As filed with the Securities and Exchange Commission on May 5, 2005 An Exhibit
List can be found on page II-11.
Registration No. 333-122056
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
Amendment No. 2 to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AMERICAN AMMUNITION, INC.
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(Name of small business issuer in its charter)
California 3990 91-2021594
--------------------------- ---------------------------- ----------------------
State or other Incorporation (Primary Standard Industrial (I.R.S. Employer
or Organization) Classification Code Number) Identification No.)
3545 NW 71st Street
Miami, Florida 33147
305-835-7400
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(Address and telephone number of principal executive
offices and principal place of business)
Andres F. Fernandez, Chief Executive Officer
AMERICAN AMMUNITION, INC.
3545 NW 71st Street
Miami, Florida 33147
305-835-7400
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(Name, address and telephone number of agent for service)
Copies to:
Gregory Sichenzia, Esq.
Stephen M. Fleming, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Flr.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
Title of each class of Amount to be Proposed Proposed Amount of
securities to be registered (1) maximum maximum registration fee
registered offering aggregate
price per offering price
share
-------------------------- --------------- ------------ ---------------- ----------------------
Common stock issuable
upon conversion of
debentures 71,778,358(2) $ .10(3) $ 7,177,835.79 $ 844.83
Common Stock issuable
upon exercise of warrants 2,663,650(4) $1.00(5) $ 2,663,650.00 $ 313.51
Total 74,442,008 $1,158.34*
-------------------------- --------------- ------------ ---------------- ----------------------
*Previously paid $1,120.99.
(1) Includes shares of our common stock, par value $0.001 per share, which may
be offered pursuant to this registration statement, which shares are
issuable upon conversion of convertible debentures and the exercise of
warrants held by the selling stockholder. In addition to the shares set
forth in the table, the amount to be registered includes an indeterminate
number of shares issuable upon exercise of the warrants, as such number may
be adjusted as a result of stock splits, stock dividends and similar
transactions in accordance with Rule 416. The number of shares of common
stock registered hereunder represents a good faith estimate by us of the
number of shares of common stock issuable upon conversion of the debentures
and upon exercise of the warrants. For purposes of estimating the number of
shares of common stock to be included in this registration statement, we
calculated a good faith estimate of the number of shares of our common
stock that we believe will be issuable upon conversion of the debentures
and upon exercise of the warrants to account for market fluctuations, and
antidilution and price protection adjustments, respectively. Should the
conversion ratio result in our having insufficient shares, we will not rely
upon Rule 416, but will file a new registration statement to cover the
resale of such additional shares should that become necessary. In addition,
should a decrease in the exercise price as a result of an issuance or sale
of shares below the then current market price, result in our having
insufficient shares, we will not rely upon Rule 416, but will file a new
registration statement to cover the resale of such additional shares should
that become necessary.
(2) Includes a good faith estimate of the shares underlying convertible
debentures to account for market fluctuations.
3
(3) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, using the
average of the high and low price as reported on the Over-The-Counter
Bulletin Board on April 26, 2005, which was $.10 per share.
(4) Includes a good faith estimate of the shares underlying warrants
exercisable at $1.00 per share to account for antidilution and price
protection adjustments.
(5) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933, using the
exercise price of $1.00.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
[Balance of this page intentionally left blank.]
4
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED MAY 5, 2005
AMERICAN AMMUNITION, INC.
74,442,008 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholder of up to
74,442,008 shares of our common stock, including up to 71,778,358 shares of
common stock underlying convertible debentures and up to 2,663,650 issuable upon
the exercise of common stock purchase warrants. The selling stockholder is
required to convert the convertible debenture and exercise the common stock
purchase warrant on a concurrent basis. The combined conversion of the
convertible debenture and the exercise of the common stock purchase warrant
concurrently will result in the issuance of shares of common stock at a 24%
discount to the market. The selling stockholder may sell common stock from time
to time in the principal market on which the stock is traded at the prevailing
market price or in negotiated transactions. The selling stockholder may be
deemed underwriters of the shares of common stock, which they are offering. We
will pay the expenses of registering these shares.
Our common stock is registered under Section 12(g) of the Securities Exchange
Act of 1934 and is listed on the Over-The-Counter Bulletin Board under the
symbol "AAMI". The last reported sales price per share of our common stock as
reported by the Over-The-Counter Bulletin Board on May 4, 2005, was $.08.
Investing in these securities involves significant risks. See "Risk Factors"
beginning on page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _______, 2005.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by American
Ammunition, Inc., with the Securities and Exchange Commission. The selling
stockholders may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the sale
is not permitted.
5
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the notes to the financial
statements.
AMERICAN AMMUNITION, INC.
We acquired American Ammunition Inc. in September 2001 and since such
acquisition are engaged principally in the manufacture and sale of ammunition
for wholesale sales. We are an established small arms munitions manufacturer
with an existing distribution network. The ammunition market is dominated by
three major manufacturers, however, we believe we are poised to enter and impact
the growing ammunition market with our manufacturing equipment and techniques.
We are an approved Department of Defense contractor.
We began in 1983 as an assembler and re-loader of ammunition in several
calibers. As we grew, management realized that the only way to break into the
industry was to become a vertically integrated manufacturer. Our founders
invested heavily in research and development, equipment, and technology and
focused on increasing our market share. As a result, we continued manufacturing
our initial calibers along with special order ammunition for the Department of
Defense. Further streamlining of the operations resulted in the manufacture of
the current ammunition product line: 9 millimeter, .45 automatic, .380
automatic, .32 automatic, .40 Smith and Wesson, 38 Special, 30 carbine, 223
Remington, 38 Super, 32 Smith and Wesson Long, 44 Special and 44 Magnum. We have
identified these products as having the largest share of the market for the next
several years.
We have incurred losses and experienced negative operating cash flow since our
formation. For our fiscal years ended December 31, 2004 and 2003, we had a net
loss of $3,318,073 and $2,939,395, respectively. We expect to continue to incur
significant operating expenses as we maintain our current line of ammunitions
and continue research and development toward improving projectile quality and
performance. Our operating expenses have been and are expected to continue to
outpace revenues and result in significant losses in the near term. We may never
be able to reduce these losses, which will require us to seek additional debt or
equity financing.
Our principal executive offices are located at 3545 NW 71st Street, Miami,
Florida 33147 and our telephone number is (305) 835-7400. We are incorporated in
the State of California.
6
The Offering
Common stock
offered by
selling
stockholder
Up to 74,442,008 shares, including up to 71,778,358 shares
of common stock underlying convertible debentures in the
amount of $266,365 and up to 2,663,650 issuable upon the
exercise of common stock purchase warrants at an exercise
price of $1.00 per share, based on current market prices and
assuming full conversion of the convertible debentures and
the full exercise of the warrants (includes a good faith
estimate of the shares underlying convertible debentures to
account for market fluctuations). This number represents
49.51% of our then current outstanding stock.
Common stock to
be outstanding
after the
offering
Up to 150,349,308 shares including 75,907,300 shares of
common stock presently outstanding, 71,778,358 shares
issuable upon conversion of the convertible debenture and
2,663,650 shares issuable upon conversion of our warrants
which are exercisable concurrently with the convertible
debenture
Use of proceeds
We will not receive any proceeds from the sale of the common
stock
However, we will receive up to $2,663,650 upon exercise of
the warrants by the selling stockholder. We expect to use
the proceeds received from the exercise of the warrants, if
any, for general working capital purposes. We received an
aggregate of $600,000 in connection with the issuance of the
convertible debenture to the selling stockholder. We used
the $600,000 for the general working capital purposes and
the payment of professional fees.
Over-The-Counter
Bulletin Board
Symbol AAMI
-------------------------------------------
The above information regarding common stock to be outstanding after the
offering is based on 75,907,300 shares of common stock outstanding as of April
26, 2005 and assumes the subsequent conversion of our issued convertible
debentures and exercise of warrants by our selling stockholder.
7
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with La Jolla Cove Investors, Inc. ("La Jolla") on October 4,
2002 for the sale of (i) $250,000 in convertible debentures and (ii) warrants to
buy 2,500,000 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 and a
warrant to purchase 3,500,000 shares of common stock. We currently have $266,365
of our convertible debentures and 2,663,650 warrants still outstanding. This
prospectus relates to the resale of the common stock underlying these
convertible debentures and warrants.
The debentures bear interest at 8%, mature on June 30, 2006, and are convertible
into our common stock, at the selling stockholder's option except for the four
conversions immediately following the effective date of this registration
statement, which must be submitted to us on a weekly basis. The convertible
debentures are convertible into the number of our shares of common stock equal
to the dollar amount of the debentures being converted multiplied by 11, less
the product of the discounted market price multiplied by 10 times the dollar
amount of the debentures being converted, which is divided by the discounted
market price. The discounted market price for the convertible debentures is the
lesser of (i) $1.00 or (ii) seventy six percent of the average of the volume
weighted average prices of our common stock during the five 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.
La Jolla has contractually committed to convert not less than 5.0% and not more
than 10.0% of the debentures on a monthly basis. In addition, La Jolla is
obligated to exercise the warrant concurrently with the submission of a
conversion notice. Upon conversion of the convertible debenture, the selling
stockholder must concurrently exercise the warrant into shares of our common
stock equal to ten times the dollar amount of the debenture being converted
divided by the exercise price, which is $1.00. Currently, the warrant is
exercisable into 2,663,650 shares of common stock at an exercise price of $1.00
per share.
