UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _______________ to ________________
Commission File No.: 000-32379
American Ammunition, Inc.
---------------------------------
(Name of small business registrant in its charter)
California 91-2021594
------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3545 NW 71st Street
Miami, FL 33147
---------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (305) 835-7400
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange
on which registered
None
----------------------------- ------------------------------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
------------------------
(Title of class)
Check whether the issuer has (1) filed all reports required to be files by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period the Company was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [_]
The issuer's revenues for the fiscal year ended December 31, 2004 were
$3,247,368.
The aggregate market value of voting common equity held by non-affiliates as of
March 24, 2005 was approximately $5,271,187.
As of March 24, 2005, there were 75,907,300 shares of Common Stock issued and
outstanding.
Transitional Small Business Disclosure Format : Yes [_] No [X]
American Ammunition, Inc.
Index to Contents
Page
Number
Part I
Item 1 Description of Business 4
Item 2 Description of Property 18
Item 3 Legal Proceedings 18
Item 4 Submission of Matters to a Vote of Security Holders 19
Part II
Item 5 Market for Company's Common Stock and Related Stockholders Matters 19
Item 6 Management's Discussion and Analysis or Plan of Operation 20
Item 7 Financial Statements 25
Item 8 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 25
Item 8A Controls and Procedures 26
Part III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 26
Item 10 Executive Compensation 29
Item 11 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 30
Item 12 Certain Relationships and Related Transactions 31
Item 13 Exhibits and Reports on 8-K 31
Item 14 Principal Accountant Fees and Services 32
Signatures 33
Index to Financial Statments F-1
Caution Regarding Forward-Looking Information
Certain statements contained in this annual filing, including, without
limitation, statements containing the words "believes", "anticipates", "expects"
and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
Such factors include, among others, the following: international, national and
local general economic and market conditions: demographic changes; the ability
of the Company to sustain, manage or forecast its growth; the ability of the
Company to successfully make and integrate acquisitions; raw material costs and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Form 10-KSB and investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
PART I
Item 1 - Description of Business
American Ammunition, Inc. (the "Company") was incorporated on February 1,
2000 in accordance with the Laws of the State of California as
FirsTelevision.com. It subsequently changed its corporate name to FBI Fresh
Burgers International with a business plan of marketing the concept of a
national "fast food" restaurant chain to children and young adults, with a menu
of fresh burgers, fries and sandwiches.
This concept was unsuccessful and we had minimal operations until September
2001, when we acquired American Ammunition Inc., a then-privately held Florida
corporation. Upon completion of the reverse acquisition transaction with
American Ammunition, Inc., we have been engaged in the manufacture and sale of
small-arms ammunition for the wholesale and governmental markets.
We are an established small arms munition manufacturer with an existing
distribution network. The small-arms ammunition market is principally dominated
by three domestic and approximately ten international major manufacturers. Our
operations are geared to provide the highest quality product in quantities
sufficient to meet our developed wholesale and governmental market demands. We
4
are an approved Department of Defense contractor. We began as an assembler and
re-loader of ammunition in several calibers. As our operations grew, our
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 in prior years to focus 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 manufactured 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 to both retail consumers and governmental
agencies domestically and principally to governmental agencies internationally
for military use. During Calendar 2004 and 2003, our sales were approximately
78.06% and 93.77% in domestic markets and approximately 21.94% and 6.23%
internationally. 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, consisting
primarily of brass, 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
maintain 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 continue to evaluate
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.
During 2004 and 2003, we acquired equipment which will allowed 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.
5
During 2004, we acquired laser gauging computer equipment for the purpose
of improving and automating quality control processes. This equipment
automatically tests and ejects projectiles from the assembly line which do not
meet the specified tolerances. We believe that this equipment will assist in the
improvement of our products and cut labor costs associated with manual
inspection of product.
Business Strategy
We are an autonomous manufacturer of ammunition, with the technology and
equipment to take advantage of the growing small-arms ammunition 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 utilizing purchased raw materials to
fabricate the necessary components in our own production facility. In
management's opinion, the consumer and governmental 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 our dealer direct program, established in the first quarter of
2004, and our historically strong relationships with various domestic and
foreign governmental agencies.
We continue to seek the necessary working capital to allow us to enlarge
our operations to take advantage of our technological capacities, equipment and
the existing marketplace.
Marketing and Sales Distribution
However, in first quarter 2004, we launched our Dealer Direct Program. In
doing so, we completely revamped the way we distribute and sell our products
domestically. In essence, we eliminated 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
our facility to the ultimate seller of our products.
Our marketing strategy consists of several 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 dollar volume.
Shipping of small arms ammunition has always been a large portion of the cost
passed to consumers as the product is considered "dense" by shipping companies,
6
such as UPS, and requires extra care in shipping. We have determined that we can
ship our products at a reduced rate in quantity and can offer 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 have been slow to
develop, primarily due to the documentation requirements for pre-qualification
of dealers; however, management is hopeful that our dealers will begin to take
advantage of the ease of use and time savings related to placing orders directly
via electronic means. We anticipate further automation in the way in which our
qualified 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 domestic manufacturers; seek additional means of commercial
distribution; seek further Department of Defense and other governmental agency
contracts and new relationships; contracts; solicit further export sales and,
potentially, develop relationships with various mass merchandisers/chain stores.
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
underutilized business zones,", generally located in "blighted" areas (as
defined) and a primary purpose is to create jobs for those who live in such
areas. 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 three major domestic manufacturers: Remington, ATK, and Winchester.
We strive to capitalize on the fact that these three competitors have very large
corporate infrastructures and, in management's opinion, have to pay much higher
labor costs to their manufacturing plant personnel. We believe that our
production cost structure and, accordingly, our pricing strategy permits our
customers to purchase our product and sell it at a retail price that is lower
than competitive distribution channels for our competitors' products.
