assailant
without damaging surrounding structure.
Design and material selection allows for the inverted expansion and aft
internal collapse of the projectile mass. Upon impact with the aircraft
fuselage, the bullet 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 our website at www.a- merc.com in the New
Product Section. We believe 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 our projectile plating needs at this
time. As our 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 our company of which there are no guarantees.
Competition
The market for small arms ammunition is becoming increasingly competitive.
Companies such as Remington, Federal and Winchester are all better equipped,
more experienced and better financed than us.
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.
23
We believe it is feasible to increase our 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 we had reduced sales in fiscal 2001 due to a lack of funding. We
have already received significant bank and private placement funding in fiscal
2002 to ramp up operations thereby significantly increasing our presence in the
market.
Sources and Availability of Raw Materials
We manufacture our ammunition by creating most of the components ourselves.
The materials needed to produce our ammunition products are widely available
from numerous third parties. No shortage of materials is expected in the
foreseeable future.
Research and Development
We believe that research and development is an important factor in our
future growth. The small arms ammunition industry is closely linked to the
latest technological advances. Therefore, we 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
We intend to protect our original intellectual property with patents,
copyrights and/or trademarks as appropriate. Our head stamp "A-MERC " was
registered as a trademark on May 10,1994. We were assigned a serial number
(60/325,046) from the U.S. Patent and Trademark Office for our provisional
patent application filed on September 26, 2001 for a bullet that will not pierce
an aircraft fuselage but will penetrate human soft tissue.
Governmental Regulation
In accordance with the provisions of Title 1, Gun Control Act of 1968, we
are required to be licensed to import firearms and manufacture ammunition for
firearms. Such licensing is subject to limitations in Chapter 44, Title 18,
United States Code. In the event such licenses are not renewed for any reason,
we would have to cease our operations. In accordance with these requirements, we
carry 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, 2006; and
* License No. 1-59-025-08-3D-69454 for "08-Importer of Firearm other
than Destructive Devices", which license expires on April 1, 2006.
We are 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
We are 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 us from
continuing our operations. Should such legislation be enacted, and should the we
be precluded from continuing our operations, it would have a materially adverse
effect upon our business and future.
Cost and Effects of Compliance with Environmental Laws
As a manufacturer, we are subject to general local, state and federal
regulations governing environmental concerns. We believe that we have always
been and continue to be in compliance with all such laws. Special precautions
have been taken us to ensure that adequate ventilation exists for the portion of
our operations that utilize lead and/or brass. Additionally, our gunpowder
supply is humidity and temperature controlled in a secure facility.
24
Employees
At January 5, 2005, we employed 57 persons. None of these employees are
represented by a labor union for purposes of collective bargaining. We consider
our relations with our employees to be excellent. We may employ additional
personnel, as necessary, to accommodate future sales and production
requirements.
Description Of Property
We lease our corporate office and manufacturing facility from our
controlling stockholder under a long-term operating lease agreement. The lease
requires a monthly payment of approximately $5,410, including applicable sales
taxes. We are responsible for all utilities and maintenance expenses. The lease
expires on August 15, 2009 and contains a clause that upon expiration, our
company and the controlling shareholder shall renegotiate the annual rental
amount. Total rent expense under this lease was approximately $67,075 and
$54,100, respectively, for each of the years ended December 31, 2003 and 2002.
Our subsidiary, IPE, leases its manufacturing facility from an unrelated
third-party under a long-term operating lease agreement. This lease is for a
period of five years and requires graduated monthly payments, changing on the
lease anniversary date, ranging from approximately $1,751 to $1,914, plus the
applicable sales taxes. We are is responsible for all utilities and maintenance
expenses. The lease expires on February 28, 2007 and may be renewed for an
additional five year term at a rental rate of approximately $1,971, plus
applicable sales taxes for the first renewal year and 3.0% increase on each
succeeding anniversary date. Total rent expense under this lease was
approximately $20,752 and $16,622, respectively, for each of the years ended
December 31, 2003 and 2002.
Future minimum rental payments on the above leases are as follows:
Year ended
December 31, Amount
------------ ----------
2004 $ 60,754
2005 23,565
2006 24,276
2007 4,076
---------
Totals $ 112,671
=========
We believe that our facilities are adequate for our needs for the
foreseeable future.
Legal Proceedings
We are not a party to any pending litigation at this time nor is any of our
property subject to any pending legal proceedings.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following information sets forth the names of our officers and
directors, their present positions with us, and their biographical information.
Name Age Office
--------------------- ------ ---------------------------------------
J.A. Fernandez, Sr. 67 Chairman of the Board and Director
of Sales
Andres F. Fernandez 38 President and Chief Executive
Officer
Emilio D. Jara 39 Vice-President of Operations,
Secretary and Director
Maria A. Fernandez 44 Director
--------------------- ------ ---------------------------------------
25
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. is the father of Andres and Maria Fernandez. There are
no other family relationships between or among the executive officers and
directors of our company.
Business Experience
J. A. Fernandez, Sr., age 67, currently serves as the Chairman of the Board
and Director or Sales. He has been employed by us since our inception in 1983.
Mr. Fernandez is the founder of what began as a family business and is
responsible for our sales activities. 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 38, 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 our company for over a decade. Mr. Fernandez is
responsible for day to day operations and has been a driving force behind our
company and our 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 39, 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 our company since 1988. He has been an
integral part of our technological growth. His abilities have contributed to our
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.
Maria A. Fernandez, age 44, 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.
26
Compliance with Section 16(a) of the Securities Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors, certain officers and persons holding 10% or more of our common stock
to file reports regarding their ownership and regarding their acquisitions and
dispositions of the Registrant's common stock with the Securities and Exchange
Commission ("SEC"). Such persons are required by SEC regulations to furnish our
company with copies of all Section 16(a) forms they file.
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the registrant under Rule 16a-3(d) during fiscal 2003, and certain
written representations from executive officers and directors, we are unaware
that any required reports that have not been timely filed.
Code of Ethics
We have not adopted a code of ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. We have not adopted such a
code of ethics because all of management's efforts have been directed to
building the business of the company; a later time, such a code of ethics may be
adopted by the board of directors.
Committees of the Board of Directors
We presently do not have an audit committee, compensation committee,
nominating committee, an executive committee of our board of directors, stock
plan committee or any other committees. However, our board of directors will
establish various committees during the current fiscal year.
Terms of Office
Our directors are appointed for a one year term to hold office until the
next annual general meeting of the holders of our Common Stock or until removed
from office in accordance with our by-laws. Our officers are appointed by our
board of directors and hold office until removed by our board of directors.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the aggregate cash
compensation paid or accrued by our company to each of our executive officers
and key employees for services rendered to our company during the our fiscal
year ended 2003, 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 Restricted Securities LTIP All
Name and Annual Stock Underlying Pay- Other
Principal Year Salary Bonus Compen- Award(s) Options/ outs Compen-
Position (1) ($) ($) sation ($) ($) SARs (f) sation ($)
----------------- ------ -------- -------- ------------ ---------- ------------ -------- ----------
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 2003 $104,000 $0 $0 $0 $0 $0 $0
Sales
27
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 2003 $132,600 $0 $0 $0 $0 $0 $0
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 2003 $ 52,000 $0 $0 $0 $0 $0 $0
Operations,
Secretary
and
Director
Amelia 2000 $ 59,202 $0 $0 $0 $0 $0 $0
Fernandez, 2001 $ 59,923 $0 $0 $0 $0 $0 $0
Former Vice 2002 $ 64,598 $0 $0 $0 $0 $0 $0
President 2003 $ 78,702 $50,000 $0 $0 $0 $0 $0
And former
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
2003 $0 $0 $0 $0 $0 $0 $0
--------------------
Compensation of Directors
We have no standard arrangements for compensating the directors of our
company for their attendance at meetings of the Board of Directors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We lease our corporate office and manufacturing facility from our
controlling stockholder under a long-term operating lease agreement. The lease
requires a monthly payment of approximately $5,410, including applicable sales
taxes. We are responsible for all utilities and maintenance expenses. The lease
expires on August 15, 2009 and contains a clause that upon expiration, our
company and the controlling shareholder shall renegotiate the annual rental
amount. Total rent expense under this lease was approximately $67,075 and
$54,100, respectively, for each of the years ended December 31, 2003 and 2002.
28
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of January 5, 2005
* by each person who is known by us to beneficially own more than 5% of
our common stock;
* by each of our officers and directors; and
* by all of our officers and directors a a group.
Shares Beneficially Owned
---------------------------
Name and Address of Beneficial Owner Number Percent
------------------------------------------------ ----------- ------------
Andres F. Fernandez, President, CEO and CFO 8,485,365 11.4%
J. A. Fernandez, Sr., Chairman of the Board
and Director of Sales 14,905,905 19.9%
Amelia C. Fernandez 4,281,900 5.7%
Maria A. Fernandez, Director 260,000 *
Emilio D. Jara, Director 54,250 *
Total securities held by officers
and directors as a group (4 people): 23,705,520 31.7%
-----------------------------------------
* Less than 1%
Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of January 5, 2005 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
J.A. Fernandez, Sr. and Amelia Fernandez are the father and mother of
Andres and Maria Fernandez.
The table above does not include the 384,500 shares Maria Fernandez holds
as a Trustee for an Irrevocable Trust in which neither she nor any of the other
Officers or Directors is the beneficial owner. However, the table does include
the shares owned by Amelia Fernandez, who was an officer and director during
2003.
DESCRIPTION OF SECURITIES BEING REGISTERED
Our authorized capital stock consists of 300,000,000 shares of Common
Stock, $.001 par value and 20,000,000 shares of Preferred Stock, $.001 par
value.
The following is a description of the material terms of our common stock.
Common Stock
The holders of the issued and outstanding shares of common stock are
entitled to receive dividends when, as and if declared by our Board of Directors
out of any funds lawfully available therefore. The Board of Directors intends to
retain future earnings to finance the development and expansion of our business
and does not expect to declare any dividends in the foreseeable future. The
holders of the common stock have the right, in the event of liquidation, to
receive pro rata all assets remaining after payment of debts
29
and expenses. The common stock does not have any preemptive rights and does not
have cumulative voting rights. The issued and outstanding shares of common stock
are fully paid and nonassessable.
Holders of shares of common stock are entitled to vote at all meetings of
such shareholders for the election of directors and for other purposes. Such
holders have one vote for each share of common stock held by them.
Transfer Agent
Atlas Stock Transfer Corporation, 5899 South State Street, Salt Lake City,
Utah 84107 has been appointed the transfer agent of our common stock and
preferred stock.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The California Corporations Code provides for the indemnification of
directors, officers, employees and agents under the circumstances as set forth
in Section 317 thereof. Section 317 permits a corporation to indemnify
itsagents, typically directors and officers, for expenses incurred or
settlements or judgments paid in connection with certain legal proceedings. Only
those legal proceedings arising out of such persons' actions as agents of the
corporation may be grounds for indemnification.
Whether indemnification may be paid in a particular case depends on whether
the agent wins, loses or settles the suit and upon whether a third party or the
corporation itself is the plaintiff. Section 317 provides for mandatory
indemnification, no matter who the plaintiff is, when an agent is successful on
the merits of a suit. In all other cases, indemnification is permissive and
sometimes requires approval of the court in which the suit is or was pending.
If the agent loses or settles a suit with a plaintiff other than the
Company or someone who did not threaten or bring suit on our behalf, the agent
may be indemnified for expenses incurred and settlements or judgments paid. That
indemnification may be authorized upon a finding that the agent acted in good
faith and in a manner he or she reasonably believed to be in our best interests,
and, in a criminal proceeding, only where the agent had no reasonable cause to
believe his or her conduct was unlawful. If the agent loses or settles a suit
with us or a plaintiff who threatened or brought suit on our behalf, the agent
may be indemnified for expenses actually and reasonably incurred in connection
with the defense or settlement of the action. Such indemnification may be
authorized upon a finding that the agent acted in good faith and in a manner he
or she believed to be in our best interests and the best interests of our
shareholders. No indemnification is permitted where the agent breached his or
her duty to us, however, unless the court in which the proceeding is or was
pending determines that the agent is fairly and reasonably entitled to indemnity
for certain expenses. No indemnification is permitted where a settlement is
reached without court approval.