The aggregate effect of the concurrent conversion of the debentures at the
applicable conversion price and the exercise of the warrants at $1.00 per share
will result in the issuance of shares of common stock to the selling stockholder
at a 24% discount to the market. For example, if the selling stockholder
converts $10,000 of the debenture on April 26, 2005, we are required to issue
1,347,368 shares assuming a market price of $.10 and a conversion price of
$.076. However, the selling stockholder is also required to convert the warrant
into 100,000 shares of common stock or ten times the dollar amount of the
debenture being converted at $1.00 per share. The end result is that we will
receive $110,000 that has been previously funded through the debenture or that
will be funded upon exercise of the warrant and we are required to issue
1,447,368 shares of common stock.
8
In December 2004, we entered into an addendum to the convertible debenture and
warrant whereby we agreed to the following:
* the discount multiplier was reduced from eighty percent to seventy six
percent;
* within five business days after this registration statement being
declared effective, La Jolla is required to submit a debenture
conversion in the amount of $10,000 and every ten business days
thereafter La Jolla shall submit three additional debenture conversion
in the amount of $10,000 each;
* within five business days after this registration statement being
declared effective, La Jolla shall wire $400,000 to us as a prepayment
towards the exercise of its warrant (such prepayment shall be applied
towards future mandatory exercises of La Jolla's warrant); and
* immediately following the sale of all shares held by La Jolla in
connection with the debenture conversions in the aggregate amount of
$40,000, La Jolla shall wire $275,000 to us as a prepayment towards
the exercise of its warrant and shall submit a debenture conversion in
the amount of $6,250 on the first business day of each month until the
debenture is no longer outstanding.
* the selling stockholder agreed to dismiss, without prejudice, the
lawsuit entitled "La Jolla Cove Investors, Inc. v. American
Ammunition, Inc." filed in San Diego Superior Court as case number
GIC836693.
* in December 2004, we deposited 1,500,000 shares of common stock with
an escrow agent and La Jolla submitted a $10,000 conversion of the
debenture and provided us with $100,000 as a prepayment for the
warrant exercise. Upon completion of the sale by La Jolla of all
shares received in connection with this exercise and conversion, La
Jolla made a payment to our company equal to 76% of the net proceeds
from the sale of the shares less $100,000.
The selling stockholder has contractually agreed to restrict its ability to
convert or exercise its warrants and receive shares of our common stock such
that the number of shares of common stock held by them and their affiliates
after such conversion or exercise does not exceed 4.9% of the then issued and
outstanding shares of common stock. See the "Selling Stockholders" and "Risk
Factors" sections for a complete description of the convertible debentures.
9
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
Risks Relating to Our Business:
We may never become profitable and continue as a going concern because we have
had losses since our inception.
We may never become profitable and continue as a going concern because we have
incurred losses and experienced negative operating cash flow since our
formation. We have incurred losses and experienced negative operating cash flow
since our formation. For our fiscal years ended December 31, 2004 and 2003, we
had a net loss of $3,318,073 and $2,939,395, respectively. We expect to continue
to incur significant operating expenses as we maintain our current line of
ammunitions and continue research and development toward improving projectile
quality and performance. Our operating expenses have been and are expected to
continue to outpace revenues and result in significant losses in the near term.
We may never be able to reduce these losses, which will require us to seek
additional debt or equity financing. If such financing is available you may
experience significant additional dilution.
There may exist an uncertainty as to our continuation as a going concern.
Our audited financial statements for the fiscal year ended December 31, 2004
reflect an accumulated deficit of approximately $19,989,875, since our
inception, working capital of approximately $872,000, and stockholders' equity
of $4,384,696.
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
10
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 - w maybe viewed as a high market
risk
As a result, we may not have adequate capital to implement future expansions,
maintain our current levels of operation or to pursue strategic acquisitions.
Our failure to obtain sufficient additional financing could result in the delay
or abandonment of some or all of our development, expansion and expenditures,
which could harm our business and the value of our common stock.
Our competitive position may be harmed if we fail to respond to rapid changes in
the market for small arms ammunitions.
Our competitive position may be harmed if we fail to respond to rapid changes in
the market for small arms ammunitions. Our future success will depend
significantly on our ability to develop and market new products that keep pace
with technological developments and evolving industry standards for hand gun and
rifle ammunition. Our delay or failure to develop or acquire technological
improvements, adapt our products to technological changes or provide higher
quality product lines that appeals to our customers may cause us to lose
customers and may prevent us from generating revenue which could ultimately
cause us to cease operations.
Our revenues may decrease from production delays due to fire or explosive
incidents.
Our revenues may decrease from production delays due to fire or explosive
incidents. Our ammunition products, involve the manufacture and/or handling of a
variety of explosive and flammable materials. This manufacturing and/or handling
may result in incidents that will temporarily shut down or otherwise disrupt our
manufacturing, causing production delays and resulting in liability for
workplace injuries and fatalities. We cannot assure you that we will not
experience these types of incidents in the future or that these incidents will
not result in production delays, which can lead to a reduction in revenues.
We may incur substantial costs in complying with environmental laws and may be
subject to substantial liability resulting from the use of hazardous substances
or required cleanup of contaminated sites.
Our operations and use of real property are subject to a number of federal,
state and local environmental laws and regulations which, among other things,
require us to obtain permits to operate and to install pollution control
equipment and regulate the generation, storage, handling, transportation,
treatment and disposal of hazardous and solid wastes. Our operations, as well as
historical operations at our sites, also subject us to liability for the cleanup
of releases of hazardous substances. Environmental laws and regulations change
frequently, and it is difficult to predict whether and to what extent we may be
subject to liability for compliance with environmental laws and regulations.
11
Our business operations will be harmed if we are unable to obtain additional
funding.
Our business operations will be harmed if we are unable to obtain additional
funding outside of the La Jolla financing. We believe that our available
short-term assets, investment income and financing arrangement with La Jolla
will be sufficient to meet our operating expenses and capital expenditures
through the end of fiscal year 2005. We do not know if additional financing will
be available when needed, or if it is available, if it will be available on
acceptable terms. Insufficient funds may prevent us from implementing our
business strategy or may require us to delay, scale back or eliminate certain
contracts for the provision of our technology and products.
Our competitors may misappropriate our intellectual property because we have
only one trademark and two patents.
We attempt to protect our limited proprietary property through trademark, trade
secret, nondisclosure and confidentiality measures. Such protections, however,
may not preclude competitors from developing similar technologies. Any inability
to adequately protect our proprietary technology could harm our ability to
compete.
Our future success and ability to compete depends in part upon our proprietary
technology and our trademark, which we attempt to protect with a combination of
trademark and confidentiality procedures and contractual provisions. These legal
protections afford only limited protection and are time-consuming and expensive
to obtain and/or maintain. Further, despite our efforts, we may be unable to
prevent third parties from infringing upon or misappropriating our intellectual
property.
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 April 26, 2005, we had 75,907,300 shares of common stock issued and
outstanding and convertible debentures outstanding that may be converted into an
estimated 35,889,179 shares of common stock at current market prices, and
outstanding warrants to purchase 2,663,650 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 formula feature of our convertible
debentures could require us to issue a substantially greater number of shares,
which will cause dilution to our existing stockholders.
12
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 in the amount of $266,365 (excluding accrued interest), based on
market prices 25%, 50% and 75% below the market price, as of April 26, 2005 of
$0.10.
Effective Number % of
% Below Price Per Conversion of Shares Outstanding
Market Share Price Issuable Stock
------ ----- ------ -------- -----
25% $.0750 $.0570 48,740,122 39.10%
50% $.0500 $.0380 74,442,008 49.51%
75% $.0250 $.0190 151,547,666 66.63%
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. In addition,
as the selling stockholder converts its convertible debenture it is required to
concurrently exercise its warrant which will result in the issuance of
additional shares of common stock. The selling stockholder's warrant is
exercisable into shares of our common stock equal to ten times the dollar amount
of the debenture being converted divided by the exercise price, which is $1.00.
The continuously adjustable conversion formula 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 the number of our shares of
common stock equal to the dollar amount of the debentures being converted
multiplied by 11, less the product of the discounted market price multiplied by
10 times the dollar amount of the debentures being converted, which is divided
by the discounted market price. The discounted market price for the convertible
debentures is the lesser of (i) $1.00 or (ii) seventy six percent of the average
of the lowest volume weighted average prices of our common stock during the five
trading days prior to the conversion. In addition, as the selling stockholder
converts its convertible debenture it is required to concurrently exercise its
warrant which will result in the issuance of additional shares of common stock.
The selling stockholder's warrant is exercisable into shares of our common stock
equal to ten times the dollar amount of the debenture being converted divided by
the exercise price, which is $1.00. The significant downward pressure on the
price of the common stock as the selling stockholder converts and sells material
amounts of common stock could encourage short sales by investors. This could
place further downward pressure on the price of the common stock. The selling
stockholder could sell common stock into the market in anticipation of covering
the short sale by converting their securities, which could cause the further
downward pressure on the stock price. In addition, not only the sale of shares
issued upon conversion or exercise of debentures, warrants and options, but also
the mere perception that these sales could occur, may adversely affect the
market price of the common stock.