7
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 benefitted 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
future assembly on a consignment basis, 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"). This transaction closed
on October 19, 2004, with the issuance of 1,111,112 shares of restricted,
unregistered common stock valued at $500,000.
The assets acquired consisted of various pieces of manufacturing machinery,
raw materials and finished inventory and various intellectual property rights.
Triton conveyed the sole usage patent right agreements and various related
licenses for the Hi-Vel and Quik-Shok lines of ammunition.
The allocation of the purchase price was as follows: Manufacturing
equipment - approximately $134,000; Raw materials and finished inventory -
approximately $89,500; and Patents and a Covenant not-to-compete - approximately
$276,500. As the assigned patents, related licenses and the
covenant-not-to-compete have a combined remaining life and/or initial term of
approximately 5 years, the Company will amortize the approximate $276,500 to
operations over a 60-month period, commencing on the closing date of the
acquisition transaction.
We believe that with the acquisition of certain Triton specialty ammunition
and our cooperative relationship with IMI on certain ventures, we allow us to
offer an increased product line to our dealers.
8
ECO-AMMOTM
We are now manufacturing and distributing ECO-AMMO(TM). This product
utilizes a lead-free projectile with reduced lead pollutants sometimes referred
to as "green" ammo. ECO-AMMO(TM) 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.
Frangible 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 projectile 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 other environments with similar containment issues, such
as security at nuclear power plants, hazardous materials storage facilities, and
for consumer 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 a confined space while ensuring the integrity of the surrounding
environment. 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. Our initial testing, using test sections of a
commercial airliner fuselage, has revealed that 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. Further, our testing has been successful in 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 of
the Company, is a high volume "barrel plating" facility currently operating at
below 50.0% of its designed capacity. IPE is meeting all of our projectile
plating needs at this time. As our projectile plating requirement grows, IPE has
the surplus capacity to 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.
9
Competition
The market for small arms ammunition is extremely 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.
Management undertook a study of the production process and our equipment
utilization during December 2004 and the first quarter of 2005. As a result of
this study, our management believes that it is feasible to increase our
production capacity by 100% to 150% in the immediate future through the
renovation and restructuring of our plant flow utilizing our existing equipment
and increasing only labor, material and other incidental costs.
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. While we believe that no critical shortages of our
key raw material components, such as brass, lead and powder. We are cognizant of
recent press related to the availability of lead as no new mines have opened in
many years due to environmental regulations. We have experienced limited,
infrequent delays in receiving lead; however, we have always been able to meet
our production requirements from our normal sources. Current demand for our raw
material components in the domestic and international markets, principally
driven by international military conflicts, may work to our advantage in our
contracts and relationships with various domestic and foreign governmental
agencies. However, we cannot state with any certainty that any disruption of
supply may or may not occur.
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.
10
Our October 2004 acquisition of certain intellectual technology property
from Triton Ammunition Corporation included the assignment of the following
patents related to the design and manufacture of certain fragmentable
projectiles: 4,836,110, dated June 6, 1989; 4,882,822, dated November 28, 1989;
and 4,947,755, dated August 8, 1990.
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 believe that we are in full compliance with
our 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 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 and environmentally
controlled facility
Employees
At March 24, 2005, we employ approximately 70 persons. None of our
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 and believe that an ample supply of qualified labor
exists in our geographic area to facilitate any required growth.
Risk Factors
An investment in our common stock 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
11
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, 2004 and 2003, we had a net
loss of approximately $3,361,000 and $2,968,000, respectively. We may continue
to incur significant operating expenses as we maintain our current line of
small-arms ammunition and continue research and development toward improving
projectile quality and performance. We cannot estimate exactly when our
operating expenses will not 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 years ended December 31, 2004
and 2003 reflect an accumulated deficit of approximately $19,989,875 and
$16,629,044, since our inception, working capital of approximately $872,000 and
$2,028,000, and stockholders' equity of approximately $4,385,000 and $4,508,000.
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 security for the loan; and
* we are in poor financial condition where we 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.
Our competitive position may be harmed if we fail to respond to rapid changes in
the market for small arms ammunition.
12
Our competitive position may be harmed if we fail to respond to rapid
changes in the market for small arms ammunition. 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 five 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.
13
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.
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 January 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
14
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 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 Our Pending 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.
15
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.
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 36.46%
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 Fernandez family, beneficially own approximately 36.46%
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
16
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
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.
17
Item 2 - 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 $5,735, including applicable State
sales taxes. We are responsible for all utilities and maintenance expenses. The
lease expires on December 1, 2009 and contains a clause that upon expiration,
the Company and the controlling shareholder shall renegotiate the annual rental
amount.
Our 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, 2004 and 2003.
In May 2004, we entered into a long-term lease agreement for a warehouse
facility in close proximity to our primary office and manufacturing facility
with an unrelated third-party.. 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. We
are responsible for all utilities and maintenance expenses. This lease expires
on May 31, 2006. Further, we are 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
------------ ----------
2005 $ 166,974
2006 117,244
2007 72,643
2008 68,815
2007 68,815
---------
Totals $ 494,491
=========
For the respective years ended December 31, 2004 and 2003, the Company paid
an aggregate of $131,804 and $87,826 for rent under these agreements.
Item 3 - Legal Proceedings
The Company is not a party to any pending legal proceedings, and no such
proceedings are known to be contemplated.
18
Item 4 - Submission of Matters to a Vote of Security Holders
The Company has not conducted any meetings of shareholders during the
preceding quarter or periods subsequent thereto.