Where permissive indemnification provisions control, indemnification may be
authorized by a majority vote of the disinterested directors, by an independent
legal counsel's written opinion, by our shareholders (the person to be
indemnified is excluded from voting his or her shares) or by the court in which
the proceeding is or was pending.
30
Any provision in a California corporation's articles of incorporation,
bylaws or shareholder or director resolution that indemnifies its officers or
directors may prohibit permissive, but not mandatory, indemnification as
described above. Such a provision must otherwise be consistent with Section 317.
Nonetheless, a corporation has the power to purchase indemnity insurance for its
agents even for situations in which it could not indemnify them.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, we have been informed that in the opinion
of the SEC such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
* ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
* block trades in which the broker-deale will attempt to sell the shares
as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
* purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
* an exchange distribution in accordance with the rules of the
applicable exchange;
* privately-negotiated transactions;
* broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
* through the writing of options on the shares
* a combination of any such methods of sale; and
* any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders or their respective pledgees, donees, transferees
or other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
31
We are required to pay all fees and expenses incident to the registration
of the shares, including fees and disbursements of counsel to the selling
stockholders, but excluding brokerage commissions or underwriter discounts.
The selling stockholders, alternatively, may sell all or any part of the
shares offered in this prospectus through an underwriter. No selling stockholder
has entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholders defaults on
a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder is contractually
restricted from engaging in short sells. In addition, if a such short sale is
deemed to be a stabilizing activity, then the selling stockholder will not be
permitted to engage in a short sale of our common stock. All of these
limitations may affect the marketability of the shares.
We have agreed to indemnify the selling stockholders, or their transferees
or assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material arrangement
with a broker-dealer for the resale of the common stock, then we would be
required to amend the registration statement of which this prospectus is a part,
and file a prospectus supplement to describe the agreements between the selling
stockholders and the broker-dealer.
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
* that a broker or dealer approve a person's account for transactions in
penny stocks; and
* the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny
stock to be purchased.
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must:
* obtain financial information and investment experience objectives of
the person; and
* make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the
risks of transactions in penny stocks.
32
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
* sets forth the basis on which the broker or dealer made the
suitability determination; and
* that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny stocks
in both public offerings and in secondary trading and about the commissions
payable to both the broker-dealer and the registered representative, current
quotations for the securities and the rights and remedies available to an
investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares
of common stock by the selling stockholders. We will not receive any proceeds
from the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering
the resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Total
Total Shares of Percentage Percentage
Common Stock of Common Shares of Beneficial of Common
Issuable Upon Stock, Common Stock Beneficial Percentage of Ownership Stock Owned
Conversion of Assuming Included in Ownership Common Stock After the After
Name Debentures Full Prospectus Before the Owned Before Offering Offering
and/or Warrants Conversion (1) Offering* Offering* (4) (4)
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
La Jolla Cove 24,097,011(3) 24.38% Up to 3,850,987 4.99% -- --
Investors, 48,194,022
Inc.(2) shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
* These columns represents the aggregate maximum number and percentage of
shares that the selling stockholders can own at one time (and therefore,
offer for resale at any one time) due to their 4.9% limitation.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
33
also any shares, which the selling stockholders has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the convertible debentures is subject to adjustment depending on,
among other factors, the future market price of the common stock, and could be
materially less or more than the number estimated in the table.
(1) Includes a good faith estimate of the shares issuable upon conversion of
the convertible debentures and exercise of warrants, based on current
market prices. Because the number of shares of common stock issuable upon
conversion of the convertible debentures is dependent in part upon the
market price of the common stock prior to a conversion, the actual number
of shares of common stock that will be issued upon conversion will
fluctuate daily and cannot be determined at this time. Under the terms of
the convertible debentures, if the convertible debentures had actually been
converted on January 5, 2005, the conversion price would have been $.122.
The actual number of shares of common stock offered in this prospectus, and
included in the registration statement of which this prospectus is a part,
includes such additional number of shares of common stock as may be issued
or issuable upon conversion of the convertible debentures and exercise of
the related warrants by reason of any stock split, stock dividend or
similar transaction involving the common stock, in accordance with Rule 416
under the Securities Act of 1933. However the selling stockholders have
contractually agreed to restrict their ability to convert their convertible
debentures or exercise their warrants and receive shares of our common
stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not
exceed 4.99% of the then issued and outstanding shares of common stock as
determined in accordance with Section 13(d) of the Exchange Act.
Accordingly, the number of shares of common stock set forth in the table
for the selling stockholders exceeds the number of shares of common stock
that the selling stockholders could own beneficially at any given time
through their ownership of the convertible debentures and the warrants. In
that regard, the beneficial ownership of the common stock by the selling
stockholder set forth in the table is not determined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended.
(2) The selling stockholder is an unaffiliated third party. In accordance with
rule 13d-3 under the Securities Exchange Act of 1934, Norman Lizt may be
deemed a control person of the shares owned by the selling stockholder.
(3) Includes 42,861,322 shares of common stock underlying our $266,350
convertible debenture and 2,666,350 shares of common stock underlying
common stock purchase warrants issued to La Jolla Investors, Inc.
(4) Assumes that all securities registered will be sold.
Terms of Convertible Debentures
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with La Jolla on October 4, 2002 for the sale of (i) $250,000
in convertible debentures and (ii) warrants to buy 30,000,000 shares of our
common stock. On March 13, 2003 and May 6, 2003, La Jolla advanced an aggregate
of $350,000 to our company which such funding was allocated towards the
principal balance of our convertible debentures. We currently have $266,350 of
our convertible debentures and 2,666,350 warrants still outstanding. This
prospectus relates to the resale of the common stock underlying these
convertible debentures and warrants.
34
The debentures bear interest at 8%, mature on June 30, 2006, and are
convertible into our common stock, at the selling stockholder's option. The
convertible debentures are convertible into the number of our shares of common
stock equal to the principal amount of the debentures being converted multiplied
by 11, less the product of the conversion price multiplied by 10 times the
dollar amount of the debenture. The conversion price for the convertible
debentures is the lesser of (i) $1.00 or (ii) seventy six percent of the average
of the five lowest volume weighted average prices during the twenty (20) trading
days prior to the conversion. Accordingly, there is in fact no limit on the
number of shares into which the debenture may be converted. However, in the
event that our market price is less than $.30, we will have the option to prepay
the debenture at 125% rather than have the debenture converted. In addition, the
selling stockholder is obligated to exercise the warrant concurrently with the
submission of a conversion notice by the selling stockholder. Currently, the
warrant is exercisable into 2,666,350 shares of common stock at an exercise
price of $1.00 per share.
In December 2004, we entered into an addendum to the convertible debenture
and warrant whereby we agreed to the following:
* the discount multiplier was reduced from eighty percent to seventy six
percent;
* within five business days after this registration statement being
declared effective, La Jolla is required to submit a debenture
conversion in the amount of $10,000 and every ten business days
thereafter La Jolla shall submit three additional debenture conversion
in the amount of $10,000 each;
* within five business days after this registration statement being
declared effective, La Jolla shall wire $400,000 to us as a prepayment
towards the exercise of its warrant; and
* immediately following the sale of all shares held by La Jolla in
connection with the debenture conversions in the aggregate amount of
$40,000, La Jolla shall wire $275,000 to us as a prepayment towards
the exercise of its warrant and shall submit a debenture conversion in
the amount of $6,250 on the first business day of each month until the
debenture is no longer outstanding.
The selling stockholder has contractually agreed to restrict its ability to
convert or exercise its warrants and receive shares of our common stock such
that the number of shares of common stock held by them and their affiliates
after such conversion or exercise does not exceed 4.9% of the then issued and
outstanding shares of common stock.
Sample Conversion Calculation
The convertible debentures are convertible into the number of our shares of
common stock equal to the principal amount of the debentures being converted
multiplied by 11, less the product of the conversion price multiplied by ten
times the dollar amount. The conversion price for the convertible debentures is
the lesser of (i) $1.00 or (ii) seventy six percent of the average of the five
lowest volume weighted average prices during the twenty (20) trading days prior
to the conversion. For example, assuming conversion of $266,350 of debentures on
January 5, 2005, a conversion price of $0.122 per share, the number of shares
issuable upon conversion would be:
35
($266,350 x 11) - ($.122 x (10 x $266,350)) = 2,605,968 /$.122 = 21,430,661
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the principal amount of our convertible
debentures, based on market prices 25%, 50% and 75% below the market price, as
of January 5, 2005 of $0.16.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 24% Issuable Stock
------ ----- ------ -------- -----
25% $.12 $.0912 29,462,048 28.27%
50% $.08 $.0608 45,524,822 37.85%
75% $.04 $.0304 93,713,145 55.63%
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an
opinion with respect to the validity of the shares of common stock being offered
hereby.
EXPERTS
Our financial statements at December 31, 2003 and 2002 and for the years
then ended, appearing in this prospectus and registration statement have been
audited by S. W. Hatfield, CPA, independent auditors, as set forth on their
report thereon appearing elsewhere in this prospectus, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act of 1933, as amended, relating to the shares of common stock being offered by
this prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of American Ammunition, Inc., filed as
part of the registration statement, and it does not contain all information in
the registration statement, as certain portions have been omitted in accordance
with the rules and regulations of the Securities and Exchange Commission.
We are subject to the informational requirements of the Securities Exchange
Act of 1934 which requires us to file reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy
statements and other information may be inspected at public reference facilities
of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549.
Copies of such material can be obtained from the Public Reference Section of the
SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at
prescribed rates. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
36
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
CONTENTS
Page
Report of Independent Certified Public Accountants F-2
Annual Consolidated Financial Statements
Consolidated Balance Sheets
as of December 31, 2003 and 2002 F-3
Consolidated Statement of Operations and Comprehensive Loss
for the years ended December 31, 2003 and 2002 F-5
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 2003 and 2002 F-6
Consolidated Statement of Cash Flows
for the years ended December 31, 2003 and 2002 F-7
Notes to Consolidated Financial Statements F-9
Interim Consolidated Financial Statements
Consolidated Balance Sheets
as of September 30, 2004 and 2003 F-25
Consolidated Statement of Operations and Comprehensive Loss
for the nine and three months ended September 30, 2004 and 2003 F-27
Consolidated Statement of Cash Flows
for the nine months ended September 30, 2004 and 2003 F-28
Notes to Consolidated Financial Statements F-30
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, 2003 and 2002 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, 2003 and 2002,
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. and Subsidiaries as of December 31, 2003 and 2002 and
the results of their consolidated operations and consolidated cash flows for
each of the two years ended December 31, 2003 and 2002, respectively, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ S. W. Hatfield, CPA
--------------------------
S. W. HATFIELD, CPA
Dallas, Texas
January 23, 2004
F-2
AMERICAN AMMUNITION, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
December 31, December 31,
2003 2002
---------------------------------
ASSETS
Current Assets
Cash on hand and in bank $ 505,671 $ 157,316
Accounts receivable - trade,
net of allowance for doubtful accounts
of $-0- and $-0-, respectively 520,835 31,288
Inventory 1,112,756 384,814
Prepaid expenses 40,388 19,391
------------- -------------
Total Current Assets 2,179,650 592,809
------------- -------------
Property and Equipment - at cost or contributed value
Manufacturing equipment 7,131,233 6,843,135
Office furniture and fixtures 62,893 58,528
Leasehold improvements 184,690 188,263
------------- -------------
7,378,816 7,089,926
Accumulated depreciation (4,066,390) (3,393,301)
------------- -------------
Net Property and Equipment 3,312,426 3,696,625
------------- -------------
Other Assets
Deposits and other 77,860 77,860
------------- -------------
TOTAL ASSETS $ 5,569,936 $ 4,367,294
============= =============
- Continued -
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
AMERICAN AMMUNITION, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, 2003 and 2002
December 31, December 31,
2003 2002
---------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of leases payable $ 7,841 $ 9,507
Customer deposits 4,100 80,953
Accounts payable - trade 128,865 414,910
Accrued interest payable - 18,709
Accrued dividends payable 11,020 12,600
------------- -------------
Total Current Liabilities 151,826 536,679
Long-Term Liabilities
Note payable to a bank - 450,000
Capital leases payable - 7,841
------------- -------------
Total Liabilities 151,826 994,520
------------- -------------
Commitments and Contingencies
Mandatory Convertible Debenture 391,365 250,000
------------- -------------
Mandatory Convertible Preferred Stock
103,700 and 41,000 shares issued and outstanding 518,500 205,000
------------- -------------
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.