13
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 4.9% 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 This
Prospectus May Not Be Adequate And We May Be Required to File A Subsequent
Registration Statement Covering Additional Shares. If The Shares We Have
Allocated And Are Registering Herewith Are Not Adequate And We Are Required To
File An Additional Registration Statement, We May Incur Substantial Costs In
Connection Therewith.
Based on our current market price and the potential decrease in our market price
as a result of the issuance of shares upon conversion of the convertible
debentures, we have made a good faith estimate as to the amount of shares of
common stock that we are required to register and allocate for conversion of the
convertible debentures. We have allocated and registered 71,778,358 shares to
cover the conversion of the convertible debentures. In the event that our stock
price decreases, the shares of common stock we have allocated for conversion of
the convertible debentures and are registering hereunder may not be adequate. If
the shares we have allocated to the registration statement are not adequate and
we are required to file an additional registration statement, we may incur
substantial costs in connection with the preparation and filing of such
registration statement.
If We Are Required for any Reason to Repay Our Outstanding Convertible
Debentures, We Would Be Required to Deplete Our Working Capital, If Available,
Or Raise Additional Funds. Our Failure to Repay the Convertible Debentures, If
Required, Could Result in Legal Action Against Us, Which Could Require the Sale
of Substantial Assets.
We entered into a Securities Purchase Agreement with La Jolla on October 4, 2002
for the sale of (i) $250,000 in convertible debentures and (ii) warrants to buy
2,500,000 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
14
allocated towards the principal balance of our convertible debentures and a
warrant to purchase 3,500,000 shares of common stock. As of April 26, 2005,
$266,365 of the debenture and warrants exercisable into 2,663,650 shares of
common stock 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 31.3% 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 April 26, 2005, our executive officers and directors, which primarily
includes the Fernandez family, beneficially own approximately 31.3% 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
15
stockholder approval, including the election of directors and approval of
significant corporate transactions. In addition, sales of significant amounts of
shares held by our directors and executive officers, or the prospect of these
sales, could adversely affect the market price of our common stock. Management's
stock ownership may discourage a potential acquirer from making a tender offer
or otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock
price.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require:
* that a broker or dealer approve a person's account for transactions in
penny stocks; and
* the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny
stock to be purchased.
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
16
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by the selling stockholder. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
will receive the sale price of any common stock we sell to the selling
stockholder upon exercise of the warrants. We expect to use the proceeds
received from the exercise of the warrants, if any, for general working capital
purposes.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol "AAMI".
For the periods indicated, the following table sets forth the high and low bid
prices per share of common stock. These prices represent inter-dealer quotations
without retail markup, markdown, or commission and may not necessarily represent
actual transactions.
Quarter Ended High ($) Low ($)
------------------------ ------------- --------------
March 31, 2004 .17 .09
December 31, 2004 .24 .15
September 30, 2004 .27 .17
June 30, 2004 .42 .17
March 31, 2004 .50 .27
December 31, 2003 .42 .22
September 30, 2003 .55 .37
June 30, 2003 .85 .42
March 31, 2003 .78 .53
December 31, 2002 .47 .38
September 30, 2002 .57 .31
June 30, 2002 .65 .36
March 31, 2002 .81 .33
------------------------ ------------- --------------
HOLDERS
As of April 26, 2005, we had 178 shareholders of record of our 75,907,300
outstanding shares of common stock. The number of record holders was determined
from the records of our transfer agent and does not include beneficial owners of
common stock whose shares are held in the names of various security brokers,
dealers, and registered clearing agencies. The transfer agent of our common
stock is Atlas Stock Transfer Corporation, 5899 South State Street, Salt Lake
City, Utah 84107.
17
DIVIDENDS
We have never declared or paid any cash dividends on our common stock. We do not
anticipate paying any cash dividends to stockholders in the foreseeable future.
In addition, any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon our financial
condition, results of operations, capital requirements, and such other factors
as the Board of Directors deem relevant.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Some of the information in this Form SB-2 contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
* discuss our future expectations;
* contain projections of our future results of operations or of our
financial condition; and * state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there may
be events in the future that we are not able to accurately predict or over which
we have no control. Our actual results and the timing of certain events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under "Risk Factors,"
"Business" and elsewhere in this prospectus. See "Risk Factors."
Overview
We were incorporated on February 1, 2000 in the State of California as
FirsTelevision.com. We subsequently changed our corporate name to FBI Fresh
Burgers International which unsuccessfully marketed a business plan concept of a
national "fast food" restaurant chain.
We are a holding company with two operating subsidiaries:
* F&F Equipment, Inc. ("F&F"); and
* Industrial Plating Enterprise Co.
F&F was incorporated on October 4, 1983 under the laws of the State of Florida.
F&F was formed to engage principally in the import, export, retail and wholesale
of firearms equipment, ammunition and other devices. F&F conducts its business
operations under the assumed name of "American Ammunition."
In June 2002, we formed a wholly owned subsidiary, Industrial Plating Enterprise
Co., which started production on June 14, 2002. Industrial Plating is a fully
licensed and approved electrochemical metallization facility with significant
capacity for processing our line of projectiles as well as other products and
services while employing environmentally sound water conservation and proven
waste treatment techniques.
18
During the third quarter of 2003, our operations experienced the negative impact
of a lower than anticipated or budgeted purchases by Ellett Brothers, a
significant customer.
However, during this same time period, we entered into a strategic alliance with
Israel Military Industries ("IMI"), an entity owned by the State of Israel, for
the cross-production and sale of various small arms ammunition. We believe that
this alliance may greatly expand our catalog of products and assist in utilizing
existing production capacity.
In prior periods, we executed a private labeling agreement with Century
International Arms, Inc. ("Century"). Under this agreement, we were to produce
our standard catalog of small arms ammunition plus one specialty small arms
cartridge to Century's specifications for packaging in Century's designated
labeling. This agreement required no modifications to our production line and
did not require the addition of supplemental personnel or equipment. We made an
initial shipment under this agreement to Century during December 2003. In
early-January 2004, we began to experience problems with Century regarding
Century's compliance with their performance criteria under this agreement.
During the first quarter of 2004, Century defaulted on certain agreed- upon
payment schedules on merchandise sold during December 2003. In repayment of the
outstanding trade debt, we accepted unscheduled product returns as payment of
the trade debt. As a result of these issues, we recognized a charge to
operations of approximately $28,000 on our business activity with Century. The
returned merchandise was repackaged and is resalable by our company to other
customers. As of June 30, 2004, we cancelled this agreement and we are
contemplating litigation against Century for breach of contractual obligations
under this agreement.
Additionally, we have been awarded three separate contracts from various
departments of the U. S. Government. Each contract is for an initial term of one
year (commencing between April 24, 2003 and September 30, 2003) with four
successive individual one-year extension options, of which the first extension
period has been exercised. The contracts are summarized as follows:
Contract 1 U. S. Department of State. Minimum annual volume of approximately
100,000 rounds of military grade small arms ammunition. Maximum
annual volume of approximately 5,000,000 rounds. Maximum volume
may be increased at the discretion of the Contracting Officer and
respective utilization requirements. We have received firm orders
for 2,265,000 rounds of ammunition under this contract and have
approximately 1,265,000 rounds ready for shipment. The ammunition
under this contract will be subject to the strategic alliance
with IMI.
Contract 2 U. S. Department of Energy. This contract covers seven separate
products in our standard catalog of products. The U. S.
Department of Energy is obligated to purchase an aggregate of
4,549,000 rounds of ammunition under this contract.
19
Contract 3 U. S. Department of Homeland Security. This contract covers four
separate products being introduced to our catalog through the
strategic alliance with IMI and requires no modifications to our
production facilities or additions to the labor force. The
minimum annual volume is 1,000 rounds of each product and a
maximum annual volume of 9,600,000 rounds of two products and
36,000,000 of the remaining two products.
--------------------------------------
We have received purchase orders against these contracts; however, due to delays
in receiving the initial purchase orders and the unpredictability of subsequent
reorder cycles, we are unable to fully anticipate or predict the future impact
of these contracts. We remain in negotiation and to prepare bids on other
contracts from these and other U. S. Governmental agencies.
During the first quarter of 2004, we commenced a direct solicitation program for
our "dealer direct" sales program. As this endeavor has received a very positive
initial response from the qualified retail resellers of our product, the
announcement of this program had a significantly detrimental impact on our
relationship with wholesale distributors and, accordingly, had a significant
negative impact on first quarter 2004 sales. We continue to experience increases
in customer demand, order size and reorder quantities in this program by smaller
"single store" owner/operators of retail outlets selling our products. During
November 2004, we qualified our 1,000th dealer under this program for direct
sales and we anticipate that the overall Calendar 2004 sales volume through the
"dealer direct" program may well equal or exceed the sales volumes generated by
wholesale distributors in prior years.
Results of Operations
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
20
depreciation of older equipment and/or the addition of new equipment to expand
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, we believe
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
21
the area of material consumption and direct labor. We have recognized
depreciation expense on production equipment of approximately $669,000 and
$653,000, respectively, in the above cost of goods expense totals. These
depreciation levels are anticipated to remain fairly constant for future periods
as management does not anticipate any significant capital equipment acquisitions
in future periods. Further, the addition of the Industrial Plating Enterprise
Co. equipment allows us to produce certain components which were previously
outsourced to unrelated third parties. For the year ended December 31, 2003 and
2002, respectively, we have generated a negative gross profit of approximately
$(1,247,000), or (62.82%), and approximately $(1,047,000), or (74.31%). We
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 And Capital Resources
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
22
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.