PART II
Item 5 - Market for Company's Common Stock and Related Stockholder Matters
Market for Trading
Our common stock of the Company currently is quoted on the NASDAQ Over the
Counter Bulletin Board under the symbol "AAMI" and has been since October 23,
2001. Prior to that time, our common stock was approved for trading under symbol
"FBIB," although it never traded under that symbol. The ask/high and bid/low
information for each quarter since October 23, 2001 are as follows:
Quarter Ask/High Bid/Low
1/1/2002 - 3/31/2002 0.81 0.33
4/1/2002 - 6/30/2002 0.65 0.36
7/1/2002 - 9/30/2002 0.57 0.31
10/1/2002 - 12/31/2002 0.47 0.38
1/1/2003 - 3/31/2003 0.78 0.53
4/1/2003 - 6/30/2003 0.85 0.42
7/1/2003 - 9/30/2003 0.55 0.37
10/1/2003 - 12/31/2003 0.42 0.22
1/1/2004 - 3/31/2004 0.50 0.27
4/1/2004 - 6/30/2004 0.42 0.17
7/1/2004 - 9/30/2004 0.27 0.17
10/1/2004 - 12/31/2004 0.24 0.15
1/1/2005 - 3/20/2005 0.17 0.09
Please note that over-the-counter market quotations have been provided
herein. The quotations reflect inter-dealer prices, without retail markup,
mark-down or commission and may not represent actual transactions.
As of December 31, 2004, we had approximately 178 shareholders of record,
exclusive of our stockholders with their holdings in street name.
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
19
holders of the common stock have the right, in the event of liquidation, to
receive pro rata all assets remaining after payment of debts 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
Our independent stock transfer agent for our common and preferred stock is
Atlas Stock Transfer Corporation. Their mailing address and telephone number is
5899 South State Street, Salt Lake City, Utah 84107; (801) 266-7151.
Reports to Stockholders
The Company plans to furnish its stockholders with an annual report for
each fiscal year ending December 31 containing financial statements audited by
its registered independent public accounting firm. In the event the Company
enters into a business combination with another Company, it is the present
intention of management to continue furnishing annual reports to stockholders.
Additionally, the Company may, in its sole discretion, issue unaudited quarterly
or other interim reports to its stockholders when it deems appropriate. The
Company intends to maintain compliance with the periodic reporting requirements
of the Securities Exchange Act of 1934.
Dividend policy
No dividends have been paid to date and the Company's Board of Directors
does not anticipate paying dividends in the foreseeable future. It is the
current policy to retain all earnings, if any, to support future growth and
expansion.
Item 6 - Management's Discussion and Analysis or Plan of Operation
Caution Regarding Forward-Looking Information
Certain statements contained in this annual filing, including, without
limitation, statements containing the words "believes", "anticipates", "expects"
and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
Such factors include, among others, the following: international, national
and local general economic and market conditions: demographic changes; the
ability of the Company to sustain, manage or forecast its growth; the ability of
the Company to successfully make and integrate acquisitions; raw material costs
and availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
20
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Form 10-KSB and investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
General
American Ammunition, Inc. is a holding company with two operating subsidiaries:
F&F Equipment, Inc. and Industrial Plating Enterprise Co.
F&F Equipment, Inc. (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 & wholesale of firearms equipment, ammunition & other
devices and for the purpose of transacting any and/or all lawful business." F&F
conducts its business operations under the assumed name of "American
Ammunition."
In June 2002, American Ammunition, Inc. formed a wholly owned subsidiary,
Industrial Plating Enterprise Co. (IPE), which started production on June 14,
2002. IPE is a fully licensed and approved 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.
Results of Operations
Year ended December 31, 2004 compared to Year ended December 31, 2003
During the year ended December 31, 2004, we experienced aggregate net
revenues of approximately $3,247,000, with approximately $1,535,000 being
realized during the 4th quarter, as compared to approximately $1,985,000 in
total net revenues for the year ended December 31, 2003.
We experienced costs of goods sold of approximately $4,621,000 for the year
ended December 31, 2003 as compared to approximately $3,232,000 for the year
ended December 31, 2003.
During 2004 and 2003, we experienced negative trends off of our standard
production costs for material and labor due to difficulties in training new
employees, adding new products to our catalog and lower than expected orders
during the first two quarters of 2004 due to uncontrollable delays in ordering
by various U. S. Governmental entities. 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 $729,000 and $669,000, respectively, in
the above cost of goods expense totals. These depreciation levels are
anticipated to fluctuate nominally in future periods based upon either the full
depreciation of older equipment and/or the addition of new equipment to expand
21
capacity. For the year ended December 31, 2004 and 2003, respectively, we
generated a negative gross profit of approximately $(1,373,298), or (42.29%),
and approximately $(1,247,000), or (62.82%). Based on orders received and
products shipped during the first quarter of 2005 (through the filing date of
this document) and our ongoing conversations with various customers that we
should be able to generate a positive gross profit in future periods..
We experienced nominal research and development expenses of approximately
$11,000 and $4,000, respectively, during the years ended December 31, 2004 and
2003, principally related to the expansion of our product line.
Other general and administrative expenses increased by approximately
$440,000 from approximately $1,127,000 for the year ended December 31, 2003 as
compared to approximately $1,567,000 for the year ended December 31, 2004. The
most significant increases relate to advertising and marketing expenses
(approximately $324,000), office and administrative wages and salaries and
overall office overhead (approximately $116,000).
During 2004 and 2003, respectively, we experienced charges to operations of
approximately $382,000 and $883,000 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 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 $(3,318,000) and $(2,968,000) for
the respective years ended December 31, 2004 and 2003, respectively, or $(0.05)
and $(0.05) per share.
Year ended December 31, 2003 compared to 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
22
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
anticipated that with the fulfillment of the various private labeling agreements
and government contracts, continued retail consumer demand for our product line,
lower production costs being experienced from internally generated plating
activities and adequate liquidity, we would 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 December 31, 2003. The
most significant increases relate to advertising and marketing expenses, office
and administrative wages and salaries and overall office overhead.
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
As of December 31, 2004 and 2003, respectively, we had working capital of
approximately $872,000 and $2,000,000. 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. At December 31, 2004, our working capital declined due to
liabilities for customer deposits received at year-end for orders which had not
been produced and shipped; but, were completed during the quarter ended March
31, 2005 and increased trade account payable levels for 4th quarter 2004
production on orders which were shipped under our "net 60" terms programs
related to our dealer direct sales efforts.