66,893,628 and 55,328,166 shares issued
and outstanding 66,894 55,328
Additional paid-in capital 21,070,395 16,523,164
Accumulated deficit (16,629,044) (13,660,718)
------------- -------------
Total Stockholders' Equity 4,508,245 2,917,774
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,569,936 $ 4,367,294
============= =============
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, 2003 and 2002
Year ended Year ended
December 31, December 31,
2003 2002
---------------------------------
Revenues $ 1,984,997 $ 1,409,364
------------- -------------
Cost of Sales
Materials 1,355,098 1,041,553
Direct Labor 868,004 663,787
Other direct costs and expenses 340,346 128,371
Depreciation 668,574 652,943
------------- -------------
Total Cost of Sales 3,232,022 2,456,654
------------- -------------
Gross Profit (1,247,025) (1,047,290)
------------- -------------
Operating Expenses
Research and development expenses 4,038 3,662
Marketing and promotion expenses 115,767 23,453
Salaries, wages and related expenses 399,710 341,532
Other operating expenses 567,700 389,732
Interest expense 35,154 72,444
Depreciation expense 4,516 2,642
Compensation expense related to common stock
issuances at less than "fair value" 882,291 11,538
------------- -------------
Total Operating Expenses 2,009,176 845,003
------------- -------------
Loss from Operations (3,256,201) (1,892,293)
Other Income (Expense)
Other income (expense) 63,382 9,206
Gain on forgiveness of accounts payable 339,202 -
Gain on sale of equipment 7,900 -
Amortization of Beneficial Conversion
Feature Discount on Preferred Stock (93,678) -
------------- -------------
Loss before Income Taxes (2,939,395) (1,883,087)
Provision for Income Taxes - -
------------- -------------
Net Loss (2,939,395) (1,883,087)
Other Comprehensive Income - -
------------- -------------
Comprehensive Loss (2,939,395) (1,883,087)
Preferred Stock Dividends (28,931) (23,000)
------------- -------------
Net Loss available to Common Shareholders $ (2,968,326) $ (1,883,087)
============= =============
Loss per weighted-average share of common stock outstanding,
computed on net loss - basic and fully diluted $ (0.05) $ (0.04)
============= =============
Weighted-average number of common shares outstanding 61,202,839 52,605,993
============= =============
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, 2003 and 2002
Mandatory Convertible
Preferred Stock Common Stock Additional
---------------------- ------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
--------------------------------------------------------------------------------------
Balances at January 1, 2002 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
Issuance of preferred stock for Cash 91,700 458,500 - - - - 458,500
Less costs of raising capital - - - - (45,850) - (45,850)
Issuance of common stock for
Cash - - 4,552,183 4,552 1,179,630 - 1,184,182
Conversion of debenture - - 4,561,753 4,562 1,086,364 - 1,090,926
Exercise of warrant for cash - - 2,086,350 2,086 2,084,264 - 2,086,350
Payment of preferred stock dividends - - 46,176 46 20,464 - 20,510
Conversion of preferred stock (29,000) (145,000) 319,000 319 144,681 - -
Costs of acquiring convertible debenture - - - - (16,000) - -
Beneficial Conversion Discount
Feature on preferred stock - - - - 93,678 - 93,678
Dividends declared on Preferred Stock - - - - - (28,931) (28,931)
Net loss for the year - - - - - (2,939,395) (2,939,395)
------- ---------- ---------- -------- ---------- ----------- ---------
Balances at December 31, 2003 62,700 $ 518,500 66,893,628 $ 66,894 $21,070,395 $(16,629,044) $4,508,245
======= ========== ========== ======== =========== =========== =========
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, 2003 and 2002
Year ended Year ended
December 31, December 31,
2003 2002
------------------------------
Cash flows from operating activities
Net loss for the year $(2,939,395) $(1,883,087)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 673,090 655,585
Bad debt expense 2,522 -
Gain on forgiveness of accounts payable (339,202) -
Gain on sale of equipment (7,900) -
Amortization of conversion discount on preferred stock 93,678 -
Compensation expense related to common stock
issuances at less than "fair value" 882,291 11,538
Common stock issued for fees and services - 33,395
Accrued interest converted to common stock - 24,000
(Increase) Decrease in
Accounts receivable (492,069) (31,288)
Inventory (727,942) (258,884)
Prepaid expenses, deposits and other (20,997) (13,483)
Increase (Decrease) in
Accounts payable and other accrued liabilities 53,157 126,384
Accrued payroll (18,709) 18,709
Customer deposits (76,853) 80,953
----------- -----------
Net cash provided by (used in) operating activities (2,918,329) (1,236,178)
----------- -----------
Cash flows from investing activities
Cash received on sale of equipment 7,900 -
Purchase of property and equipment (288,891) (386,955)
----------- -----------
Net cash used in investing activities (280,991) (386,955)
----------- -----------
Cash flows from financing activities
Increase in cash overdraft - -
Cash received (paid) on short term loans - net - -
Cash received on long-term loans - -
Principal paid on long-term loans (450,000) (500,000)
Principal paid on long-term capital leases (9,507) (8,365)
Cash received on sale of Mandatory Convertible Preferred Stock 458,500 -
Cash received on issuance of Mandatory Convertible Debenture 350,000 250,000
Cash received on sale of common stock 3,260,532 1,462,395
Cash paid to acquire capital (61,850) (20,000)
----------- -----------
Net cash provided by financing activities 3,547,675 1,184,030
----------- -----------
INCREASE (DECREASE) IN CASH 348,355 (439,103)
Cash at beginning of year 157,316 596,419
----------- -----------
Cash at end of year $ 505,671 $ 157,316
=========== ===========
- 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, 2003 and 2002
Year ended Year ended
December 31, December 31,
2003 2002
------------------------------
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 26,170 $ 29,735
=========== ===========
Income taxes paid for the period $ - $ -
=========== ===========
Supplemental disclosure of non-cash
investing and financing activities
Conversion of debt into common stock $ 208,635 $ 101,000
=========== ===========
Payment of accounts payable with
issuance of common stock $ - $ 182,017
=========== ===========
Payment of accrued dividends on preferred
stock with common stock $ 30,511 $ 10,400
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
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 which unsuccessfully marketed
a business plan concept of a national "fast food" restaurant chain.
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.
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 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. was 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.
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.
F-9
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note B - Preparation of Financial Statements - Continued
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. 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.
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.
F-10
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note C - Summary of Significant Accounting Policies - Continued
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, 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 December 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 December 31, 2003 and 2002, and
subsequent thereto, the Company had no options outstanding. The outstanding
warrants and convertible preferred stock and mandatorily convertible
debentures are anti- dilutive due to the Company's net operating loss
position.
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.
F-11
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 - Inventory
As of December 31, 2003 and 2002, inventory consisted of the following
components:
December 31, December 31,
2003 2002
-------------------------------------
Raw materials $ 523,550 $149,824
Work in process 360,450 116,216
Finished goods 212,832 118,774
---------- -------
Totals $1,112,756 $384,814
========= =======
Note F - Property and Equipment
Property and equipment consist of the following components:
December 31, December 31, Estimated
2003 2002 useful life
------------ ------------ --------------
Manufacturing equipment $7,131,233 $6,843,135 3-10 years
Office furniture and fixtures 62,893 58,528 3- 7 years
Leasehold improvements 184,690 188,263 8-20 years
---------- ----------
7,378,816 7,089,926
Accumulated depreciation (4,066,390) (3,393,301)
--------- ---------
Net property and equipment $3,312,426 $3,696,625
========= =========
Total depreciation expense charged to operations for the years ended December
31, 2003 and 2002 was approximately $673,090 and $655,585, respectively.
F-12
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note F - Property and Equipment - Continued
Included in the amounts reflected in the accompanying balance sheet are the
following fixed assets on long- term capital leases:
December 31, December 31,
2003 2002
------------- --------------
Manufacturing and processing equipment $153,400 $153,400
Less accumulated depreciation (69,859) (54,519)
-------- --------
$ 83,541 $ 98,881
======== ========
Note G - Capital Leases Payable
Capital leases payable consist of the following as of December 31, 2003 and
2002, respectively:
December 31, December 31,
2003 2002
------------------------------
Three separate capital leases payable to various equipment
financing companies. Interest ranging between 11.37% and
14.05%. Payable in aggregate monthly installments of
approximately $935, including interest. Final maturities
occur between September 2004 and December 2004.
Collateralized the underlying leased manufacturing
equipment. $ 7,841 $17,348
Less current maturities (7,841) (9,507)
------ -------
Long-term portion $ - $ 7,841
====== =======
Future maturities of capital leases payable are as follows:
Year ending
December 31 Amount
2004 $7,841
=====
Note H - Long-Term Debt Payable to a Bank
On June 28, 2001, the Company executed a $950,000 note payable to a financial
institution. This 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
aggregating $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 Calendar 2003, the Company made two (2) lump-sum principal reductions
aggregating $450,000 to the outstanding balance on this note. As of March 31,
2003, this note was retired in full.
F-13
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note I - 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.
During the second quarter of Calendar 2003, the Holder made additional cash
advances to the Company totaling $350,000 which were applied to the then
outstanding principal balance on the Debenture.
The Debenture bears interest at 8.0% and matures on October 4, 2004. 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.
At December 31, 2003 and 2002, respectively, the outstanding balance on the
Debenture was approximately $391,365 and $250,000.
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 Company was 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. This Registration Statement was declared effective by the U. S. Securities
and Exchange Commission on May 14, 2003.
F-14
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note I - Convertible Debenture - Continued
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%.
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.
On various dates through December 31, 2003, the Debenture Holder elected to
convert an aggregate $208,635, through 24 separate transactions, in outstanding
Debenture principal into restricted, unregistered common stock. This election
caused the Company to issue 4,561,753 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 2,086,350 shares of the Company's restricted, unregistered common stock
for gross proceeds of $2,086,350.
As of December 31, 2003, pursuant to the conversion terms of the Debenture, the
Debenture Holder was approximately $77,500 in arrears in the contractually
obligated conversions, and accordingly, the related mandatory warrant exercise
of approximately $775,000.
Note J - Preferred Stock Transactions
Preferred stock consists of the following as of December 31, 2003 and 2002,
respectively:
December 31, 2003 December 31, 2002
------------------ -----------------
# shares value # shares value
-------- -------- -------- -------
Series A Cumulative Convertible Stock 12,000 $ 60,000 41,000 $205,000
Series B Cumulative Convertible Stock 91,700 458,500 - -
-------- ------- -------- -------
103,700 $518,500 41,000 $205,000
======== ======= ======== =======
F-15
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note J - Preferred Stock Transactions - Continued
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 a Private Placement
Memorandum. 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 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.
In May 2003, the Company sold an aggregate 91,700 shares of $5.00 Series B
Convertible Preferred Stock (Series B Preferred Stock) for total proceeds of
approximately $458,500 through a separate Private Placement Memorandum. The
Series B 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 B 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.
F-16
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - 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.
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.
F-17
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Common Stock Transactions - Continued
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.
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.
F-18
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Common Stock Transactions - Continued
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.
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.
F-19
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Common Stock Transactions - Continued
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.
In May 2003, the Company issued 1,967 shares of restricted, unregistered common
stock in payment of approximately $1,200 in accrued dividends payable on the
Company's outstanding Series A Preferred Stock for the quarter ended March 31,
2003.
During the period from July 1, 2003 through September 30, 2003, the Company
issued an aggregate 2,902,129 shares of common stock, in 15 separate
transactions, in exchange for the redemption of approximately $93,500 in
outstanding debenture balance and approximately $935,000 in cash from the
exercise of the affiliated warrant. Where the closing price of the Company's
common stock was in excess of the respective price per share on the respective
transaction date, the Company recognized a charge to operations for
"compensation expense related to common stock issuances at less than "fair
value". The cumulative effect of transactions where the transaction price, as
established in the Debenture Agreement, was less than the closing price on the
date of the respective transactions resulted in a cumulative charge to
operations of approximately $317,539 during this time period.