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 the following:
o the expansion of our production line;
o the addition of computerized quality control inspection processes and
o 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
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with La Jolla Cove Investors, Inc. ("La Jolla") on October 4,
2002 for the sale of (i) $250,000 in convertible debentures and (ii) warrants to
buy 2,500,000 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 and we
issued an additional warrant to purchase 3,500,000 shares of common stock. We
currently have $266,365 of our convertible debentures and 2,663,650 warrants
still outstanding. This prospectus relates to the resale of the common stock
underlying these convertible debentures and warrants.
The debentures bear interest at 8%, mature on June 30, 2006, and are convertible
into our common stock, at the selling stockholder's option except for the four
conversions immediately following the effective date of this registration
statement, which must be submitted to us on a weekly basis. The convertible
debentures are convertible into the number of our shares of common stock equal
to the dollar amount of the debentures being converted multiplied by 11, less
the product of the discounted market price multiplied by 10 times the dollar
amount of the debentures being converted, which is divided by the discounted
23
market price. The discounted market price for the convertible debentures is the
lesser of (i) $1.00 or (ii) seventy six percent of the average of the volume
weighted average prices of our common stock during the five 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. For example, assuming
conversion of $266,365 of debentures on April 26, 2005, a discounted market
price of $0.076 per share, the number of shares issuable upon conversion would
be:
($266,365 x 11)-($.076 x (10 x $266,365)) = 2,727,578/$.076 = 35,889,179
La Jolla has contractually committed to convert not less than 5.0% and not more
than 10.0% of the debentures on a monthly basis. In addition, La Jolla is
obligated to exercise the warrant concurrently with the submission of a
conversion notice. Upon conversion of the convertible debenture, the selling
stockholder must concurrently exercise the warrant into shares of our common
stock equal to ten times the dollar amount of the debenture being converted
divided by the exercise price, which is $1.00. Currently, the warrant is
exercisable into 2,663,650 shares of common stock at an exercise price of $1.00
per share.
The aggregate effect of the concurrent conversion of the debentures at the
applicable conversion price and the exercise of the warrants at $1.00 per share
will result in the issuance of shares of common stock to the selling stockholder
at a 24% discount to the market. For example, if the selling stockholder
converts $10,000 of the debenture on April 26, 2005, we are required to issue
1,347,368 shares assuming a market price of $.10 and a conversion price of
$.076. However, the selling stockholder is also required to convert the warrant
into 100,000 shares of common stock or ten times the dollar amount of the
debenture being converted at $1.00 per share. The end result is that we will
receive $110,000 a portion of which has been previously funded through the
debenture or that will be funded upon exercise of the warrant and we are
required to issue 1,447,368 shares of common stock.
In December 2004, we entered into an addendum to the convertible debenture and
warrant whereby we agreed to the following:
* the discount multiplier was reduced from eighty percent to seventy six
percent;
* within five business days after this registration statement being
declared effective, La Jolla is required to submit a debenture
conversion in the amount of $10,000 and every ten business days
thereafter La Jolla shall submit three additional debenture conversion
in the amount of $10,000 each;
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 (such prepayment shall be applied
towards future mandatory exercises of La Jolla's warrant); and
* immediately following the sale of all shares held by La Jolla in
connection with the debenture conversions in the aggregate amount of
$40,000, La Jolla shall wire $275,000 to us as a prepayment towards
the exercise of its warrant and shall submit a debenture conversion in
the amount of $6,250 on the first business day of each month until the
debenture is no longer outstanding.
* the selling stockholder agreed to dismiss, without prejudice, the
lawsuit entitled "La Jolla Cove Investors, Inc. v. American
Ammunition, Inc." filed in San Diego Superior Court as case number
GIC836693.
* in December 2004, we deposited 1,500,000 shares of common stock with
an escrow agent and La Jolla submitted a $10,000 conversion of the
debenture and provided us with $100,000 as a prepayment for the
warrant exercise. Upon completion of the sale by La Jolla of all
shares received in connection with this exercise and conversion, La
Jolla made a payment to our company equal to 76% of the net proceeds
from the sale of the shares less $100,000.
The selling stockholder has contractually agreed to restrict its ability to
convert or exercise its warrants and receive shares of our common stock such
that the number of shares of common stock held by them and their affiliates
after such conversion or exercise does not exceed 4.9% of the then issued and
outstanding shares of common stock.
Due to the contractually agreed mandatory conversion of the convertible
debenture, we have reflected this transaction in our balance sheet as a
"mezzanine" level debt obligation on our balance sheet, between "Total
Liabilities" and "Stockholders' Equity". Upon the respective mandatory
conversion, we will relieve the respective portion of the convertible debenture
and 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, we 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, La Jolla elected to convert an
aggregate $208,635, through 24 separate transactions, in outstanding debenture
principal into common stock. This election caused our company to issue 4,561,753
shares of common stock to la Jolla. Additionally, pursuant to the contract
terms, La Jolla concurrently exercised a portion of the outstanding Warrant to
purchase 2,086,350 shares of our common stock for gross proceeds of $2,086,350.
25
On various dates between January 1, 2004 and December 31, 2004, La Jolla elected
to convert an aggregate $125,000, through 6 separate transactions, in
outstanding debenture principal into shares of common stock. This election
caused our company to issue 4,150,000 shares of common stock to La Jolla.
Additionally, pursuant to the contract terms, the La Jolla concurrently
exercised a portion of the outstanding Warrant to purchase 1,250,000 shares of
our common stock for gross proceeds of $1,250,000. As of December 31, 2004, an
aggregate of 1,000,000 shares of our company's common stock have been issued by
our company and are being held in escrow by our counsel pending receipt of the
final $150,000 from La Jolla.
As of December 31, 2004, an aggregate of 1,000,000 shares of our common stock
have been issued by our company and are being held in escrow by our counsel
pending receipt of the final $150,000 from the selling stockholder.
Research and Development
Depending on the demand for new product lines and the refinement of our
production processes under our production agreement with IMI for the
cross-production and sale of various small arms ammunition, we may or may not
incur increased spending on research and development activities during Calendar
2004.
Further, additional ammunition calibers and/or projectiles may be developed by
us depending upon market research, acceptance in the marketplace of existing
products and production capabilities. At this time, there are no definitive
plans for the further introduction of other new products into the marketplace.
BUSINESS
We had minimal operations until September 2001, when we acquired American
Ammunition Inc. and since such acquisition are engaged principally in the
manufacture and sale of small-arms ammunition for wholesale and government
markets. We are an established small arms munitions manufacturer with an
existing distribution network. The small-arms ammunition market is principally
dominated by three domestic and approximately ten international major
manufacturers. We believe our operations are geared to provide the highest
quality product in quantities sufficient to meet our developed wholesale
governmental market demands.
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 and, in
prior years, focused on increasing our market share. As a result, we continued
manufacturing our initial calibers along with special order ammunition for the
Department of Defense. Further streamlining of the operations resulted in the
manufacture of the current ammunition product line: 9 millimeter, .45 automatic,
.380 automatic, .32 automatic, .40 Smith and Wesson, 38 Special, 30 carbine, 223
Remington, 38 Super, .44 Special, 32 Smith and Wesson Long, 44 special and .44
26
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 retail consumers, domestic governmental agencies and
international governmental agencies for military use. Our international sales
are, at this time, made solely to foreign governments, principally 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 maintains our own testing and
quality assurance equipment and program. Ammunition is a performance-based
product. Therefore, after the manufacturing process is complete, the ammunition
must comply with specific protocols such as velocity, accuracy, and pressure. We
purchase raw materials in bulk and strive to take advantage of prepayment
discounts to produce significant savings in the manufacturing process. There are
and have been instances when discounts have been and may be missed due to cash
flow restrictions.
We 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 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.
During 2004, we acquired laser gauging computer equipment for the purpose of
improving and automating quality control processes. This equipment automatically
27
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 ammunitionutilizing purchased raw
materials to fabricate the necessary components in our 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.
Marketing and Sales Distribution
In first quarter 2004, we launched our Dealer Direct Program and hired Paul
Goebel as its National Sales Manager. In doing so, we completely revamped the
way we distribute and sell our products domestically.
In essence, we 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 new 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 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.
28
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 and a primary purpose is to
create jobs for those who live in such areas as well.
We are marketing our manufacturing flexibility to numerous Department of Defense
and commercial munitions manufacturers as subcontractors allowing prime
contractors to reap the benefits of our "HUBZone certification", thereby
allowing such prime contractors to comply with Federal Acquisition Requirements
for the use of "small and under-utilized minority business" in fulfilling
government contracts.
The Small Business Reauthorization Act of 1997 increased the overall government
agencies' procurement goals for small business to 23% and called for HUBZone
contracts to increase from 1.5% of these procurements to 3% by 2003.
Pricing and Value
We have been able to price our products competitively at a price lower than any
of the 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.
29
Advertising & Promotion
We intend to gear our advertising towards magazine and print media, focused on
the gun and ammunition, handgun and shooting markets. We believe that such
advertising will result in greater name recognition among individual consumers.