23
We have used cash in operating activities of approximately $(649,000) and
$($2,918,000) during the years ended December 31, 2004 and 2003, respectively.
Capital Requirements
During the years ended December 31, 2004 and 2003, respectively, we added
approximately $717,000 and $289,000 in new equipment. The equipment added in
2004 was related to 1) the expansion of our production line; 2) the addition of
computerized quality control inspection processes and 3) the automation of our
packaging line.
Depending on future demand for our products, we may need to further
increase our production capability and management is of the opinion that
adequate equipment, either new or used, will be available to facilitate any
future expansion.
Convertible Debenture
The Company 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.
As of December 31, 2004, the outstanding balance on the convertible
debenture is approximately $266,365 and we have approximately 2,663,650 warrants
outstanding.
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. As of December 31,
2004, the warrant is exercisable into 2,663,650 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 the Company 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;
24
* 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.
LaJolla 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 exceed 4.9% of the then issued and outstanding
shares of common stock.
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.
On various dates between January 1, 2004 and December 31, 2004, the
Debenture Holder elected to convert an aggregate $150,000, through 6 separate
transactions, in outstanding Debenture principal into registered common stock.
This election caused the Company to issue 4,900,000 shares of 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 1,500,000 shares of the Company's common stock for gross proceeds of
$1,500,000.
Item 7 - Index to Financial Statements
The required financial statements begin on page F-1 of this document.
Item 8 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None
25
Item 8A - Controls and Procedures
As of the date of this filing, an evaluation of the effectiveness of the
design and operation of American Ammunition, Inc.'s disclosure controls and
procedures was carried out under the supervision and with the participation of
management, including our Chief Executive and Financial Officer. Based upon that
evaluation, our Chief Executive and Financial Officer concluded that the
Company's disclosure controls and procedures are effective. There have been no
significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to the date we carried out the
evaluation.
PART III
Item 9 - Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The directors and executive officers serving the Company are as follows:
Name Age Position Held and Tenure
------------------ --- --------------------------------
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
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 F&F Equipment, which 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
26
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, a Louisville, KY law firm, 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.
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 us 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.
27
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; at 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.
Conflicts of Interest
We know of no identified or disclosed conflicts of interest among our
officers or directors and the affairs of the Company.
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 its
agents, 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,
28
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.
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
Item 10 - 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 each of our fiscal
years ended December 31, 2000 through December 31, 2004 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
29
Director of 2003 $104,000 $0 $0 $0 $0 $0 $0
Sales 2004 $104,000 $0 $0 $0 $0 $0 $0
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 2004 $132,600 $0 $0 $0 $0 $0 $0
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, 2004 $ 52,000 $0 $0 $0 $0 $0 $0
Secretary
and
Director
Amelia 2000 $ 59,202 $0 $0 $0 $0 $0 $0
Fernandez, 2001 $ 59,923 $0 $0 $0 $0 $0 $0
Vice President 2002 $ 64,598 $0 $0 $0 $0 $0 $0
And 2003 $ 78,702 $50,000 $0 $0 $0 $0 $0
Director 2004 $ 78,702 $0 $0 $0 $0 $0 $0
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
2004 $0 $0 $0 $0 $0 $0 $0
Compensation of Directors
We have no existing arrangements for compensating our directors for their
attendance at meetings of the Board of Directors. Depending upon market forces
and regulatory mandates, we may find it necessary to implement a formal
compensation plan in future periods to obtain and retain qualified members of
our Board of Directors.
Item 11 - Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 24, 2005, the number of shares
of Common Stock owned of record and beneficially by executive officers,
directors and persons who hold 5% or more of the outstanding Common Stock of the
Company. Also included are the shares held by all executive officers and
directors as a group.
30
Shares Beneficially Owned
---------------------------
Name and Address of Beneficial Owner Number Percent
------------------------------------------------ ----------- ------------
Andres F. Fernandez 8,485,365 11.18%
J. A. Fernandez, Sr. 14,905,905 19.64%
Amelia C. Fernandez 4,281,900 5.64%
Maria A. Fernandez 260,000 *
Emilio D. Jara 54,250 *
Total common stock held by officers
and directors as a group (4 people) 27,987,420 36.46%
* Less than 1%
The contact address for each of our officers and directors is 3545 NW 71st
Street, Miami, FL 33147.
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.
Item 12 - 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 $5,735, including applicable State
sales taxes. We are responsible for all utilities and maintenance expenses. The
lease expires on December 1, 2009 and contains a clause that upon expiration,
the Company and the controlling shareholder shall renegotiate the annual rental
amount.
Item 13 - Exhibits and Reports on Form 8-K.
(a) The exhibits required to be filed herewith by Item 601 of Regulation
S-B, as described in the following index of exhibits, are incorporated herein by
reference, as follows:
Exhibit No. Description
---------- -------------------------------------
31.1 * Certification by Chief Executive Officer pursuant to 18 U.S.C. 1350.
32.1 * Certification by Chief Financial Officer pursuant to 18 U.S.C. 1350.
* Filed herewith
31
Item 14 - Principal Accountant Fees and Services
The Company paid or accrued the following fees in each of the prior two
fiscal years to it's principal accountant, S. W. Hatfield, CPA of Dallas, Texas.
Item 14 - Principal Accountant Fees and Services
The Company paid or accrued the following fees in each of the prior two fiscal
years to its principal accountant, S. W. Hatfield, CPA of Dallas, Texas.
Year ended Year ended
December 31, December 31,
2004 2003
-------------------------------
(1) Audit fees $ 28,193 $ 29,193
(2) Audit-related fees - -
(3) Tax fees 1,208 1,208
(4) All other fees - -
--------- ---------
Totals $ 29,401 $ 29,401
========= =========
We have considered whether the provision of such non-audit services is
compatible with S. W. Hatfield, CPA maintaining its independence and determined
that these services do not compromise their independence.