In October 2003, in a separate transaction, the Company sold 2,200,000 shares of
restricted, unregistered common stock to the Debenture Holder for cash proceeds
of approximately $400,000, or approximately $0.18 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.
In October 2003, the Company issued an aggregate 1,659,847 shares of common
stock, in 3 separate transactions, in exchange for the redemption of
approximately $40,000 in outstanding debenture balance and approximately
$400,000 in cash from the exercise of the affiliated warrant. Where the closing
price of the Company's common stock was in excess of the respective price per
share on the respective transaction date, the Company recognized a charge to
operations for "compensation expense related to common stock issuances at less
than "fair value". The cumulative effect of transactions where the transaction
price, as established in the Debenture Agreement, was less than the closing
price on the date of the respective transactions resulted in a cumulative charge
to operations of approximately $146,189 during this time period.
In October 2003, the Company issued an aggregate 37,866 shares of restricted,
unregistered common stock in payment of approximately $16,710 in accrued
dividends payable on the Company's outstanding Series A and Series B Preferred
Stock for the quarters ended June 30, 2003 and September 30, 2003, collectively.
F-20
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note L - Rental Commitments
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 $5,410, including applicable sales
taxes. The Company is responsible for all utilities and maintenance expenses.
The lease expires on July 31, 2004 and contains a clause that upon expiration,
the Company and the controlling shareholder shall renegotiate the annual rental
amount. Total rent expense under this lease was approximately $67,075 and
$54,100, respectively, for each of the years ended December 31, 2003 and 2002.
The Company's subsidiary, IPE, leases it's manufacturing facility from an
unrelated third-party under a long- term operating lease agreement. This lease
is for a period of five (5) years and requires graduated monthly payments,
changing on the lease anniversary date, ranging from approximately $1,751 to
$1,914, plus the applicable sales taxes. The Company is responsible for all
utilities and maintenance expenses. The lease expires on February 28, 2007 and
may be renewed for an additional five (5) year term at a rental rate of
approximately $1,971, plus applicable sales taxes for the first renewal year and
3.0% increase on each succeeding anniversary date. Total rent expense under this
lease was approximately $20,752 and $16,622, respectively, for each of the years
ended December 31, 2003 and 2002.
Future minimum rental payments on the above leases are as follows:
Year ended
December 31, Amount
----------------------
2004 $ 60,754
2005 23,565
2006 24,276
2007 4,076
---------
Totals $112,671
=======
Note M - Income Taxes
The components of income tax (benefit) expense for the years ended December 31,
2003 and 2002, respectively, are as follows:
Year ended Year ended
December 31, December 31,
2003 2002
------------------------------
Federal:
Current $ - $ -
Deferred - -
------- ------
- -
------- ------
State:
Current - -
Deferred - -
------- ------
- -
------- ------
Total $ - $ -
======= ======
F-21
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note M - Income Taxes - Continued
As of December 31, 2003, the Company has a net operating loss carryforward of
approximately $8,500,000 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, 2003
and 2002, respectively, differed from the statutory federal rate of 34 percent
as follows:
Year ended Year ended
December 31, December 31,
2003 2002
--------------------------
Statutory rate applied to loss before income taxes $(999,400) $ (640,000)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Other, including reserve for deferred tax asset 999,400 640,000
--------- -----------
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, 2003 and 2002, respectively:
Year ended Year ended
December 31, December 31,
2003 2002
---------------------------
Deferred tax assets - long-term
Net operating loss carryforwards $2,900,000 $2,244,000
Deferred tax liabilities - long-term
Statutory depreciation differences (250,000) (250,000)
---------- ----------
2,650,000 1,994,000
Less valuation allowance (2,650,000) (1,994,000)
---------- ----------
Net Deferred Tax Asset $ - $ -
========== ==========
During the years ended December 31, 2003 and 2002, respectively, the valuation
allowance increased by approximately $656,000 and $629,000.
F-22
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note N - Revenue Concentrations
The Company sells to both commercial and governmental customers, in both
domestic and foreign markets. The following table shows the Company's gross
revenue composition:
Year ended Year ended
December 31, 2003 December 31, 2002
----------------- -----------------
Amount % of total Amount % of total
--------------------- ---------------------
Domestic
Commercial
Customer A $ 524,210 24.96 $ 555,895 43.24
Customer B 463,423 22.07 - -
Customer C 188,546 8.98 347,100 22.80
Others 348,022 16.58 619,705 33.96
----------- ------ ---------- ------
1,524,201 72.59 1,522,700 100.00
----------- ------ ---------- ------
Governmental
Customer D 421,290 20.06 - -
Others 23,663 1.12 - -
----------- ------ ---------- ------
444,953 21.18 - -
----------- ------ ---------- ------
Foreign
Governmental 130,710 6.23 - -
----------- ------ ---------- ------
Totals $ 2,099,864 100.00 $ 1,522,700 100.00
=========== ====== =========== ======
(Remainder of this page left blank intentionally)
F-23
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note O - Selected Financial Data (Unaudited)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2003 and 2002, respectively.
Quarter ended Quarter ended Quarter ended Quarter ended Year ended
March 31, June 30, September 30, December 31, December 31,
Calendar 2003
Revenues - net $ 608,437 $ 289,551 $ 317,729 $ 769,280 $ 1,984,997
Gross profit $ (66,668) $ (463,653) $ (462,483) $ (254,221) $ (1,247,025)
Net earnings after
provision for
income taxes $ (300,355) $ (1,232,951) $ (1,200,981) $ (205,108) $ (2,939,395)
Basic and fully diluted
earnings per share $ (0.01) $ (0.02) $ (0.02) nil $ (0.05)
Weighted average
number of shares
issued and outstanding 56,638,979 59,294,402 61,683,424 66,253,535 61,202,839
Calendar 2002
Revenues - net $ 272,493 $ 434,641 $ 570,320 $ 131,910 $ 1,409,364
Gross profit $ (144,971) $ (74,098) $ (223,402) $ (604,819) $ (1,047,290)
Net earnings after
provision for
income taxes $ (236,254) $ (262,562) $ (528,024) $ (856,247) $ (1,883,087)
Basic and fully diluted
earnings per share $ (0.01) $ (0.01) $ (0.01) $ (0.01) $ (0.04)
Weighted average
number of shares
issued and outstanding 50,165,120 52,023,409 53,395,558 54,684,555 52,605,993
(Remainder of this page left blank intentionally)
F-24
American Ammunition, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2004 and 2003
(Unaudited)
September 30, September 30,
2004 2003
------------ ------------
ASSETS
Current Assets
Cash on hand and in bank $ 658,641 $1,347,532
Accounts receivable - trade, net allowance for
doubtful accounts of $-0- and $-0-, respectively 255,236 288,503
Inventory 1,025,824 651,097
Prepaid expenses 62,725 36,421
------------- -------------
Total Current Assets 2,002,426 2,323,553
------------- -------------
Property and Equipment - at cost or contributed value
Manufacturing equipment 7,623,415 6,895,850
Office furniture and fixtures 82,719 62,893
Leasehold improvements 187,397 190,028
------------- -------------
7,893,531 7,148,771
Accumulated depreciation (4,595,887) (3,891,321)
------------- -------------
Net Property and Equipment 3,297,644 3,257,450
------------- -------------
Other Assets
Deposits and other 415,000 77,860
------------- -------------
TOTAL ASSETS $ 5,715,070 $ 5,658,863
============= =============
- Continued -
F-25
American Ammunition, Inc. and Subsidiaries
Consolidated Balance Sheets - Continued
September 30, 2004 and 2003
(Unaudited)
September 30, September 30,
2004 2003
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of leases payable $ 525 $ 9,507
Customer deposits 220,006 4,100
Accounts payable - trade 665,077 471,085
Working capital advance 74,000 400,000
Other accrued liabilities 82,866 63,071
------------- -------------
Total Current Liabilities 1,042,474 947,763
Long-Term Liabilities - -
Capital leases payable - 828
------------- -------------
Total Liabilities 1,042,474 948,591
------------- -------------
Commitments and Contingencies
Convertible Debenture 266,365 431,365
------------- -------------
Mandatory Convertible Preferred Stock
net of Beneficial Conversion Discount Feature
91,700 and 123,700 shares issued and outstanding 518,500 602,610
------------- -------------
Stockholders' Equity
Preferred stock - $0.001 par value
20,000,000 shares authorized.
1,795,320 shares allocated to Series A - -
1,000,000 shares allocated to Series B - -
Common stock - $0.001 par value.
300,000,000 shares authorized.
73,686,672 and 62,718,137 shares issued and outstanding 73,687 62,718
Additional paid-in capital 23,098,312 19,961,671
Accumulated deficit (19,009,268) (16,348,092)
------------- -------------
4,162,731 3,676,297
Stock subscription receivable (275,000) -
------------- -------------
Total Stockholders' Equity 3,887,731 3,676,297
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,715,070 $ 5,658,863
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
Nine and Three months ended September 30, 2004 and 2003
(Unaudited)
Nine months Nine months Three months Three months
ended ended ended ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
--------------- ---------------- ---------------- -------------
Revenues $ 1,712,280 $ 1,215,717 $ 861,988 $ 317,729
--------------- ---------------- ---------------- -------------
Cost of Sales
Materials, Direct Labor
and other direct costs 1,911,210 1,713,888 308,503 614,748
Depreciation 523,815 494,633 176,304 165,464
--------------- ---------------- ---------------- -------------
Total Cost of Sales 2,435,025 2,208,521 484,807 780,212
--------------- ---------------- ---------------- -------------
Gross Profit (722,745) (992,804) 377,181 (462,483)
--------------- ---------------- ---------------- -------------
Operating Expenses
Research and development expenses 8,332 9,208 1,858 8,824
Marketing and promotion expenses 368,458 30,350 114,404 16,835
Other operating expenses 845,663 788,599 250,570 330,127
Bad debt expense 27,819 - - -
Interest expense 15,825 26,270 58 9,725
Depreciation expense 5,681 3,387 1,894 1,129
Compensation expense related to
common stock issuances at less
than "fair value" 356,000 736,102 - 371,798
--------------- ---------------- ---------------- -------------
Total Operating Expenses 1,627,778 1,593,916 368,784 738,498
--------------- ---------------- ---------------- -------------
Loss from Operations (2,350,523) (2,586,720) 8,397 (1,200,981)
Other Income (Expense)
Interest and other income 1,409 2,594 1,155 -
Amortization of Beneficial
Conversion Feature Discount
on Preferred Stock - (77,787) - (46,839)
--------------- ---------------- ---------------- -------------
Loss before Income Taxes (2,349,114) (2,661,913) 9,552 (1,247,820)
Provision for Income Taxes - - - -
--------------- ---------------- ---------------- -------------
Net Loss (2,349,114) (2,661,913) 9,552 (1,247,820)
Other Comprehensive Income - - - -
--------------- ---------------- ---------------- -------------
Comprehensive Loss $ (2,349,114) $ (2,661,913) $ 9,552 $ (1,248,820)
=============== ================ ================ =============
Loss per weighted-average share of
common stock outstanding, computed
on net loss - basic and fully diluted $ (0.03) $ (0.04) $ (0.00) $ (0.02)
=============== ================ ================ =============
Weighted-average number of
common shares outstanding 70,873,791 59,222,995 73,673,416 61,683,424
=============== ================ ================ =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended September 30, 2004 and 2003
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
2004 2003
-------------- -------------
Cash flows from operating activities
Net loss for the year $ (2,349,114)$ (2,661,913)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization 529,496 498,020
Bad debt expense 27,819 -
Accretion of Beneficial Conversion Feature
Discount on Preferred Stock - 77,787
Compensation expense related to common stock
issuances at less than "fair value" 356,000 736,102
Common stock issued for fees and services 90,160 -
(Increase) Decrease in
Accounts receivable 237,780 (257,215)
Inventory 86,932 (266,283)
Prepaid expenses, deposits and other (28,137) (17,030)
Increase (Decrease) in
Accounts payable - trade 36,213 56,175
Other accrued expenses 69,445 10,101
Customer deposits 215,906 (76,853)
-------------- -------------
Net cash used in operating activities (727,500) (1,901,109)
-------------- -------------
Cash flows from investing activities
Purchase of property and equipment (436,214) (58,845)
-------------- -------------
Net cash used in investing activities (436,214) (58,845)
-------------- -------------
Cash flows from financing activities
Funding of working capital advance 74,000 400,000
Principal paid on long-term debt - (450,000)
Principal paid on long-term capital leases (7,316) (7,013)
Cash paid to obtain capital - (61,850)
Cash received on convertible debenture - 350,000
Cash received on sale of convertible preferred stock - 458,500
Cash received on sale of common stock 1,250,000 2,460,533
-------------- -------------
Net cash provided by financing activities 1,316,684 3,150,170
-------------- -------------
Increase (Decrease) in Cash 152,970 1,190,216
Cash at beginning of year 505,671 157,316
-------------- -------------
Cash at end of year $ 658,641 $ 1,347,532
============== =============
- Continued -
F-28
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended September 30, 2004 and 2003
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
2004 2003
-------------- -------------
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 825 $ 26,170
============== =============
Income taxes paid for the period $ - $ -
============== =============
Supplemental disclosure of non-cash
investing and financing activities
Asset purchase agreement for equipment,
inventory and intellectual property accrued
as a component of accounts payable $ 500,000 $ -
============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
American Ammunition, Inc. and Subsidiaries
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 which unsuccessfully marketed
a business plan concept of a national "fast food" restaurant chain.