Currently, our sales are generated with very little advertising and we believe
that advertising could significantly improve retail/mass merchandiser sales and
increase market share.
Status of Publicly Announced Products and Services
Israeli Military Industries Ltd.
We have developed a relationship with Israeli Military Industries Ltd. ("IMI"),
whereby we work together on individual projects. To date, we have primarily
focused their cooperation on federal contracts and on our dealer direct program.
In such contracts, projectiles manufactured by IMI have been assembled by our
company under IMI's strict quality control requirements.
The joint venture has benefited our company in several ways. First and foremost,
IMI has a distinct following as a result of offering very high quality products
of the course of many years. Associating our name with IMI's history has added
value to our brand and reputation in the small arms ammunition industry. Second,
IMI manufactures different calibers and products than us, thereby increasing the
catalogue of items we may offer to our dealers. IMI produces commercial
ammunition, similar to our company. However, we also specialize in the
production of law enforcement and military grade ammunition, which we currently
do not have the production capability to produce on our own. Lastly, on past and
current cooperation initiatives, IMI has shipped projectiles and materials for
future assembly companion 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 patents we
acquired were as follows:
o Patent #4,836,110 which relates to bullets having sections separable
upon impact and method fabrication.
o Patent #4,882,822 which relates to the method of fabrication of a
bullet having sections separable upon impact.
30
o Patent #4,947,755 which relates to bullets having sections separable
upon impact.
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.
ECO-AMMO(TM)
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 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 surround 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
31
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 our
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.
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
32
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.
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.
33
Effect of Probable Governmental Regulation on the Business
We are not aware of any pending legislation at either the state or federal level
that would change the requirements under which it is licensed and is not aware
of any reason why the existing licenses cannot be renewed at their expiration
dates. There can be no assurance that legislation will not be proposed and
enacted at some time in the future that would preclude us from continuing our
operations. Should such legislation be enacted, and should the we be precluded
from continuing our operations, it would have a materially adverse effect upon
our business and future.
Cost and Effects of Compliance with Environmental Laws
As a manufacturer, we are subject to general local, state and federal
regulations governing environmental concerns. We believe that we have always
been and continue to be in compliance with all such laws. Special precautions
have been taken us to ensure that adequate ventilation exists for the portion of
our operations that utilize lead and/or brass. Additionally, our gunpowder
supply is humidity and temperature controlled in a secure and environmentally
controlled facility.
Employees
At April 26, 2005, we employed 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.
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 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, our company and the
controlling shareholder shall renegotiate the annual rental amount.
Our subsidiary, IPE, leases its manufacturing facility from an unrelated
third-party under a long-term operating lease agreement. This lease is for a
period of five years and requires graduated monthly payments, changing on the
lease anniversary date, ranging from approximately $1,751 to $1,914, plus the
applicable sales taxes. We are is responsible for all utilities and maintenance
expenses. The lease expires on February 28, 2007 and may be renewed for an
additional five year term at a rental rate of approximately $1,971, plus
applicable sales taxes for the first renewal year and 3.0% increase on each
succeeding anniversary date. Total rent expense under this lease was
approximately $20,752 and $16,622, respectively, for each of the years ended
December 31, 2004 and 2003.
34
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
2009 68,815
---------
Totals $ 494,491
=========
For the respective years ended December 31, 2004 and 2003, we paid an aggregate
of $131,804 and $87,826 for rent under these agreements. We believe that our
facilities are adequate for our needs for the foreseeable future.
Legal Proceedings
We are not a party to any pending litigation at this time nor is any of our
property subject to any pending legal proceedings.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following information sets forth the names of our officers and directors,
their present positions with us, and their biographical information.
Name Age Office
--------------------- ------ ---------------------------------------
J.A. Fernandez, Sr. 67 Chairman of the Board and Director
of Sales
Andres F. Fernandez 38 President and Chief Executive
Officer
Emilio D. Jara 39 Vice-President of Operations,
Secretary and Director
Maria A. Fernandez 44 Director
--------------------- ------ ---------------------------------------
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.
35
Family Relationships
J.A. Fernandez, Sr. is the father of Andres and Maria Fernandez. There are no
other family relationships between or among the executive officers and directors
of our company.
Business Experience
J. A. FERNANDEZ, SR., age 67, currently serves as the Chairman of the Board and
Director or Sales. He has been employed by us since our inception in 1983. Mr.
Fernandez is the founder of what began as a family business and is responsible
for our sales activities. Mr. Fernandez has over 40 years experience in diverse
industries including aerospace, advanced polymer manufacturing, munitions,
mining and processing of gemstones and metal ores and has utilized such
experience for the growth and development of the Company. He is fluent in
Spanish.
ANDRES FERNANDEZ, age 38, currently serves as President and Chief Executive
Officer. Mr. Fernandez has served in each of these capacities since September
2001. He has been employed by our company for over a decade. Mr. Fernandez is
responsible for day to day operations and has been a driving force behind our
company and our success in becoming a vertically integrated manufacturer. He
studied physics and calculus at St. Thomas University, FL and at the University
of Miami, FL. He is a licensed pilot, having graduated from the American
Institute of Aeronautics, FL, and received his certificate as a private pilot
(fixed wing) as well as private helicopter (rotary)in 1989. In 1989, Mr.
Fernandez graduated from the Institute of Public Service (Pan Am), GA as a
tactical rappel instructor. In 1990, he graduated from Omni Explosives, TN with
a specialty in tactical explosives. Mr. Fernandez was certified by the Florida
Department of Law Enforcement Academy in special operations/entry techniques in
1990. He has served as a tactical advisor to U.S. Treasury Department, Bureau of
Alcohol, Tobacco and Firearms, U.S. Customs Service and the Florida Department
of Law Enforcement. He has received numerous commendations and letters of
appreciation. He also served on the Board of Veterans Affairs (Hialeah , FL)
from 1990 to 1991. He is fluent in Spanish.
EMILIO JARA, age 39, currently serves as Vice President of Operations, Secretary
and a Director. Mr. Jara has served in each of these capacities since September
2001. He has been employed with our company since 1988. He has been an integral
part of our technological growth. His abilities have contributed to our research
and development and subsequent increase in the number of production lines. Mr.
Jara is extremely well versed in metallurgical and ballistic issues. He studied
business administration at Miami- Dade Community College (1984/1985). In 1989,
he graduated from the Institute of Public Service (Pan Am), GA as a Tactical
Rappel Instructor. In 1990, Mr. Jara graduated from Omni Explosives, TN with a
specialty in Tactical Explosives. He is fluent in Spanish.
MARIA A. FERNANDEZ, age 44, currently serves as a Director. Mrs. Fernandez has
served as a Director since September 2001. She has been the managing partner at
Fernandez Friedman Grossman & Kohn PLLC since May 1998. Prior to that date, she
was a partner at Taustine Post Sotsky Berman Fineman & Kohn. She concentrates
her legal practice in the areas of estate planning, probate and administration.
She also practices in the areas of Medicaid and disability planning, corporate
and individual taxation and corporate law, with an emphasis in closely held
corporations. She is a graduate of the University of Miami, FL (Bachelor of
36
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
the registrant under Rule 16a-3(d) during fiscal 2004, and certain written
representations from executive officers and directors, we are unaware that any
required reports that have not been timely filed.
Code of Ethics
We have not adopted a code of ethics that applies to our principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. We have not adopted such a
code of ethics because all of management's efforts have been directed to
building the business of the company; a later time, such a code of ethics may be
adopted by the board of directors.
Committees of the Board of Directors
We presently do not have an audit committee, compensation committee, nominating
committee, an executive committee of our board of directors, stock plan
committee or any other committees. However, our board of directors will
establish various committees during the current fiscal year.
Terms of Office
Our directors are appointed for a one year term to hold office until the next
annual general meeting of the holders of our Common Stock or until removed from
office in accordance with our by-laws. Our officers are appointed by our board
of directors and hold office until removed by our board of directors.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the aggregate cash
compensation paid or accrued by our company to each of our executive officers
37
and key employees for services rendered to our company during the our fiscal
year ended 2003, 2002, 2001 and 2000 and all plan and non-plan compensation
awarded to, earned by or paid to certain designated executive officers.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted Securities LTIP All
Name and Annual Stock Underlying Pay- Other
Principal Year Salary Bonus Compen- Award(s) Options/ outs Compen-
Position (1) ($) ($) sation ($) ($) SARs (f) sation ($)
----------------- ------ -------- -------- ------------ ---------- ------------ -------- ----------
J.A. 2000 $ 59,202 $0 $0 $0 $0 $0 $0
Fernandez, Sr., 2001 $ 50,859 $0 $0 $0 $0 $0 $0
Chairman, 2002 $ 77,770 $0 $0 $0 $0 $0 $0
Director of 2003 $104,000 $0 $0 $0 $0 $0 $0
Sales 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
Former Vice 2002 $ 64,598 $0 $0 $0 $0 $0 $0
President 2003 $ 78,702 $50,000 $0 $0 $0 $0 $0
And former 2004 $ 78,702 $0 $0 $0 $0 $0 $0
Director
Maria A. 2000 $0 $0 $0 $0 $0 $0 $0
Fernandez, 2001 $0 $0 $0 $0 $0 $0 $0
Director 2002 $0 $0 $0 $0 $0 $0 $0
2003 $0 $0 $0 $0 $0 $0 $0
2004 $0 $0 $0 $0 $0 $0 $0
--------------------
38
Compensation of Directors
We have no standard arrangements for compensating the directors of our company
for their attendance at meetings of the Board of Directors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We lease our corporate office and manufacturing facility from our controlling
stockholder under a long-term operating lease agreement. The lease requires a
monthly payment of approximately $5,735, including applicable 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, our company and the
controlling shareholder shall renegotiate the annual rental amount.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of April 26, 2005:
* by each person who is known by us to beneficially own more than 5% of
our common stock;
* by each of our officers and directors; and
* by all of our officers and directors a group.