Financial Information System Design and Implementation: S. W. Hatfield, CPA
did not charge the Company any fees for financial information system design and
implementation fees.
The Company has no formal audit committee. However, the entire Board of
Directors (the "Board") is the Company's defacto audit committee. In discharging
its oversight responsibility as to the audit process, the Board obtained from
the independent auditors a formal written statement describing all relationships
between the auditors and the Company that might bear on the auditors'
independence as required by Independence Standards Board Standard No. 1,
"Independence Discussions with Audit Committees." The Board discussed with the
auditors any relationships that may impact their objectivity and independence,
including fees for non-audit services, and satisfied itself as to the auditors'
independence. The Board also discussed with management, the internal auditors
and the independent auditors the quality and adequacy of the Company's internal
controls.
The Company's principal accountant, S. W. Hatfield, CPA, did not engage any
other persons or firms other than the principal accountant's full-time,
permanent employees.
32
SIGNATURES
In accord with Section 13 or 15(d) of the Securities Act of 1933, as amended,
the Company caused this report to be signed on its behalf by the undersigned,
thereto duly authorized.
American Ammunition, Inc.
Dated: March , 2005 By: /s/ Andres F. Fernandez
-------------- --------------------------------
Andres F. Fernandez
President, Chief Executive Officer,
Chief Financial Officer and Director
In accordance with the Securities Exchange Act of 1934, as amended, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the date as indicated.
Dated: March , 2005 By: /s/ Andres F. Fernandez
-------------- --------------------------------
Andres F. Fernandez
President, Chief Executive Officer,
Chief Financial Officer and Director
Dated: March , 2005 By: /s/ J.A. Fernandez, Sr.
-------------- --------------------------------
J. A. Fernandez, Sr.
Chairman, Director of Sales,
and Director
Dated: March , 2005 By: /s/ Emilio D. Jara
-------------- --------------------------------
Emilio D. Jara.
Vice President - Operations,
Corporate Secretary and Director
Dated: March , 2005 By: /s/ Maria A. Fernandez
-------------- --------------------------------
Maria A. Fernandez,
Director
33
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
CONTENTS
Page
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Consolidated Balance Sheets
as of December 31, 2004 and 2003 F-3
Consolidated Statement of Operations and Comprehensive Loss
for the years ended December 31, 2004 and 2003 F-5
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 2004 and 2003 F-6
Consolidated Statement of Cash Flows
for the years ended December 31, 2004 and 2003 F-7
Notes to Consolidated Financial Statements F-9
F-1
Letterhead of S. W. Hatfield, CPA
Report of Independent Registered Public Accounting Firm
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, 2004 and 2003 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, 2004 and 2003,
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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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, 2004 and 2003 and
the results of their consolidated operations and consolidated cash flows for
each of the two years ended December 31, 2004 and 2003, respectively, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ S.W. Hatfield
-------------------
S. W. HATFIELD, CPA
Dallas, Texas
March 11, 2005
F-2
AMERICAN AMMUNITION, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
December 31, December 31,
2004 2003
----------------------------
ASSETS
Current Assets
Cash on hand and in bank $ 805,465 $ 505,671
Accounts receivable - trade,
net of allowance for doubtful accounts
of $-0- and $-0-, respectively 639,444 520,835
Inventory 912,424 1,112,756
Prepaid expenses 58,847 40,388
------------- ------------
Total Current Assets 2,416,180 2,179,650
------------ ------------
Property and Equipment - at cost or contributed value
Manufacturing equipment 7,976,248 7,131,233
Office furniture and fixtures 69,889 62,893
Leasehold improvements 184,939 184,690
------------ ------------
8,231,076 7,378,816
Accumulated depreciation (4,801,695) (4,066,390)
------------ ------------
Net Property and Equipment 3,429,381 3,312,426
------------ ------------
Other Assets
Patents, Trademarks and Noncompetition agreement,
net of accumulated amortization of approximately $9,190 266,500 -
Deposits and other 83,660 77,860
------------ ------------
Total Other Assets 350,160 77,860
------------ ------------
TOTAL ASSETS $ 6,195,721 $ 5,569,936
============ ============
- Continued -
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
AMERICAN AMMUNITION, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, 2004 and 2003
December 31, December 31,
2004 2003
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of leases payable $ - $ 7,841
Customer deposits 440,906 4,100
Accounts payable - trade 936,885 128,865
Accrued salaries and wages 135,970 -
Accrued interest payable 15,000 -
Accrued dividends payable 15,899 11,020
------------ ------------
Total Liabilities 1,544,660 151,826
------------ ------------
Commitments and Contingencies
Mandatory Convertible Debenture 266,365 391,365
------------ ------------
Stockholders' Equity
Preferred stock - $0.001 par value
20,000,000 shares authorized.
1,795,320 shares allocated to Series A
91,700 shares allocated to Series B
1,905,882 shares allocated to Series C 2,010 104
Common stock - $0.001 par value.
300,000,000 shares authorized.