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.
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 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. was 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-30
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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, 2003. 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, 2004.
The accompanying consolidated financial statements contain the accounts of
American Ammunition, Inc. 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, 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.
F-31
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note C - Summary of Significant Accounting Policies - Continued
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 September 30, 2004 and 2003, 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 September 30, 2004 and 2003, 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) available to common shareholders by the weighted-average number of
common shares outstanding during the respective period presented in our
accompanying financial statements. Fully diluted earnings (loss) per share
is computed similar to basic income (loss) per share except that the
denominator is increased to include the number of 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, at either the
beginning of the respective period presented or the date of issuance,
whichever is later, and only if the common stock equivalents are considered
dilutive based upon the Company's net income (loss) position at the
calculation date.
At September 30, 2004 and 2003, the Company had no common stock equivalents
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.
F-32
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
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 years ended December 31, 2003 and 2002 and for the nine
month period ended September 30, 2004, respectively, 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 September 30, 2004 and 2003, inventory consisted of the following
components:
September 30, September 30,
2004 2003
------------- -------------
Raw materials $ 231,456 $ 205,818
Work in process 515,622 246,477
Finished goods 278,746 198,802
----------- -----------
Totals $ 1,025,824 $ 651,097
=========== ===========
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F-33
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note G - Property and Equipment
Property and equipment consist of the following components:
September 30, September 30, Estimated
2004 2003 useful life
-------------- --------------- -----------
Manufacturing equipment $ 7,623,415 $ 6,895,850 3-10 years
Office furniture and fixtures 82,719 62,893 3-7 years
Leasehold improvements 187,397 190,028 8-20 years
------------- ------------
7,893,531 7,148,771
Accumulated depreciation (4,595,887) (3,891,321)
------------- ------------
Net property and equipment $ 3,297,644 $ 3,257,450
============= ============
Total depreciation expense charged to operations for the respective nine month
periods ended September 30, 2004 and 2003 was approximately $529,496 and
$498,020.
Included in the amounts reflected in the accompanying balance sheet are the
following fixed assets on long-term capital leases:
September 30, September 30,
2004 2003
------------- -------------
Manufacturing equipment $ 153,400 $ 153,400
Less accumulated depreciation (81,364) (66,024)
----------- -----------
$ 72,036 $ 87,376
=========== ===========
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 could 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. During the 2nd
quarter of 2003, La Jolla elected to add this balance to the principal balance
on the convertible debenture.
In August 2004, the Company's controlling shareholders advanced the Company
approximately $74,000 for working capital to fund certain capital equipment
purchases. These advances are non-interest bearing and are repayable upon
demand.
(Remainder of this page left blank intentionally)
F-34
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note I- Capital Leases Payable
Capital leases payable consist of the following as of September 30, 2004 and
2003, respectively:
September 30, September 30,
2004 2003
------------- -------------
Three capital leases, respectively, payable to various
equipment financing companies. Interest ranging between
11.37% and 14.05%. Payable in aggregate monthly installments
of approximately $935, including accrued interest. Final
maturities occur between September 2004 and December 2004.
Collateralized by the underlying leased manufacturing
equipment. $ 525 $ 10,335
Less current maturities (525) (9,507)
--------- ---------
Long-term portion $ - $ 828
========= =========
Future maturities of capital leases payable are as follows:
Year ending
December 31 Amount
------------------------
2004 $ 2,606
=======
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.
During the second quarter of Calendar 2003, the Holder made additional cash
advances to the Company totaling $350,000 which were applied to the then
outstanding principal balance on the Debenture.
The Debenture bears interest at 8.0% and matures on October 4, 2004. 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.
F-36
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note J - Convertible Debenture - Continued
At June 30, 2004 and 2003, respectively, the outstanding balance on the
Debenture was approximately $266,365 and $524,865.
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 Company was 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. This Registration Statement was declared effective by the U. S. Securities
and Exchange Commission on May 14, 2003.
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%.
F-37
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note J - Convertible Debenture - Continued
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.
On various dates through June 30, 2004, the Debenture Holder elected to convert
an aggregate $333,635, through 29 separate transactions, in outstanding
Debenture principal into restricted, unregistered common stock. This election
caused the Company to issue 8,711,753 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 3,336,350 shares of the Company's restricted, unregistered common stock
for gross proceeds of $3,336,350.
As of June 30, 2004, pursuant to the conversion terms of the Debenture, the
Debenture Holder is in arrears in the contractually obligated conversions, and
accordingly, the related mandatory warrant exercise and owes the Company an
aggregate $275,000 in cash for Warrant exercise and debenture conversion
transactions.
(Remainder of this page left blank intentionally)
F-38
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note K - Preferred Stock Transactions
Preferred stock consists of the following as of September 30, 2004 and 2003,
respectively:
September 30, 2004 September 30, 2003
------------------ ------------------
# shares value # shares value
-------- --------- -------- ---------
Series A Cumulative Convertible Stock 12,000 $ 60,000 32,000 $ 160,000
Series B Cumulative Convertible Stock 91,700 458,500 91,700 458,500
-------- --------- -------- ---------
103,700 518,500 123,700 618,500
========= =========
Beneficial Conversion Feature Discount (15,890)
--------- ---------
Totals 518,500 $ 602,610
========= =========
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 a Private Placement
Memorandum. 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 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.
F-39
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note K - Preferred Stock Transactions - Continued
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.
In May 2003, the Company sold an aggregate 91,700 shares of $5.00 Series B
Convertible Preferred Stock (Series B Preferred Stock) for total proceeds of
approximately $458,500 through a separate Private Placement Memorandum. The
Series B 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 B 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.
Note L - Common Stock Transactions
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. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
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. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
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. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
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.
F-40
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note L - Common Stock Transactions - Continued
In May 2003, the Company issued 1,967 shares of restricted, unregistered common
stock in payment of approximately $1,200 in accrued dividends payable on the
Company's outstanding Series A Preferred Stock for the quarter ended March 31,
2003. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
During the period from July 1, 2003 through September 30, 2003, the Company
issued an aggregate 2,902,129 shares of common stock, in 15 separate
transactions, in exchange for the redemption of approximately $93,500 in
outstanding debenture balance and approximately $935,000 in cash from the
exercise of the affiliated warrant. Where the closing price of the Company's
common stock was in excess of the respective price per share on the respective
transaction date, the Company recognized a charge to operations for
"compensation expense related to common stock issuances at less than "fair
value". The cumulative effect of transactions where the transaction price, as
established in the Debenture Agreement, was less than the closing price on the
date of the respective transactions resulted in a cumulative charge to
operations of approximately $317,539 during this time period.
In October 2003, in a separate transaction, the Company sold 2,200,000 shares of
restricted, unregistered common stock to the Debenture Holder for cash proceeds
of approximately $400,000, or approximately $0.18 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.
In October 2003, the Company issued an aggregate 1,659,847 shares of common
stock, in 3 separate transactions, in exchange for the redemption of
approximately $40,000 in outstanding debenture balance and approximately
$400,000 in cash from the exercise of the affiliated warrant. Where the closing
price of the Company's common stock was in excess of the respective price per
share on the respective transaction date, the Company recognized a charge to
operations for "compensation expense related to common stock issuances at less
than "fair value". The cumulative effect of transactions where the transaction
price, as established in the Debenture Agreement, was less than the closing
price on the date of the respective transactions resulted in a cumulative charge
to operations of approximately $146,189 during this time period.
In October 2003, the Company issued an aggregate 37,866 shares of restricted,
unregistered common stock in payment of approximately $16,710 in accrued
dividends payable on the Company's outstanding Series A and Series B Preferred
Stock for the quarters ended June 30, 2003 and September 30, 2003, collectively.
The Company relied upon Section 4(2) of the Securities Act of 1933, as amended,
for an exemption from registration of these shares and no underwriter was used
in this transaction.
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F-41
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note L - Common Stock Transactions - Continued
In January 2004, the Company issued 38,038 shares of restricted, unregistered
common stock in payment of approximately $10,000 in accrued dividends payable on
the Company's outstanding Series A and Series B Preferred Stock for the quarter
ended December 31, 2003. The Company relied upon Section 4(2) of the Securities
Act of 1933, as amended, for an exemption from registration of these shares and
no underwriter was used in this transaction.
During the period from January 1, 2004 through March 31, 2004, the Company
issued an aggregate 2,400,000 shares of common stock, in two (2) separate
transactions, in exchange for the redemption of approximately $50,000 in
outstanding debenture balance and approximately $500,000 in cash from the
exercise of the affiliated warrant. Where the closing price of the Company's
common stock was in excess of the respective price per share on the respective
transaction date, the Company recognized a charge to operations for
"compensation expense related to common stock issuances at less than "fair
value". The cumulative effect of transactions where the transaction price, as
established in the Debenture Agreement, was less than the closing price on the
date of the respective transactions resulted in a cumulative charge to
operations of approximately $321,000 during this time period.
In May 2004, the Company issued 25,260 shares of restricted, unregistered common
stock in payment of approximately $9,170 in accrued dividends payable on the
Company's outstanding Series B Preferred Stock for the quarter ended March 31,
2004. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
During the period from April 1, 2004 through June 30, 2004, the Company issued
an aggregate 3,000,000 shares of common stock, in three (3) separate
transactions, in exchange for the redemption of approximately $75,000 in
outstanding debenture balance and approximately $750,000 in cash from the
exercise of the affiliated warrant. Where the closing price of the Company's
common stock was in excess of the respective price per share on the respective
transaction date, the Company recognized a charge to operations for
"compensation expense related to common stock issuances at less than "fair
value". The cumulative effect of transactions where the transaction price, as
established in the Debenture Agreement, was less than the closing price on the
date of the respective transactions resulted in a cumulative charge to
operations of approximately $35,000 during this time period. Additionally, on
June 29, 2004, the Company issued an additional 1,000,000 shares of common stock
in advance of the exercise of a $25,000 redemption on the outstanding debenture
payable and a $250,000 cash payment on the exercise of the affiliated warrant,
which was received in July 2004.
On May 26, 2004, the Company issued 300,000 shares of restricted, unregistered
common stock to two separate corporations in payment and full satisfaction of
all amounts due for fees and/or commissions due in conjunction with the
Company's convertible debenture financing transaction. This transaction was
valued at approximately $36,000, which approximated the "fair value" of the
underlying securities given in payment and the related charges for the services
F-42
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note L - Common Stock Transactions - Continued
provided. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
In August 2004, the Company issued 29,746 shares of restricted, unregistered
common stock in payment of approximately $9,170 in accrued dividends payable on
the Company's outstanding Series B Preferred Stock for the quarter ended June
30, 2004. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
Note M - Rental Commitments
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 $5,410, including applicable sales
taxes. After the five (5) year and five month term of this lease, should the
parties desire to renew this lease, Lessor and Lessee shall renegotiate the
annual rent paid by Lessee. The Company is responsible for all utilities and
maintenance expenses. The lease expires on December 31, 2009. Total rent expense
under this lease was approximately $67,075 and $54,100, respectively, for each
of the years ended December 31, 2003 and 2002.