Shares Beneficially Owned
---------------------------
Name and Address of Beneficial Owner Number Percent**
------------------------------------------------ ----------- ------------
Andres F. Fernandez, President, CEO and CFO 8,485,365 11.2%
J. A. Fernandez, Sr., Chairman of the Board
and Director of Sales 14,905,905 19.7%
Amelia C. Fernandez 4,281,900 5.7%
Maria A. Fernandez, Director 260,000 *
Emilio D. Jara, Director 54,250 *
Total securities held by officers
and directors as a group (4 people): 23,705,520 31.3%
-----------------------------------------
* Less than 1%
** Based on 75,907,300 shares outstanding as of April 26, 2005. 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
39
warrants currently exercisable or convertible, or exercisable or
convertible within 60 days of April 26, 2005 are deemed outstanding for
computing the percentage of the person holding such option or warrant but
are not deemed outstanding for computing the percentage of any other
person.
J.A. Fernandez, Sr. and Amelia Fernandez are the father and mother of Andres and
Maria Fernandez.
The table above does not include the 384,500 shares Maria Fernandez holds as a
Trustee for an Irrevocable Trust in which neither she nor any of the other
Officers or Directors is the beneficial owner. However, the table does include
the shares owned by Amelia Fernandez, who was an officer and director during
2003.
DESCRIPTION OF SECURITIES BEING REGISTERED
Our authorized capital stock consists of 300,000,000 shares of Common Stock,
$.001 par value and 20,000,000 shares of Preferred Stock, $.001 par value.
The following is a description of the material terms of our common stock.
Common Stock
The holders of the issued and outstanding shares of common stock are entitled to
receive dividends when, as and if declared by our Board of Directors out of any
funds lawfully available therefore. The Board of Directors intends to retain
future earnings to finance the development and expansion of our business and
does not expect to declare any dividends in the foreseeable future. The holders
of the common stock have the right, in the event of liquidation, to receive pro
rata all assets remaining after payment of debts and expenses. The common stock
does not have any preemptive rights and does not have cumulative voting rights.
The issued and outstanding shares of common stock are fully paid and
nonassessable.
Holders of shares of common stock are entitled to vote at all meetings of such
shareholders for the election of directors and for other purposes. Such holders
have one vote for each share of common stock held by them.
Transfer Agent
Atlas Stock Transfer Corporation, 5899 South State Street, Salt Lake City, Utah
84107 has been appointed the transfer agent of our common stock and preferred
stock.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The California Corporations Code provides for the indemnification of directors,
officers, employees and agents under the circumstances as set forth in Section
317 thereof. Section 317 permits a corporation to indemnify itsagents, typically
directors and officers, for expenses incurred or settlements or judgments paid
40
in connection with certain legal proceedings. Only those legal proceedings
arising out of such persons' actions as agents of the corporation may be grounds
for indemnification.
Whether indemnification may be paid in a particular case depends on whether the
agent wins, loses or settles the suit and upon whether a third party or the
corporation itself is the plaintiff. Section 317 provides for mandatory
indemnification, no matter who the plaintiff is, when an agent is successful on
the merits of a suit. In all other cases, indemnification is permissive and
sometimes requires approval of the court in which the suit is or was pending.
If the agent loses or settles a suit with a plaintiff other than the Company or
someone who did not threaten or bring suit on our behalf, the agent may be
indemnified for expenses incurred and settlements or judgments paid. That
indemnification may be authorized upon a finding that the agent acted in good
faith and in a manner he or she reasonably believed to be in our best interests,
and, in a criminal proceeding, only where the agent had no reasonable cause to
believe his or her conduct was unlawful. If the agent loses or settles a suit
with us or a plaintiff who threatened or brought suit on our behalf, the agent
may be indemnified for expenses actually and reasonably incurred in connection
with the defense or settlement of the action. Such indemnification may be
authorized upon a finding that the agent acted in good faith and in a manner he
or she believed to be in our best interests and the best interests of our
shareholders. No indemnification is permitted where the agent breached his or
her duty to us, however, unless the court in which the proceeding is or was
pending determines that the agent is fairly and reasonably entitled to indemnity
for certain expenses. No indemnification is permitted where a settlement is
reached without court approval.
Where permissive indemnification provisions control, indemnification may be
authorized by a majority vote of the disinterested directors, by an independent
legal counsel's written opinion, by our shareholders (the person to be
indemnified is excluded from voting his or her shares) or by the court in which
the proceeding is or was pending.
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
41
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees, assignees
and other successors-in-interest may, from time to time, sell any or all of
their shares of common stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
* ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
* block trades in which the broker-deale will attempt to sell the shares
as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
* purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
* an exchange distribution in accordance with the rules of the
applicable exchange;
* privately-negotiated transactions;
* broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
* through the writing of options on the shares
* a combination of any such methods of sale; and
* any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders or their respective pledgees, donees, transferees or
other successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
42
We are required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the selling stockholders,
but excluding brokerage commissions or underwriter discounts.
The selling stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholders defaults on
a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder is contractually
restricted from engaging in short sells. In addition, if a such short sale is
deemed to be a stabilizing activity, then the selling stockholder will not be
permitted to engage in a short sale of our common stock. All of these
limitations may affect the marketability of the shares.
We have agreed to indemnify the selling stockholders, or their transferees or
assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material arrangement with
a broker-dealer for the resale of the common stock, then we would be required to
amend the registration statement of which this prospectus is a part, and file a
prospectus supplement to describe the agreements between the selling
stockholders and the broker-dealer.
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require:
43
* 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.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares of
common stock by the selling stockholders. We will not receive any proceeds from
the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering the
resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
44
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Total
Total Shares of Percentage Percentage
Common Stock of Common Shares of Beneficial of Common
Issuable Upon Stock, Common Stock Beneficial Percentage of Ownership Stock Owned
Conversion of Assuming Included in Ownership Common Stock After the After
Name Debentures Full Prospectus Before the Owned Before Offering Offering
and/or Warrants Conversion (1) Offering* Offering* (4) (4)
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
La Jolla Cove 38,552,829(3) 33.68% Up to 3,911,102 4.99% -- --
Investors, 74,442,008
Inc.(2) shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
* These columns represents the aggregate maximum number and percentage of
shares that the selling stockholders can own at one time (and therefore,
offer for resale at any one time) due to their 4.9% limitation.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the convertible debentures is subject to adjustment depending on,
among other factors, the future market price of the common stock, and could be
materially less or more than the number estimated in the table.
(1) Includes a good faith estimate of the shares issuable upon conversion of
the convertible debentures and exercise of warrants, based on current
market prices. Because the number of shares of common stock issuable upon
conversion of the convertible debentures is dependent in part upon the
market price of the common stock prior to a conversion, the actual number
of shares of common stock that will be issued upon conversion will
fluctuate daily and cannot be determined at this time. Under the terms of
the convertible debentures, if the convertible debentures had actually been
converted on April 26, 2005, the discounted market price would have been
$.076. The actual number of shares of common stock offered in this
prospectus, and included in the registration statement of which this
prospectus is a part, includes such additional number of shares of common
stock as may be issued or issuable upon conversion of the convertible
debentures and exercise of the related warrants by reason of any stock
split, stock dividend or similar transaction involving the common stock, in
45
accordance with Rule 416 under the Securities Act of 1933. However the
selling stockholders have contractually agreed to restrict their ability to
convert their convertible debentures or exercise their warrants and receive
shares of our common stock such that the number of shares of common stock
held by them in the aggregate and their affiliates after such conversion or
exercise does not exceed 4.99% of the then issued and outstanding shares of
common stock as determined in accordance with Section 13(d) of the Exchange
Act. Accordingly, the number of shares of common stock set forth in the
table for the selling stockholders exceeds the number of shares of common
stock that the selling stockholders could own beneficially at any given
time through their ownership of the convertible debentures and the
warrants. In that regard, the beneficial ownership of the common stock by
the selling stockholder set forth in the table is not determined in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended.
(2) The selling stockholder is an unaffiliated third party. In accordance with
rule 13d-3 under the Securities Exchange Act of 1934, Norman Lizt may be
deemed a control person of the shares owned by the selling stockholder.
(3) Includes 71,778,358 shares of common stock underlying our $266,365
convertible debenture and 2,663,650 shares of common stock underlying
common stock purchase warrants issued to La Jolla Investors, Inc.
(4) Assumes that all securities registered will be sold.