74,851,691 and 66,893,628 shares issued and outstanding 74,852 66,894
Additional paid-in capital 24,472,709 21,588,791
Accumulated deficit (19,989,875) (16,629,044)
------------ ------------
4,559,696 5,026,745
Stock subscription receivable (175,000) -
------------ ------------
Total Stockholders' Equity 4,384,696 5,026,745
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,195,721 $ 5,569,936
============ ============
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, 2004 and 2003
Year ended Year ended
December 31, December 31,
2004 2003
----------------------------
Revenues $ 3,247,368 $ 1,984,997
------------ ------------
Cost of Sales
Materials 2,383,198 1,355,098
Direct Labor 836,386 868,004
Other direct costs and expenses 671,787 340,346
Depreciation 729,295 668,574
------------ ------------
Total Cost of Sales 4,620,666 3,232,022
------------ ------------
Gross Profit (1,373,298) (1,247,025)
------------ ------------
Operating Expenses
Research and development expenses 11,457 4,038
Marketing and promotion expenses 440,248 115,767
Salaries, wages and related expenses 365,633 399,710
Other operating expenses 718,610 567,700
Interest expense 16,005 35,154
Depreciation expense 6,009 4,516
Amortization of intangibles 9,190 -
Compensation expense related to common stock
issuances at less than "fair value" 381,902 882,291
------------ ------------
Total Operating Expenses 1,949,054 2,009,176
------------ ------------
Loss from Operations (3,322,352) (3,256,201)
Other Income (Expense)
Other income (expense) 4,279 63,382
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 (3,318,073) (2,939,395)
Provision for Income Taxes - -
------------ ------------
Net Loss (3,318,073) (2,939,395)
Other Comprehensive Income - -
------------ ------------
Comprehensive Loss (3,318,073) (2,939,395)
Preferred Stock Dividends (42,758) (28,931)
------------ ------------
Net Loss available to Common Shareholders $ (3,360,831) $ (2,968,326)
============ ============
Loss per weighted-average share of common stock outstanding,
computed on net loss - basic and fully diluted $ (0.05) $ (0.05)
============ ============
Weighted-average number of common shares outstanding 71,814,490 61,202,839
============ ============
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, 2004 and 2003
Mandatory Convertible
Preferred Stock Common Stock Additional
---------------- ------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
---------------- ------------------- ---------- ------------- -----------
Balances at January 1, 2003 41,000 $ 41 55,328,166 $55,329 $16,728,123 $(13,660,718) $3,122,775
Issuance of preferred stock for cash 91,700 92 - - 458,408 - 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) (29) 319,000 319 (290) - -
Costs of acquiring convertible debenture - - - - (16,000) - (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 62,700 104 66,893,628 66,894 21,588,791 (16,629,044) 5,026,745
Issuance of preferred stock for cash 1,905,882 1,906 - - 322,094 - 324,000
Issuance of common stock for Cash - - 1,500,000 1,500 1,498,500 - 1,500,000
Less subscription receivable - - - - - - (150,000)
Conversion of debenture - - 4,900,000 4,900 501,100 - 506,000
Less subscription receivable - - - - - - (25,000)
Payment of costs to acquire capital - - 300,000 300 59,700 - 60,000
Less cost of capital - - - - (36,000) - (36,000)
Acquisition of assets - - 1,111,112 1,111 498,889 - 500,000
Payment of preferred stock dividends - - 146,952 147 39,635 - 39,782
Dividends declared on Preferred Stock - - - - - (42,758) (42,758)
Net loss for the year - - - - - (3,318,073) (3,318,073)
--------- ------ ---------- ------- ---------- ------------ ----------
Balances at December 31, 2004 2,009,582 $2,010 74,851,692 $74,852 $24,472,709 $(19,989,875) $4,384,696
========= ====== ========== ======= ========== ============ ==========
Stock subscription receivable at December 31, 2004 $ (175,000)
=========
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, 2004 and 2003
Year ended Year ended
December 31, December 31,
2004 2003
----------------------------
Cash flows from operating activities
Net loss for the year $ (3,318,073) $ (2,939,395)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 744,494 673,090
Bad debt expense 85,490 2,522
Acquisition of inventory with common stock 89,510 -
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" 381,902 882,291
(Increase) Decrease in
Accounts receivable (204,099) (492,069)
Inventory 200,332 (727,942)
Prepaid expenses, deposits and other (24,258) (20,997)
Increase (Decrease) in
Accounts payable and other accrued liabilities 808,023 53,157
Accrued payroll payable 135,970 (18,709)
Accrued interest payable 15,000 -
Customer deposits 436,806 (76,853)
------------ ------------
Net cash provided by (used in) operating activities (648,903) (2,918,329)
------------ ------------
Cash flows from investing activities
Cash received on sale of equipment - 7,900
Purchase of property and equipment (717,462) (288,891)
------------ ------------
Net cash used in investing activities (717,462) (280,991)
------------ ------------
Cash flows from financing activities
Principal paid on long-term debt - (450,000)
Principal paid on long-term capital leases (7,841) (9,507)
Cash received on sale of Preferred Stock 324,000 458,500
Cash received on issuance of Mandatory Convertible Debenture 1,350,000 350,000
Cash received on sale of common stock - 3,260,532
Cash paid to acquire capital - (61,850)
------------ ------------
Net cash provided by financing activities 1,666,159 3,547,675
------------ ------------
INCREASE (DECREASE) IN CASH 299,794 348,355
Cash at beginning of year 505,671 157,316
------------ ------------
Cash at end of year $ 805,465 $ 505,671
============ ============
- 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, 2004 and 2003
Year ended Year ended
December 31, December 31,
2004 2003
----------------------------
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 1,005 $ 26,170
============ ============
Income taxes paid for the period $ - $ -
============ ============
Supplemental disclosure of non-cash
investing and financing activities
Conversion of debt into common stock $ 125,000 $ 208,635
============ ============
Payment of accrued dividends on preferred
stock with common stock $ 37,878 $ 30,511
============ ============
Acquisition of equipment and intangibles
with common stock $ 410,490 $ -
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-8
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Organization and Description of Business
American Ammunition, Inc. (AAI or Company) was incorporated on February 1, 2000
in accordance with the Laws of the State of California. The Company functions as
a holding company providing management oversight services to it's wholly-owned
operating subsidiaries; F&F Equipment, Inc. and Industrial Plating Enterprise
Co.
F&F Equipment, Inc.(F&F) was incorporated on October 4, 1983 in accordance with
the Laws of the State of Florida. F&F is engaged in the design, manufacture and
international sales of small arms ammunition. F&F has conducted its business
operations under the assumed name of "American Ammunition" since its inception.