The Company's subsidiary, IPE, leases it's manufacturing facility from an
unrelated third-party under a long-term operating lease agreement. This lease is
for a period of five (5) years and requires graduated monthly payments, changing
on the lease anniversary date, ranging from approximately $1,751 to $1,914, plus
the applicable sales taxes. The Company is responsible for all utilities and
maintenance expenses. The lease expires on February 28, 2007 and may be renewed
for an additional five (5) year term at a rental rate of approximately $1,971,
plus applicable sales taxes for the first renewal year and 3.0% increase on each
succeeding anniversary date. Total rent expense under this lease was
approximately $20,752 and $16,622, respectively, for each of the years ended
December 31, 2003 and 2002.
F-43
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note M - Rental Commitments - Continued
In May 2004, the Company entered into a long-term lease agreement for a
warehouse facility adjacent to the Company's primary office and manufacturing
facility. This lease is for a period of two (2) years and requires payments of
approximately $6,206 per month for the first 12 months and approximately $6,393
for the second 12 months, plus applicable sales taxes. The Company is
responsible for all utilities and maintenance expenses. This lease expires on
May 31, 2006. Further, the Company is responsible for any incremental real
estate taxes and property insurance in excess of the amounts incurred by the
landlord for the calendar year immediately preceding the execution of the lease.
Future minimum rental payments on the above leases are as follows:
Year ended
December 31, Amount
----------------------
2004 $ 138,365
2005 166,974
2006 117,244
2007 72,643
2008 68,815
2007 68,815
---------
Totals $ 632,856
=========
Note N - Income Taxes
The components of income tax (benefit) expense for the nine month periods
ended September 30, 2004 and 2003, respectively, are as follows:
Nine months Nine months
ended ended
September 30, September 30,
2004 2003
------------- -------------
Federal:
Current $ - $ -
Deferred - -
------- -------
- -
------- -------
State:
Current - -
Deferred - -
------- -------
- -
------- -------
Total $ - $ -
======= =======
F-44
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note N - Income Taxes - Continued
As of December 31, 2003, the Company has a net operating loss carryforward of
approximately $8,500,000 to offset future taxable income. Subject to current
regulations, components of this carryforward began 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 nine month periods ended
September 30, 2004 and 2003, respectively, differed from the statutory federal
rate of 34 percent as follows:
Nine months Nine months
ended ended
September 30, September 30,
2004 2003
---------------------------
Statutory rate applied to loss before income taxes $ (799,000) $ (902,000)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Other, including reserve for deferred tax asset 799,000 902,000
---------- -----------
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, 2003 and 2002, respectively:
December 31, December 31,
2003 2002
------------------------------
Deferred tax assets - long-term - net $ 3,000,000 $ 2,150,000
Less valuation allowance (3,000,000) (2,150,000)
------------- -------------
Net Deferred Tax Asset $ - $ -
============= =============
During the years ended December 31, 2003 and 2002, respectively, the valuation
allowance increased by approximately $656,000 and $629,000.
Note O - Subsequent Events
In October 2004, the Company issued 53,908 shares of restricted, unregistered
common stock in payment of approximately $9,170 in accrued dividends payable on
the Company's outstanding Series B Preferred Stock for the quarter ended
September 30, 2004. The Company relied upon Section 4(2) of the Securities Act
of 1933, as amended, for an exemption from registration of these shares and no
underwriter was used in this transaction.
F-45
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note O - Subsequent Events - Continued
On October 19, 2004, the Company completed negotiations and closed an Asset
Purchase Agreement by and between the Company, Voluto Ventures LLC (a New York
limited liability company and Voluto Patent Holding Co., Inc. (a New York
corporation). The Company acquired certain machinery and equipment, inventory
and the assignment of certain patents and intellectual property related to the
manufacture and production of specialty small-arms ammunition. The Company
issued 1,111,111 shares of restricted, unregistered common stock with an
agreed-upon value of $500,000 for this transaction.
The sellers agreed to contractually restrict their sale of the 1,111,111 shares
of restricted, unregistered common stock to an amount of up to 175,000 shares
per month starting on April 28, 2005.
(Remainder of this page left blank intentionally)
F-46
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under California law, a corporation shall have power to indemnify any
person who was or is a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of the corporation to
procure a judgment in its favor) by reason of the fact that the person is or was
an agent of the corporation, against expenses, judgments, fines, settlements,
and other amounts actually and reasonably incurred in connection with the
proceeding if that person acted in good faith and in a manner the person
reasonably believed to be in the best interests of the corporation and, in the
case of a criminal proceeding, had no reasonable cause to believe the conduct of
the person was unlawful. The termination of any proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which the person reasonably believed to be in the best
interests of the corporation or that the person had reasonable cause to believe
that the person's conduct was unlawful.
Further under California law, corporation shall have power to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action by or in the right of the corporation
to procure a judgment in its favor by reason of the fact that the person is or
was an agent of the corporation, against expenses actually and reasonably
incurred by that person in connection with the defense or settlement of the
action if the person acted in good faith, in a manner the person believed to be
in the best interests of the corporation and its shareholders.
However, no indemnification shall be made for any of the following:
(1) In respect of any claim, issue or matter as to which the person shall have
been adjudged to be liable to the corporation in the performance of that
person's duty to the corporation and its shareholders, unless and only to
the extent that the court in which the proceeding is or was pending shall
determine upon application that, in view of all the circumstances of the
case, the person is fairly and reasonably entitled to indemnity for
expenses and then only to the extent that the court shall determine;
(2) Of amounts paid in settling or otherwise disposing of a pending action
without court approval; or
(3) Of expenses incurred in defending a pending action which is settled or
otherwise disposed of without court approval.
To the extent that an agent of a corporation has been successful on the
merits in defense of any proceeding referred to above or in defense of any
claim, issue, or matter therein, the agent shall be indemnified against expenses
actually and reasonably incurred by the agent in connection therewith.
However, any indemnification shall be made by the corporation only if
authorized in the specific case, upon a determination that indemnification of
the agent is proper in the circumstances because the agent has met the
applicable standard of conduct set out in the statute by any of the following:
(1) A majority vote of a quorum consisting of directors who are not parties to
such proceeding;
(2) If such a quorum of directors is not obtainable, by independent legal
counsel in a written opinion;
(3) Approval of the shareholders (Section 153), with the shares owned by the
person to be indemnified not being entitled to vote thereon; or
(4) The court in which the proceeding is or was pending upon application made
by the corporation or the agent or the attorney or other person rendering
services in connection with the defense, whether or not the application by
the agent, attorney or other person is opposed by the corporation.
Expenses incurred in defending any proceeding may be advanced by the
corporation prior to the final disposition of the proceeding upon receipt of an
undertaking by or on behalf of the agent to repay that amount if it shall be
determined ultimately that the
1
agent is not entitled to be indemnified as authorized in this section. The
provisions of subdivision (a) of Section 315 do not apply to advances made
pursuant to this subdivision.
The indemnification authorized by this section is not exclusive of any
additional rights to indemnification for breach of duty to the corporation and
its shareholders while acting in the capacity of a director or officer of the
corporation to the extent the additional rights to indemnification are
authorized in an article provision adopted pursuant to paragraph (11) of
subdivision (a) of Section 204. The indemnification provided by this section for
acts, omissions, or transactions while acting in the capacity of, or while
serving as, a director or officer of the corporation but not involving breach of
duty to the corporation and its shareholders is not exclusive of any other
rights to which those seeking indemnification may be entitled under any bylaw,
agreement, vote of shareholders or disinterested directors, or otherwise, to the
extent the additional rights to indemnification are authorized in the articles
of the corporation. An article provision authorizing indemnification "in excess
of that otherwise permitted by Section 317" or "to the fullest extent
permissible under California law" or the substantial equivalent thereof shall be
construed to be both a provision for additional indemnification for breach of
duty to the corporation and its shareholders as referred to in, and with the
limitations required by, paragraph (11) of subdivision (a) of Section 204 and a
provision for additional indemnification as referred to in the second sentence
of this subdivision. The rights to indemnity hereunder shall continue as to a
person who has ceased to be a director, officer, employee, or agent and shall
inure to the benefit of the heirs, executors, and administrators of the person.
Nothing contained in this section shall affect any right to indemnification to
which persons other than the directors and officers may be entitled by contract
or otherwise.
No indemnification or advance shall be made under this section in any
circumstance where it appears:
(1) That it would be inconsistent with a provision of the articles, bylaws, a
resolution of the shareholders, or an agreement in effect at the time of
the accrual of the alleged cause of action asserted in the proceeding in
which the expenses were incurred or other amounts were paid, which
prohibits or otherwise limits indemnification.
(2) That it would be inconsistent with any condition expressly imposed by a
court in approving a settlement.
A corporation shall have power to purchase and maintain insurance on behalf
of any agent of the corporation against any liability asserted against or
incurred by the agent in that capacity or arising out of the agent's status as
such whether or not the corporation would have the power to indemnify the agent
against that liability under this section. The fact that a corporation owns all
or a portion of the shares of the company issuing a policy of insurance shall
not render this subdivision inapplicable if either of the following conditions
are satisfied:
(1) if the articles authorize indemnification in excess of that authorized in
this section and the insurance provided by this subdivision is limited as
indemnification is required to be limited by paragraph (11) of subdivision
(a) of Section 204; or
(2) (A) the company issuing the insurance policy is organized, licensed, and
operated in a manner that complies with the insurance laws and regulations
applicable to its jurisdiction of organization,
(B) the company issuing the policy provides procedures for processing
claims that do not permit that company to be subject to the direct control
of the corporation that purchased that policy, and
(C) the policy issued provides for some manner of risk sharing between the
issuer and purchaser of the policy, on one hand, and some unaffiliated
person or persons, on the other, such as by providing for more than one
unaffiliated owner of the company issuing the policy or by providing that a
portion of the coverage furnished will be obtained from some unaffiliated
insurer or reinsurer.
This section does not apply to any proceeding against any trustee,
investment manager, or other fiduciary of an employee benefit plan in that
person's capacity as such, even though the person may also be an agent as
defined in subdivision (a) of the employer corporation. A corporation shall have
power to indemnify such a trustee, investment manager, or other fiduciary to the
extent permitted by subdivision (f) of Section 207.
The Company's Articles of Incorporation and Bylaws require the Company to
indemnify its directors to the fullest extent permitted by California law. The
specific provisions of the Articles of Incorporation of the Registrant with
respect to the indemnification of directors and officers are as follows:
2
"FOURTH: The liability of the directors of the corporation
for monetary damages shall be eliminated to the fullest
extent permissible under California law."
The specific provisions of the Bylaws of the Registrant with respect to the
indemnification of directors and officers are as follows:
ARTICLE XI INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Corporation shall indemnify each of its directors and officers who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit, or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director or officer of the Corporation,
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding, if he acted in good faith and
in a manner he reasonably believed to be in, or not opposed to, the best
interests of the Corporation, and with respect to any criminal action or
proceeding had no reasonable cause to believe his conduct was unlawful.
Except as provided hereinbelow, any such indemnification shall be made by the
Corporation only as authorized in the specific case upon determination that
indemnification of the director or officer is proper in the circumstances
because he has met the applicable standard of conduct set forth above. Such
determination shall be made: (a) by the Board of Directors by a majority vote of
a quorum of directors; or (b) by the shareholders.
Expenses (including attorneys' fees) incurred in defending a civil or criminal
action, suit or proceeding may be paid by the Corporation in advance of the
final disposition of such action or proceeding if authorized by the Board of
Directors and upon receipt of an undertaking by or on behalf of the director or
officer to repay such amount unless it shall ultimately be determined that he is
entitled to be indemnified by the Corporation.