Terms of Convertible Debentures
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with La Jolla on October 4, 2002 for the sale of (i) $250,000
in convertible debentures and (ii) warrants to buy 2,500,000 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 and a warrant to purchase
3,500,000 shares of our common stock. We currently have $266,365 of our
convertible debentures and 2,663,650 warrants still outstanding. This prospectus
relates to the resale of the common stock underlying these convertible
debentures and warrants.
The debentures bear interest at 8%, mature on June 30, 2006, and are convertible
into our common stock, at the selling stockholder's option except for the four
conversions immediately following the effective date of this registration
statement, which must be submitted to us on a weekly basis. The convertible
debentures are convertible into the number of our shares of common stock equal
to the dollar amount of the debentures being converted multiplied by 11, less
the product of the discounted market price multiplied by 10 times the dollar
46
amount of the debentures being converted, which is divided by the discounted
market price. The discounted market price for the convertible debentures is the
lesser of (i) $1.00 or (ii) seventy six percent of the average of the volume
weighted average prices of our common stock during the five 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.
La Jolla has contractually committed to convert not less than 5.0% and not more
than 10.0% of the debentures on a monthly basis. In addition, the selling
stockholder is obligated to exercise the warrant concurrently with the
submission of a conversion notice by the selling stockholder. Upon conversion of
the convertible debenture, the selling stockholder must concurrently exercise
the warrant into shares of our common stock equal to ten times the dollar amount
of the debenture being converted divided by the exercise price, which is $1.00.
Currently, the warrant is exercisable into 2,663,650 shares of common stock at
an exercise price of $1.00 per share.
The aggregate effect of the concurrent conversion of the debentures at the
applicable conversion price and the exercise of the warrants at $1.00 per share
will result in the issuance of shares of common stock to the selling stockholder
at a 24% discount to the market. For example, if the selling stockholder
converts $10,000 of the debenture on April 26, 2005, we are required to issue
1,347,368 shares assuming a market price of $.10 and a conversion price of
$.076. However, the selling stockholder is also required to convert the warrant
into 100,000 shares of common stock or ten times the dollar amount of the
debenture being converted at $1.00 per share. The end result is that we will
receive $110,000 that has been previously funded through the debenture or that
will be funded upon exercise of the warrant and we are required to issue
1,447,368 shares of common stock.
In December 2004, we entered into an addendum to the convertible debenture and
warrant whereby we agreed to the following:
* the discount multiplier was reduced from eighty percent to seventy six
percent;
* within five business days after this registration statement being
declared effective, La Jolla is required to submit a debenture
conversion in the amount of $10,000 and every ten business days
thereafter La Jolla shall submit three additional debenture conversion
in the amount of $10,000 each;
* within five business days after this registration statement being
declared effective, La Jolla shall wire to us as a prepayment towards
the exercise of its warrant (such prepayment shall be applied towards
future mandatory exercises of La Jolla's warrant); and
* immediately following the sale of all shares held by La Jolla in
connection with the debenture conversions in the aggregate amount of
47
$40,000, La Jolla shall wire $275,000 to us as a prepayment towards
the exercise of its warrant and shall submit a debenture conversion in
the amount of $6,250 on the first business day of each month until the
debenture is no longer outstanding.
* the selling stockholder agreed to dismiss, without prejudice, the
lawsuit entitled "La Jolla Cove Investors, Inc. v. American
Ammunition, Inc." filed in San Diego Superior Court as case number
GIC836693.
* in December 2004, we deposited 1,500,000 shares of common stock with
an escrow agent and La Jolla submitted a $10,000 conversion of the
debenture and provided us with $100,000 as a prepayment for the
warrant exercise. Upon completion of the sale by La Jolla of all
shares received in connection with this exercise and conversion, La
Jolla made a payment to our company equal to 76% of the net proceeds
from the sale of the shares less $100,000.
The selling stockholder has contractually agreed to restrict its ability to
convert or exercise its warrants and receive shares of our common stock such
that the number of shares of common stock held by them and their affiliates
after such conversion or exercise does not exceed 4.9% of the then issued and
outstanding shares of common stock.
Sample Conversion Calculation
The convertible debentures are convertible into the number of our shares of
common stock equal to the dollar amount of the debentures being converted
multiplied by 11, less the product of the discounted market price multiplied by
ten times the dollar amount of the debentures being converted, which is divided
by the discounted market price. The discounted market price for the convertible
debentures is the lesser of (i) $1.00 or (ii) seventy six percent of the average
of the volume weighted average prices of our common stock during the five
trading days prior to the conversion. For example, assuming conversion of
$266,365 of debentures on April 26, 2005, a discounted market price of $0.076
per share, the number of shares issuable upon conversion would be:
($266,365 x 11) - ($.076 x (10 x $266,365)) = 2,727,578 /$.076 = 35,889,179
The following is an example of the amount of shares of our common stock that are
issuable, upon conversion of our convertible debenture in the amount of
$266,365, based on market prices 25%, 50% and 75% below the market price, as of
April 26, 2005 of $0.10.
% Below Price Per Conversion of Shares Outstanding
Market Share Price Issuable Stock
------ ----- ------ -------- -----
25% $.0750 $.0570 48,740,122 39.10%
50% $.0500 $.0380 74,442,008 49.51%
75% $.0250 $.0190 151,547,666 66.63%
48
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an opinion
with respect to the validity of the shares of common stock being offered hereby.
EXPERTS
Our financial statements at December 31, 2004 and 2003 and for the years then
ended, appearing in this prospectus and registration statement have been audited
by S. W. Hatfield, CPA, independent auditors, as set forth on their report
thereon appearing elsewhere in this prospectus, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities Act of
1933, as amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of American Ammunition, Inc., filed as
part of the registration statement, and it does not contain all information in
the registration statement, as certain portions have been omitted in accordance
with the rules and regulations of the Securities and Exchange Commission.
We are subject to the informational requirements of the Securities Exchange Act
of 1934 which requires us to file reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy
statements and other information may be inspected at public reference facilities
of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549.
Copies of such material can be obtained from the Public Reference Section of the
SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at
prescribed rates. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
49
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. AND SUBSIDIARIES
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. AND SUBSIDIARIES
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. AND SUBSIDIARIES
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. AND SUBSIDIARIES
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. AND SUBSIDIARIES
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. AND SUBSIDIARIES
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. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Organization and Description of Business
American Ammunition, Inc. (AAI or Company) was incorporated on February 1, 2000
in 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. AND SUBSIDIARIES
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.
F-10
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note C - Summary of Significant Accounting Policies - Continued
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.
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.
F-11
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note D - Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximates fair value due to the short term nature of
these items and/or the current interest rates payable in relation to current
market conditions.
Interest rate risk is the risk that the Company's earnings are subject to
fluctuations in interest rates on either investments or on debt and is fully
dependent upon the volatility of these rates. The Company does not use
derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company's earnings are subject to
fluctuations in interest rates or foreign exchange rates and are fully dependent
upon the volatility of these rates. The company does not use derivative
instruments to moderate its exposure to financial risk, if any.
Note E - Inventory
As of December 31, 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.
F-12
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 $ - $ -
=========== ===========
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.
A recap of the debenture activity is as follows:
Debenture Warrant
(in dollars) (in shares)
------------ -----------
Initial amount $600,000 6,000,000
2003 redemptions (208,635) (2,086,350)
2004 redemptions (125,000) (1,250,000)
------------ -----------
Balances outstanding
at December 31, 2004 $266,365 2,633,650
============ ===========
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.
F-13
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note H - Convertible Debenture - continued
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
F-14
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note H - Convertible Debenture - continued
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 $125,000, through 6 separate
transactions, in outstanding Debenture principal into registered common stock.
This election caused the Company to issue 4,150,000 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 1,250,000 shares of the Company's common stock for gross proceeds of
$1,250,000. 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
========= ========= ======== =========
F-15
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note I - Preferred Stock Transactions - Continued
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.
In December 2001, concurrent with a modification in the holding period prior to
conversion, certain holders of the Series A Preferred Stock orally notified the
Company of their intent to exercise the conversion features on 1,749,720 issued
and outstanding shares of Series A Preferred Stock into 19,246,920 shares of
common stock prior to December 31, 2001. Due to the timing of the requisite
documentation, the clerical activities related to this conversion were not
completed until February 2002.
In conjunction with the Series A Preferred Stock, certain shares were sold after
the Company's common stock was approved for trading by the National Association
of Securities Dealers on the OTC Bulletin Board in October 2001. The shares of
Series A Preferred Stock sold subsequent to this date had an equivalent per
share value of common stock below the ending quoted market price of the
Company's common stock on their respective issue dates. This difference created
a Beneficial Conversion Feature Discount of approximately $1,207,993. This
discount was then amortized over the unexpired time period between the date of
issue of the eligible shares and the eligible conversion date, as amended. All
of the shares sold subsequent to the initial trading date were converted in
December 2001 and, accordingly, the approximate $1,207,993 in Beneficial
Conversion Feature Discount was fully amortized to operations.
In December 2002, a holder of 5,000 shares of Series A Preferred Stock exercised
his conversion rights and converted these shares of Series A Preferred Stock
into 55,000 shares of restricted, unregistered common stock.
F-16
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note I - Preferred Stock Transactions - Continued
SERIES A CONVERTIBLE PREFERRED 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.
Each share of 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.