Industrial Plating Enterprise Co. (IPE), which was incorporated and commenced
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
small arms 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. All activities of IPE since it's inception have been dedicated to
the needs and demands of F&F.
Note B - Preparation of Financial Statements
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.
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".
F-9
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
The Company ships all product on an FOB-Plant, "as-is" 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 and the Company
has no remaining performance obligations related to the sale. The Company
sells all products with "no right of return" by the purchaser for any
factor other than defects in the product's production.
On rare occasion, the Company may elect to accept product returns from
customers on a case-by-case basis to offset unpaid accounts receivable.
These situations are a "last case" scenario and are initiated by senior
management through negotiations with the respective customer.
3. Inventory
Inventory consists of raw materials, work-in-process and finished goods
related to the production and sale of small arms ammunition. Inventory is
valued at the lower of cost or market using the first-in, first-out method.
4. Property, plant and equipment
Property and equipment are recorded at historical cost. These costs are
depreciated over the estimated useful lives of the individual assets using
the straight-line method, generally three to ten years.
Gains and losses from disposition of property and equipment are recognized
as incurred and are included in operations.
5. Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. At December 31, 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.
F-10
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note C - Summary of Significant Accounting Policies - Continued
5. Income Taxes - continued
As of December 31, 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.
As of December 31, 2004 and 2003, 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.
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.
F-11
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note E - Inventory
As of December 31, 2004 and 2003, inventory consisted of the following
components:
December 31, December 31,
2004 2003
---------------------------
Raw materials $ 522,585 $ 539,474
Work in process 306,360 360,450
Finished goods 83,479 212,832
---------- -----------
Totals $ 912,424 $ 1,112,756
========== ===========
Note F - Property and Equipment
Property and equipment consist of the following components:
December 31, December 31, Estimated
2004 2003 useful life
------------------------------------------
Manufacturing equipment $ 7,745,112 $ 7,131,233 3-10 years
Office furniture and fixtures 69,889 62,893 3- 7 years
Leasehold improvements 184,939 184,690 8-20 years
------------ ------------
7,999,940 7,378,816
Accumulated depreciation (4,762,074) (4,066,390)
------------ -----------
Net property and equipment $ 3,237,866 $ 3,312,426
============ ============
Total depreciation expense charged to operations for the years ended December
31, 2004 and 2003 was approximately $717,349 and $673,090, respectively.
Note G - Capital Leases Payable
Capital leases payable consist of the following as of December 31, 2004 and
2003, respectively:
December 31, December 31,
2004 2003
----------------------------
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
occurred between September 2004 and December 2004. $ - $ 7,841
Less current maturities - (7,841)
----------- -----------
Long-term portion $ - $ -
=========== ===========
F-12
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note H - Convertible Debenture
The Company 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.
As of December 31, 2004, the outstanding balance on the convertible debenture is
approximately $266,365 and we have approximately 2,663,650 warrants outstanding.
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. As of December 31, 2004, the
warrant is exercisable into 2,663,650 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 the Company 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.
LaJolla 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 exceed 4.9% of the then issued and outstanding shares of common
stock.
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.
F-13
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note H - Convertible Debenture - continued
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.
On various dates between January 1, 2004 and December 31, 2004, the Debenture
Holder elected to convert an aggregate $150,000, through 6 separate
transactions, in outstanding Debenture principal into registered common stock.
This election caused the Company to issue 4,900,000 shares of 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 1,500,000 shares of the Company's common stock for gross proceeds of
$1,500,000. As of December 31, 2004, an aggregate of 1,000,000 shares of the
Company's common stock have been issued by the Company and are being held in
escrow by the Company's counsel pending receipt of the final $150,000 from the
Debenture Holder.
Note I - Preferred Stock Transactions
Preferred stock consists of the following as of December 31, 2004 and 2003,
respectively:
December 31, 2004 December 31, 2003
------------------ ------------------
# shares value # shares value
--------- -------- --------- --------
Series A Cumulative
Convertible Preferred Stock 12,000 $ 60,000 12,000 $ 60,000
Series B Cumulative
Convertible Preferred Stock 91,700 458,500 91,700 458,500
Series C Convertible Preferred Stock 1,905,882 324,000 - -
--------- -------- -------- --------
2,009,582 $842,500 103,700 $518,500
========= ======== ======== ========
Series A Convertible Preferred Stock
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.
F-14
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note I - Preferred Stock Transactions - Continued
Series A Convertible Preferred Stock - continued
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.
Series B Convertible Preferred 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.
Series C Convertible Preferred Stock
In November 2004, the Company sold 1,905,882 shares of Series C Convertible
Preferred Stock to an existing shareholder and officer of the Company in a
private transaction pursuant to Section (4)2 of the Securities Act of 1933 for
gross proceeds of approximately $324,000. No underwriter was used in conjunction
with this transaction.
The Series C Convertible Preferred Stock provides for dividends at a rate of
4.0% per annum, to be declared and paid monthly in either cash or stock at the
discretion of the Company.
The Series C Preferred Stock is convertible at a rate of $0.18 per share into
1,800,000 shares of the Company's common stock at any time at the option of the
holder, subject to adjustments for customary anti-dilution events.
F-15
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - 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.
In February 2003, the Company issued 384,615 shares of restricted, unregistered
common stock for cash proceeds of approximately $100,000. These sales were made
at a price of $0.26 per share, which was in excess of the discounted "fair
value" of the Company's common stock based on the quoted closing price of the
Company's common stock on the date of the respective transaction. The proceeds
of this transaction were used to reduce the Company's outstanding long-term
debt.
In March 2003, the Company issued 972,222 shares of restricted, unregistered
common stock for cash proceeds of approximately $350,000. These sales were made
at a price of $0.36 per share, which was in excess of the discounted "fair
value" of the Company's common stock based on the quoted closing price of the
Company's common stock on the date of the respective transaction. The proceeds
of this transaction were used to reduce the Company's outstanding long-term
debt.