To the extent that a director or officer has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to above, or in
defense of any claim issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith without any further determination that he has met the
applicable standard of conduct set forth above."
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act" or "Securities Act") may be permitted to directors, officers
or persons controlling American Ammunition pursuant to the foregoing provisions,
or otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 1,120.99
Accounting fees and expenses 10,000.00*
Legal fees and expenses 35,000.00*
Miscellaneous 5,000.00
-----------
TOTAL $ 51,120.99*
===========
* Estimated.
3
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, the Company sold securities without
registration under the Securities Act of 1933, as amended (the "Act") as
follows:
SECURITIES NAMES OF CONSIDERATION EXEMPTION
SOLD INVESTORS RECEIVED FROM REGISTRATION
--------------- ----------------- ---------------------- ---------------------------
1,810,000 shares of Three (3) individuals $ 1,810 Section 4(2) of the Act
Common Stock (1)
140,000 shares of Two (2) individuals $ 140 Section 4(2) of the Act
Common Stock (2)
124,4000 (pre-acquisition) See footnote $ 125 Section 4(2) of the Act
916,000 (post acquisition) (3) $ 916 Section 4(2) of the Act
Common stock
21,000,000 Shares Nineteen (19) $ 3,998,650 Section 4(2) of the Act
of Common Stock individuals pursuant and Regulation D, Rule
to Share Exchange 506
(4)
222,600 Shares of Seven (7) individuals $ 1,113,000 Section 4(2) of the Act
$5.00 Series A (5) and Regulation D, Rule
Convertible Preferred 506
2,000 Shares of One (1) individual $ 10,000 Section 4(2) of the Act
$5.00 Series A (6)
Convertible Preferred
1,510,720 Shares of One (1) individual $ 7,553,600 Section 4(2) of the Act and
$5.00 Series A (7) Regulation D, Rule 506
Convertible Preferred
10% Senior One (1) company $ 135,000 Section 4(2) of the Act and
Convertible (8) Regulation D, Rule 506
Promissory Note
for $135,000
Option to Purchase One (1) company $ 15,000 Section 4(2) of the Act and
10% Senior (8) Regulation D, Rule 506
Convertible Promissory
Notes for up to $3,354,000
-----------------------------
(1) On February 1, 2000, a total of 805,000 shares of Common Stock were issued
to Artem Gotov in exchange for services valued at $805 and as founders
shares, 805,000 shares of Common Stock were issued to Agata Gotov, the
sister of Artem Gotov in exchange for services valued at $805 and as
founder shares, and 200,000 shares of Common Stock were issued to Kenneth
G. Eade in exchange for legal services valued at $200. Each of Mr. Gotov,
Ms. Gotov and Mr. Eade, as the husband of Ms. Gotov, may be deemed a
promoter of the Company. The Company claimed an exemption under the
Securities Act of 1933, pursuant to Section 4(2) of the Act. Mr. Gotov and
Ms. Gotov were both Officers and Directors of the Company, while Mr. Eade
is a sophisticated and accredited investor.
(2) In June 2001, a total of 70,000 shares of Common Stock were issued to
Jeffrey Volpe in exchange for clerical services rendered valued at $70 and
70,000 shares of Common Stock were issued to Richard Tearle in exchange for
Internet web services valued at $70.. The Company claimed an exemption
under the Securities Act of 1933, pursuant to Section 4(2) of the Act. Both
Mr. Volpe and Mr. Tearle had access to all corporate information and both
were sophisticated investors.
4
(3) In 2001, a total of 284,600 shares (pre-acquisition) and 916,000 shares
(pre-forward split and post acquisition) to various consultants in exchange
for services rendered to the Company. This offering and sale was deemed to
be exempt under Rule 506 of Regulation D and Section 4(2) of the Securities
Act. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of
persons, all of whom were accredited investors and transfer was restricted
by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
(4) In September 2001 the Company issued 21,000,000 shares of its Common Stock
to nineteen (19) shareholders of F.&F. Equipment, Inc. d/b/a American
Ammunition, ("AA") pursuant to a Share Exchange Agreement. The shares were
valued at $3,998,650. The transaction resulted in AA becoming a wholly
owned subsidiary of the Company in a transaction that was treated as a
reverse merger for accounting purposes. Of such shares, the current
officers and directors of the Company were issued a total of 15,750,000
shares and 1,050,000 were issued to Donald F. Mintmire, sole owner of the
firm of Mintmire & Associates. This offering and sale was deemed to be
exempt under Rule 506 of Regulation D and Section 4(2) of the Securities
Act. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of
persons, all of whom were accredited investors and transfer was restricted
by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
(5) In September and October 2001 the Company issued 222,600 shares of $5.00
Series A Convertible Preferred Stock valued at $1,113,000 through an
ongoing private placement. For such offering, the Company relied on Section
4(2) of the Act and Regulation D, Rule 506 promulgated thereunder. All such
sales were to accredited investors. Of such shares, the Robert I. Escobio
Family Trust acquired 2,000 shares. Mr. Escobio is a Director of the
Company.
(6) In September 2001, a creditor, Key Packaging Company, agreed to converted
$10,000 of debt due from the Company into 2,000 shares of $5.00 Series A
Convertible Preferred stock. This offering and sale was deemed to be exempt
under Rule 506 of Regulation D and Section 4(2) of the Securities Act. No
advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of
persons, all of whom were accredited investors and transfer was restricted
by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
(7) In September 2001, a principal shareholder, Andres Fernandez, converted
$7,553,600 of unsecured debt due to him by the Company into 1,510,720
shares of $5.00 Series A Convertible Preferred Stock. Mr. Fernandez is an
Officer and Director of the Company and is an accredited investor. The
Company relied on Section 4(2) of the Act and Regulation D, Rule 506
promulgated thereunder.
(8) On November 5, 2001, the Company entered into an agreement with the
Placement Agreements in connection with the offering of the Notes. In
conjunction with such agreement, the Company received a payment in the
amount of $15,000.00 from Argo for the Option, which provided Argo with the
right to purchase up to $3,500,000.00 of the Notes to be offered by the
Company and simultaneously, Argo purchased $135,000.00 of such Notes. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D
and Section 4(2) of the Securities Act. No advertising or general
solicitation was employed in offering the securities. The offerings and
sales were made to a limited number of persons, all of whom were accredited
investors and transfer was restricted by American Ammunition in accordance
with the requirements of the Securities Act of 1933. These notes have been
redeemed and are not currently outstanding.
On February 27, 2002, the Company issued an aggregate 277,777 shares of
restricted, unregistered common stock, at $0.45 per share, to Forus Investments,
Inc., an existing shareholder, in satisfaction of a $100,000 short-term working
capital loan payable and $25,000 in agreed-upon interest payable to a
shareholder, thereby satisfying all outstanding short-term debt in full. The
valuation of this transaction was based on the discounted "fair value" of the
Company's common stock based upon the quoted closing price on the date of the
transaction. This offering and sale was deemed to be exempt under Rule 506 of
Regulation D and Section 4(2) of the Securities Act. No advertising or general
solicitation was employed in offering the securities. The offerings and sales
were made to a limited number of persons, all of whom were accredited investors
and transfer was restricted by American Ammunition in accordance with the
requirements of the Securities Act of 1933.
On March 25, 2002, the Company sold 611,110 shares of restricted,
unregistered common stock, at $0.36 per share, to Kissimmul, Inc., a Toronto,
Ontario, Canada corporation, for gross proceeds of approximately $220,000. The
valuation of this transaction was based on the discounted "fair value" of the
Company's common stock based upon the quoted closing price on the date of the
transaction. This offering and sale was deemed to be exempt under Rule 506 of
Regulation D and Section 4(2) of the Securities Act.
5
No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were accredited investors and transfer was restricted by American
Ammunition in accordance with the requirements of the Securities Act of 1933.
On March 28, 2002, the Company sold 777,775 shares of restricted,
unregistered common stock, at $0.36 per share, to Tomina Associates, Ltd., a
Vancouver, B.C., Canada corporation, for gross proceeds of approximately
$280,000. The valuation of this transaction was based on the discounted "fair
value" of the Company's common stock based upon the quoted closing price on the
date of the transaction. This offering and sale was deemed to be exempt under
Rule 506 of Regulation D and Section 4(2) of the Securities Act. No advertising
or general solicitation was employed in offering the securities. The offerings
and sales were made to a limited number of persons, all of whom were accredited
investors and transfer was restricted by American Ammunition in accordance with
the requirements of the Securities Act of 1933.
On March 5, 2002, the Company issued 32,000 shares of restricted,
unregistered common stock to Len Hale, amember 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. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
On March 5, 2002, the Company issued 41,665 shares of restricted,
unregistered common stock to D. P. Martin & Associates, 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. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
In April and May 2002, the Company issued an aggregate 432,721 shares of
restricted, unregistered common stock to Ammunition Accessories, Inc., Saunders
Lead Co. and Airco Plating Co., three unrelated trade 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. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
On June 21, 2002, the Company issued 347,223 shares of restricted,
unregistered common stock to Access Investments, Inc., an existing shareholder,
to reimburse said shareholder for the payment of legal fees associated with the
bank related litigation concluded in June 2001 and related consulting services.
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. This offering and sale was deemed to be exempt under
Rule 506 of Regulation D and Section 4(2) of the Securities Act. No advertising
or general solicitation was employed in offering the securities. The offerings
and sales were made to a limited number of persons, all of whom were accredited
investors and transfer was restricted by American Ammunition in accordance with
the requirements of the Securities Act of 1933.
On June 26, 2002, the Company sold 277,778 shares of restricted,
unregistered common stock to Gala Investments, an unrelated 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. This offering and sale was deemed to be
exempt under Rule 506 of Regulation D and Section 4(2) of the Securities Act. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors and transfer was restricted by American Ammunition in
accordance with the requirements of the Securities Act of 1933.
6
On July 25, 2002, the Company sold 384,615 shares of restricted,
unregistered common stock to Gala Enterprises, Ltd., 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 were used to reduce the
Company's outstanding balance on a long-term note payable to a bank. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
On August 14, 2002, the Company sold 384,615 shares of restricted,
unregistered common stock to Gala Enterprises, Ltd., 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 were used to reduce the
Company's outstanding balance on a long-term note payable to a bank. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
On August 21, 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 were used to retire trade accounts payable
to a New Mexico law firm for legal services rendered to the Company. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
On September 20, 2002, the Company sold 277,778 shares of restricted,
unregistered common stock to Access Investments, Inc., 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 were used to reduce the
Company's outstanding balance on a long-term note payable to a bank. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
On September 26, 2002, the Company sold 277,778 shares of restricted,
unregistered common stock to Access Investments, Inc., 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 were used to provide
working capital liquidity for future periods. This offering and sale was deemed
to be exempt under Rule 506 of Regulation D and Section 4(2) of the Securities
Act. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were accredited investors and transfer was restricted by American
Ammunition in accordance with the requirements of the Securities Act of 1933.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with La Jolla Cove Investors, Inc. ("La Jolla") on October 4,
2002 for the sale of (i) $250,000 in convertible debentures and (ii) warrants to
buy 30,000,000 shares of our common stock. On March 13, 2003 and May 6, 2003, La
Jolla advanced an aggregate of $350,000 to our company which such funding was
allocated towards the principal balance of our convertible debentures. We
currently have $266,350 of our convertible debentures and 2,666,350 warrants
still outstanding. This prospectus relates to the resale of the common stock
underlying these convertible debentures and warrants.
7
The debentures bear interest at 8%, mature on June 30, 2006, and are
convertible into our common stock, at the selling stockholder's option. The
convertible debentures are convertible into the number of our shares of common
stock equal to the principal amount of the debentures being converted multiplied
by 11, less the product of the conversion price multiplied by 10 times the
dollar amount of the debenture. The conversion price for the convertible
debentures is the lesser of (i) $1.00 or (ii) seventy six percent of the average
of the five lowest volume weighted average prices during the twenty (20) trading
days prior to the conversion. Accordingly, there is in fact no limit on the
number of shares into which the debenture may be converted. However, in the
event that our market price is less than $.30, we will have the option to prepay
the debenture at 125% rather than have the debenture converted. In addition, the
selling stockholder is obligated to exercise the warrant concurrently with the
submission of a conversion notice by the selling stockholder. Currently, the
warrant is exercisable into 2,666,350 shares of common stock at an exercise
price of $1.00 per share.