In March 2003, the Company issued an aggregate 966,608 shares of restricted,
unregistered common stock to the Holder of the Company's 8.0% Convertible
Debenture upon notice of conversion of $35,000 of outstanding principal and
exercise of a portion of the outstanding warrant to purchase 350,000 shares of
common stock. This transaction was valued at $385,000, or approximately $0.40
per share, which was in excess of the discounted "fair value" of the Company's
common stock based on the quoted closing price of the Company's common stock on
the date of the respective transaction. The cash proceeds of this transaction
were used to provide working capital and support operations.
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.
F-16
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Common Stock Transactions - Continued
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.
As of December 31, 2004, the Company has received $100,000 in cash on the
warrant exercise and has not applied the debt reduction portion of this
transaction.
F-17
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Common Stock Transactions - Continued
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 was less than the closing price on the
date of the respective transaction resulted in a charge to operations of
approximately $24,000. 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.
On October 19, 2004, the Company issued 1,111,112 shares of restricted,
unregistered common stock to acquire certain assets valued at an aggregate
$500,000. The assets consist principally of equipment (approximately $134,000),
inventory (approximately $89,500) and patents and a covenant not-to-compete
(approximately $276,500).
In November 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 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 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 $5,735, including applicable sales
taxes. The Company is responsible for all utilities and maintenance expenses.
The lease expires on December 1, 2009 and contains a clause that upon
expiration, the Company and the controlling shareholder shall renegotiate the
annual rental amount.
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, 2004 and 2003.
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.
F-18
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note L - Rental Commitments - Continued
Future minimum rental payments on the above leases are as follows:
Year ended
December 31, Amount
------------------------
2005 $166,974
2006 117,244
2007 72,643
2008 68,815
2007 68,815
--------
Totals $494,491
========
For the respective years ended December 31, 2004, the Company paid an aggregate
of $131,804 and $87,826 for rent under these agreements.
Note M - Income Taxes
The components of income tax (benefit) expense for the years ended December 31,
2004 and 2003, respectively, are as follows:
Year ended Year ended
December 31, December 31,
2004 2003
---------------------------
Federal:
Current $ - $ -
Deferred - -
----------- ----------
- -
----------- ----------
State:
Current - -
Deferred - -
----------- ----------
- -
----------- ----------
Total $ - $ -
=========== ==========
As of December 31, 2004, the Company has a net operating loss carryforward of
approximately $7,850,000 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.
(Remainder of this page left blank intentionally)
F-19
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note M - Income Taxes - Continued
The Company's income tax expense (benefit) for the years ended December 31, 2004
and 2003, respectively, differed from the statutory federal rate of 34 percent
as follows:
Year ended Year ended
December 31, December 31,
2004 2003
--------------------------
Statutory rate applied to loss before income taxes $(1,128,000) $ (999,000)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Other, including reserve for deferred tax asset 1,128,000 999,000
----------- -----------
Income tax expense $ - $ -
============ ===========
Temporary differences, consisting primarily of the net operating loss
carryforward and 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, 2004 and 2003, respectively:
Year ended Year ended
December 31, December 31,
2004 2003
--------------------------
Deferred tax assets - long-term
Net operating loss carryforwards $ 2,669,000 $ 2,900,000
Deferred tax liabilities - long-term
Statutory depreciation differences (690,000) (250,000)
------------ -----------
1,979,000 2,650,000
Less valuation allowance (1,979,000 (2,650,000)
------------ -----------
Net Deferred Tax Asset $ - $ -
============ ===========
During the years ended December 31, 2004 and 2003, respectively, the valuation
allowance increased (decreased) by approximately $(671,000)and $656,000.
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, 2004 December 31, 2003
----------------- -----------------
Amount % of total Amount % of total
--------- ---------- --------- ----------
Domestic
Commercial
Customer A $ - - $ 524,210 24.96
Customer B - - 463,423 22.07
Customer C - - 188,546 8.98
Others 1,827,104 56,26 348,022 16.58
--------- ---------- --------- ----------
1,827,104 56,26 1,524,201 72.59
--------- ---------- --------- ----------
(Remainder of this page left blank intentionally)
F-20
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note N - Revenue Concentrations - Continued
Year ended Year ended
December 31, 2004 December 31, 2003
----------------- -----------------
Amount % of total Amount % of total
--------- ---------- --------- ----------
Governmental
Customer D - - 421,290 20.06
Customer E 698,976 21.52 - -
Others 8,905 0.28 23,663 1.12
--------- ---------- --------- ----------
707,881 21.80 444,953 21.18
--------- ---------- --------- ----------
Foreign
Governmental
Customer F 684,340 21.07 - -
Others 28,043 0.87 130,710 6.23
--------- ---------- --------- ----------
712,383 21.94 130,710 6.23
--------- ---------- --------- ----------
Totals $3,247,368 100.00 $2,099,864 100.00
--------- ---------- --------- ----------
Note O - Selected Financial Data (Unaudited)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2004 and 2003, respectively.
Quarter ended Quarter ended Quarter ended Quarter ended Year ended
March 31, June 30, September 30, December 31, December 31,
------------------------------------------------------------------------------------------------------------
Calendar 2004
Revenues - net $ 281,507 $ 568,785 $ 861,988 $ 1,535,088 $ 3,247,368
Gross profit $ (423,626) $ (676,300) $ 377,181 $ (650,553) $(1,373,298)
Net earnings after
provision for
income taxes $(1,188,358) $(1,155,307) $ 9,552 $ (983,960) $(3,318,073)
Basic and fully diluted
earnings per share $ (0.02) $ (0.02) $ 0.00 $ (0.01) $ (0.05)
Weighted average
number of shares
issued and outstanding 67,769,150 71,148,043 73,673,416 74,616,136 71,814,490
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
F-21