In December 2004, we entered into an addendum to the convertible debenture
and warrant whereby we agreed to the following:
* the discount multiplier was reduced from eighty percent to seventy six
percent;
* within five business days after this registration statement being
declared effective, La Jolla is required to submit a debenture
conversion in the amount of $10,000 and every ten business days
thereafter La Jolla shall submit three additional debenture conversion
in the amount of $10,000 each;
* within five business days after this registration statement being
declared effective, La Jolla shall wire $400,000 to us as a prepayment
towards the exercise of its warrant; and
* immediately following the sale of all shares held by La Jolla in
connection with the debenture conversions in the aggregate amount of
$40,000, La Jolla shall wire $275,000 to us as a prepayment towards
the exercise of its warrant and shall submit a debenture conversion in
the amount of $6,250 on the first business day of each month until the
debenture is no longer outstanding.
The selling stockholder has contractually agreed to restrict its ability to
convert or exercise its warrants and receive shares of our common stock such
that the number of shares of common stock held by them and their affiliates
after such conversion or exercise does not exceed 4.9% of the then issued and
outstanding shares of common stock.
In December 2002, we 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 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.
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.
8
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.
This offering and sale was deemed to be exempt under Rule 506 of Regulation
D and Section 4(2) of the Securities Act. No advertising or general solicitation
was employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
Except as expressly set forth above, the individuals and entities to whom
we issued securities as indicated in this section of the registration statement
are unaffiliated with us.
During January 2003, we issued to existing preferred shareholders an
aggregate of 6,343 shares of restricted, unregistered common stock in accrued
dividends payable on our outstanding Series A Preferred Stock for the quarter
ended December 31, 2002. This offering and sale was deemed to be exempt under
Rule 506 of Regulation D and Section 4(2) of the Securities Act. No advertising
or general solicitation was employed in offering the securities. The offerings
and sales were made to a limited number of persons, all of whom were accredited
investors and transfer was restricted by American Ammunition in accordance with
the requirements of the Securities Act of 1933.
In February 2003, we sold an aggregate 104,234 shares of restricted,
unregistered common stock to an existing shareholder in a separate transaction
valued at an aggregate of approximately $27,100. These sales were made at a
price of $0.26 per share. The proceeds of this transaction were used to directly
retire a trade account payable to a specific vendor. This offering and sale was
deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of the
Securities Act. No advertising or general solicitation was employed in offering
the securities. The offerings and sales were made to a limited number of
persons, all of whom were accredited investors and transfer was restricted by
American Ammunition in accordance with the requirements of the Securities Act of
1933.
In February 2003, we 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. The proceeds of this
transaction were used to pay down an equivalent portion of our long-term note
payable to a bank. This offering and sale was deemed to be exempt under Rule 506
of Regulation D and Section 4(2) of the Securities Act. No advertising or
general solicitation was employed in offering the securities. The offerings and
sales were made to a limited number of persons, all of whom were accredited
investors and transfer was restricted by American Ammunition in accordance with
the requirements of the Securities Act of 1933.
In March 2003, we issued 99,000 shares of restricted, unregistered common
stock upon the exercise of 9,000 shares of outstanding Series A Preferred Stock
upon the exercise of the conversion option by the holder of the Series A
Preferred Stock. This offering and sale was deemed to be exempt under Rule 506
of Regulation D and Section 4(2) of the Securities Act. No advertising or
general solicitation was employed in offering the securities. The offerings and
sales were made to a limited number of persons, all of whom were accredited
investors and transfer was restricted by American Ammunition in accordance with
the requirements of the Securities Act of 1933.
In March 2003, we sold 972,222 shares of restricted, unregistered common
stock to two (2) existing shareholders for cash proceeds of approximately
$350,000. This sale was made at a price of $0.36 per share. The proceeds of this
transaction were used to pay down an equivalent portion of our long-term note
payable to a bank. This offering and sale was deemed to be exempt under Rule 506
of Regulation D and Section 4(2) of the Securities Act. No advertising or
general solicitation was employed in offering the securities. The offerings and
sales were made to a limited number of persons, all of whom were accredited
investors and transfer was restricted by American Ammunition in accordance with
the requirements of the Securities Act of 1933.
In April 2003, in two separate transactions, we sold an aggregate 833,334
shares of restricted, unregistered common stock to two (2) existing shareholders
for aggregate proceeds of $300,000. Each sale was made at a price of $0.36 per
share. These proceeds are to be used to supplement operational working capital.
This offering and sale was deemed to be exempt under Rule 506 of Regulation D
and Section 4(2) of the Securities Act. No advertising or general solicitation
was employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
9
During the period from July 1, 2003 through September 30, 2003, the Company
issued an aggregate 2,902,129 shares of common stock, in 15 separate
transactions, in exchange for the redemption of approximately $93,500 in
outstanding debenture balance and approximately $935,000 in cash from the
exercise of the affiliated warrant. Where the closing price of the Company's
common stock was in excess of the respective price per share on the respective
transaction date, the Company recognized a charge to operations for
"compensation expense related to common stock issuances at less than "fair
value". The cumulative effect of transactions where the transaction price, as
established in the Debenture Agreement, was less than the closing price on the
date of the respective transactions resulted in a cumulative charge to
operations of approximately $317,539 during this time period.
In October 2003, in a separate transaction, the Company sold 2,200,000
shares of restricted, unregistered common stock to the Debenture Holder for cash
proceeds of approximately $400,000, or approximately $0.18 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.
In October 2003, the Company issued an aggregate 1,659,847 shares of common
stock, in 3 separate transactions, in exchange for the redemption of
approximately $40,000 in outstanding debenture balance and approximately
$400,000 in cash from the exercise of the affiliated warrant. Where the closing
price of the Company's common stock was in excess of the respective price per
share on the respective transaction date, the Company recognized a charge to
operations for "compensation expense related to common stock issuances at less
than "fair value". The cumulative effect of transactions where the transaction
price, as established in the Debenture Agreement, was less than the closing
price on the date of the respective transactions resulted in a cumulative charge
to operations of approximately $146,189 during this time period.
In October 2003, the Company issued an aggregate 37,866 shares of
restricted, unregistered common stock in payment of approximately $16,710 in
accrued dividends payable on the Company's outstanding Series A and Series B
Preferred Stock for the quarters ended June 30, 2003 and September 30, 2003,
collectively.
In January 2004, the Company issued 38,038 shares of restricted,
unregistered common stock in payment of approximately $10,000 in accrued
dividends payable on the Company's outstanding Series A and Series B Preferred
Stock for the quarter ended December 31, 2003. The Company relied upon Section
4(2) of the Securities Act of 1933, as amended, for an exemption from
registration of these shares and no underwriter was used in this transaction.
During the period from January 1, 2004 through March 31, 2004, the Company
issued an aggregate 2,400,000 shares of common stock, in two (2) separate
transactions, in exchange for the redemption of approximately $50,000 in
outstanding debenture balance and approximately $500,000 in cash from the
exercise of the affiliated warrant. Where the closing price of the Company's
common stock was in excess of the respective price per share on the respective
transaction date, the Company recognized a charge to operations for
"compensation expense related to common stock issuances at less than "fair
value". The cumulative effect of transactions where the transaction price, as
established in the Debenture Agreement, was less than the closing price on the
date of the respective transactions resulted in a cumulative charge to
operations of approximately $321,000 during this time period.
In May 2004, the Company issued 25,260 shares of restricted, unregistered
common stock in payment of approximately $9,170 in accrued dividends payable on
the Company's outstanding Series B Preferred Stock for the quarter ended March
31, 2004. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
During the period from April 1, 2004 through June 30, 2004, the Company
issued an aggregate 3,000,000 shares of common stock, in three (3) separate
transactions, in exchange for the redemption of approximately $75,000 in
outstanding debenture balance and approximately $750,000 in cash from the
exercise of the affiliated warrant. Where the closing price of the Company's
common stock was in excess of the respective price per share on the respective
transaction date, the Company recognized a charge to operations for
"compensation expense related to common stock issuances at less than "fair
value". The cumulative effect of transactions where the transaction price, as
established in the Debenture Agreement, was less than the closing price on the
date of the respective transactions resulted in a cumulative charge to
operations of approximately $35,000 during this time period. Additionally, on
June 29, 2004, the Company issued an additional 1,000,000 shares of common stock
in advance of the exercise of a $25,000 redemption on the outstanding debenture
payable and a $250,000 cash payment on the exercise of the affiliated warrant,
which was received in July 2004.
10
On May 26, 2004, the Company issued 300,000 shares of restricted,
unregistered common stock to two separate corporations in payment and full
satisfaction of all amounts due for fees and/or commissions due in conjunction
with the Company's convertible debenture financing transaction. This transaction
was valued at approximately $36,000, which approximated the "fair value" of the
underlying securities given in payment and the related charges for the services
provided. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
In August 2004, the Company issued 29,746 shares of restricted,
unregistered common stock in payment of approximately $9,170 in accrued
dividends payable on the Company's outstanding Series B Preferred Stock for the
quarter ended June 30, 2004. The Company relied upon Section 4(2) of the
Securities Act of 1933, as amended, for an exemption from registration of these
shares and no underwriter was used in this transaction.
* All of the above offerings and sales were deemed to be exempt under rule 506
of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors, business associates of our company or executive officers
of our company, and transfer was restricted by Radix in accordance with the
requirements of the Securities Act of 1933. In addition to representations by
the above-referenced persons, we have made independent determinations that all
of the above- referenced persons were accredited or sophisticated investors, and
that they were capable of analyzing the merits and risks of their investment,
and that they understood the speculative nature of their investment.
Furthermore, all of the above-referenced persons were provided with access to
our Securities and Exchange Commission filings.
11
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2. References
to "the Company" in this Exhibit List mean American Ammunition, Inc., a
California corporation.
Exhibit # Exhibit Name
----------- ------------------
2.1 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 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 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 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 Amended and Restated Bylaws (Incorporated by reference to our
Form 10QSB for the quarter ended September 30, 2001).
4.1* Common Stock Purchase Warrant with La Jolla Cove Investors, Inc.,
dated October 4, 2002.
4.2* Convertible Debenture with La Jolla Cove Investors, Inc., dated
October 4, 2002.
4.3* Addendum with La Jolla Cove Investors, Inc., dated October 4,
2002.
4.4* Letter Agreement with La Jolla Cove Investors, dated October 4,
2002.
4.5* Registration Rights Agreement with La Jolla Cove Investors, dated
October 4, 2002.
4.6* Letter Agreement with La Jolla Cove, dated December 2002.
4.7 Letter Agreement with La Jolla Cove, dated December 2004.
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent (filed
herewith)
9.1 Ellet Brothers, Inc. Purchase Order (incorporated by reference to
our Form SB-2 filed May 13, 2003)
23.1 Consent of Smith & Company (filed herewith)
23.2 Consent of legal counsel (see Exhibit 5.1)
--------------------------
*Incorporated by reference to the Form SB-2 filed January 6, 2003.
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
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(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
the securities offered would not exceed that which was registered) and
any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with
the Commission pursuant to Rule 424(b) under the Securities Act if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement, and
(iii)Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this registration statement as
of the time it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of Miami,
State of Florida, on January 13, 2005.
AMERICAN AMMUNITION, INC.
By: /s/ Andres F. Fernandez
----------------------------
Andres F. Fernandez, President and CEO
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Signature Title Date
---------------------------- ----------------------------------------- ----------------
/s/ J.A. Fernandez, Sr.
---------------------------- Chairman of the Board and Director of January 13, 2005
J.A. Fernandez, Sr. Sales
/s/ Andres F. Fernandez
---------------------------- President, Chief Executive Officer, January 13, 2005
Andres F. Fernandez Chief Financial Officer and Principal
Accounting Officer
/s/ Emilio D. Jara
---------------------------- Vice-President of Operations, Secretary January 13, 2005
Emilio D. Jara and Director
/s/ Maria A. Fernandez
---------------------------- Director January 13, 2005
Maria A. Fernandez
14