Note K - Common Stock Transactions
Calendar 2003 transactions
During the period from March 19, 2003 through December 31, 2003, the Company
issued an aggregate 4,561,753 shares of common stock, in 24 separate
transactions, in exchange for the redemption of approximately $208,635 in
outstanding debenture balance and approximately $2,086,350 in cash from the
exercise of the affiliated warrant. Where the closing price of the Company's
F-17
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Common Stock Transactions - Continued
Calendar 2003 transactions
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 $882,291 during this time period.
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 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.
In October 2003, in a separate transaction, the Company sold 2,200,000 shares of
restricted, unregistered common stock to the Debenture Holder for cash proceeds
of approximately $400,000, or approximately $0.18 per share, which was in excess
of the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The cash proceeds of this transaction were used to provide working
capital and support operations.
In October 2003, the Company issued an aggregate 37,866 shares of restricted,
unregistered common stock in payment of approximately $16,710 in accrued
dividends payable on the Company's outstanding Series A and Series B Preferred
Stock for the quarters ended June 30, 2003 and September 30, 2003, collectively.
F-18
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Common Stock Transactions - Continued
Calendar 2004 transactions
During the period from February 13, 2004 through June 4, 2004, the Company
issued an aggregate 4,150,000 shares of common stock, in 5 separate
transactions, in exchange for the redemption of approximately $125,000 in
outstanding debenture balance and approximately $1,250,000 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 $356,000 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.
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.
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.
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
F-19
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Common Stock Transactions - Continued
Calendar 2004 transactions
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,
F-20
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note L - Rental Commitments - Continued
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.
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 $ - $ -
=========== ==========
F-21
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note M - Income Taxes - Continued
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.
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.
F-22
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note N - Revenue Concentrations
The Company sells to both commercial and governmental customers, in both
domestic and foreign markets. The following table shows the Company's gross
revenue composition:
Year ended Year ended
December 31, 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
--------- ---------- --------- ----------
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
--------- ---------- --------- ----------
{Balance of this page intentionally left blank.]
F-23
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note O - Selected Financial Data (Unaudited)
The following is a summary of the quarterly results of operations for the years
ended December 31, 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
{Balance of this page intentionally left blank.]
F-24
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under California law, a corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any proceeding (other
than an action by or in the right of the corporation to procure a judgment in
its favor) by reason of the fact that the person is or was an agent of the
corporation, against expenses, judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with the proceeding if that
person acted in good faith and in a manner the person reasonably believed to be
in the best interests of the corporation and, in the case of a criminal
proceeding, had no reasonable cause to believe the conduct of the person was
unlawful. The termination of any proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which the person reasonably believed to be in the best interests of the
corporation or that the person had reasonable cause to believe that the person's
conduct was unlawful.
Further under California law, corporation shall have power to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action by or in the right of the corporation
to procure a judgment in its favor by reason of the fact that the person is or
was an agent of the corporation, against expenses actually and reasonably
incurred by that person in connection with the defense or settlement of the
action if the person acted in good faith, in a manner the person believed to be
in the best interests of the corporation and its shareholders.
However, no indemnification shall be made for any of the following:
(1) In respect of any claim, issue or matter as to which the person shall have
been adjudged to be liable to the corporation in the performance of that
person's duty to the corporation and its shareholders, unless and only to
the extent that the court in which the proceeding is or was pending shall
determine upon application that, in view of all the circumstances of the
case, the person is fairly and reasonably entitled to indemnity for
expenses and then only to the extent that the court shall determine;
(2) Of amounts paid in settling or otherwise disposing of a pending action
without court approval; or
(3) Of expenses incurred in defending a pending action which is settled or
otherwise disposed of without court approval.
To the extent that an agent of a corporation has been successful on the merits
in defense of any proceeding referred to above or in defense of any claim,
issue, or matter therein, the agent shall be indemnified against expenses
actually and reasonably incurred by the agent in connection therewith.
However, any indemnification shall be made by the corporation only if authorized
in the specific case, upon a determination that indemnification of the agent is
74
proper in the circumstances because the agent has met the applicable standard of
conduct set out in the statute by any of the following:
(1) A majority vote of a quorum consisting of directors who are not parties
to such proceeding;
(2) If such a quorum of directors is not obtainable, by independent legal
counsel in a written opinion;
(3) Approval of the shareholders (Section 153), with the shares owned by
the person to be indemnified not being entitled to vote thereon; or
(4) The court in which the proceeding is or was pending upon application
made by the corporation or the agent or the attorney or other person rendering
services in connection with the defense, whether or not the application by the
agent, attorney or other person is opposed by the corporation.
Expenses incurred in defending any proceeding may be advanced by the corporation
prior to the final disposition of the proceeding upon receipt of an undertaking
by or on behalf of the agent to repay that amount if it shall be determined
ultimately that the agent is not entitled to be indemnified as authorized in
this section. The provisions of subdivision (a) of Section 315 do not apply to
advances made pursuant to this subdivision.
The indemnification authorized by this section is not exclusive of any
additional rights to indemnification for breach of duty to the corporation and
its shareholders while acting in the capacity of a director or officer of the
corporation to the extent the additional rights to indemnification are
authorized in an article provision adopted pursuant to paragraph (11) of
subdivision (a) of Section 204. The indemnification provided by this section for
acts, omissions, or transactions while acting in the capacity of, or while
serving as, a director or officer of the corporation but not involving breach of
duty to the corporation and its shareholders is not exclusive of any other
rights to which those seeking indemnification may be entitled under any bylaw,
agreement, vote of shareholders or disinterested directors, or otherwise, to the
extent the additional rights to indemnification are authorized in the articles
of the corporation. An article provision authorizing indemnification "in excess
of that otherwise permitted by Section 317" or "to the fullest extent
permissible under California law" or the substantial equivalent thereof shall be
construed to be both a provision for additional indemnification for breach of
duty to the corporation and its shareholders as referred to in, and with the
limitations required by, paragraph (11) of subdivision (a) of Section 204 and a
provision for additional indemnification as referred to in the second sentence
of this subdivision. The rights to indemnity hereunder shall continue as to a
person who has ceased to be a director, officer, employee, or agent and shall
inure to the benefit of the heirs, executors, and administrators of the person.
Nothing contained in this section shall affect any right to indemnification to
which persons other than the directors and officers may be entitled by contract
or otherwise.
No indemnification or advance shall be made under this section in any
circumstance where it appears:
75
(1) That it would be inconsistent with a provision of the articles, bylaws,
a resolution of the shareholders, or an agreement in effect at the time of the
accrual of the alleged cause of action asserted in the proceeding in which the
expenses were incurred or other amounts were paid, which prohibits or otherwise
limits indemnification.
(2) That it would be inconsistent with any condition expressly imposed by a
court in approving a settlement.
A corporation shall have power to purchase and maintain insurance on behalf of
any agent of the corporation against any liability asserted against or incurred
by the agent in that capacity or arising out of the agent's status as such
whether or not the corporation would have the power to indemnify the agent
against that liability under this section. The fact that a corporation owns all
or a portion of the shares of the company issuing a policy of insurance shall
not render this subdivision inapplicable if either of the following conditions
are satisfied:
(1) if the articles authorize indemnification in excess of that authorized
in this section and the insurance provided by this subdivision is limited as
indemnification is required to be limited by paragraph (11) of subdivision (a)
of Section 204; or
(2) (A) the company issuing the insurance policy is organized, licensed,
and operated in a manner that complies with the insurance laws and regulations
applicable to its jurisdiction of organization,
(B) the company issuing the policy provides procedures for processing
claims that do not permit that company to be subject to the direct control of
the corporation that purchased that policy, and
(C) the policy issued provides for some manner of risk sharing between the
issuer and purchaser of the policy, on one hand, and some unaffiliated person or
persons, on the other, such as by providing for more than one unaffiliated owner
of the company issuing the policy or by providing that a portion of the coverage
furnished will be obtained from some unaffiliated insurer or reinsurer.
This section does not apply to any proceeding against any trustee, investment
manager, or other fiduciary of an employee benefit plan in that person's
capacity as such, even though the person may also be an agent as defined in
subdivision (a) of the employer corporation. A corporation shall have power to
indemnify such a trustee, investment manager, or other fiduciary to the extent
permitted by subdivision (f) of Section 207.
The Company's Articles of Incorporation and Bylaws require the Company to
indemnify its directors to the fullest extent permitted by California law. The
specific provisions of the Articles of Incorporation of the Registrant with
respect to the indemnification of directors and officers are as follows:
76
"FOURTH: The liability of the directors of the corporation for
monetary damages shall be eliminated to the fullest extent
permissible under California law."
The specific provisions of the Bylaws of the Registrant with respect to the
indemnification of directors and officers are as follows:
ARTICLE XI INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Corporation shall indemnify each of its directors and officers who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit, or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director or officer of the Corporation,
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding, if he acted in good faith and
in a manner he reasonably believed to be in, or not opposed to, the best
interests of the Corporation, and with respect to any criminal action or
proceeding had no reasonable cause to believe his conduct was unlawful.
Except as provided hereinbelow, any such indemnification shall be made by the
Corporation only as authorized in the specific case upon determination that
indemnification of the director or officer is proper in the circumstances
because he has met the applicable standard of conduct set forth above. Such
determination shall be made: (a) by the Board of Directors by a majority vote of
a quorum of directors; or (b) by the shareholders.
Expenses (including attorneys' fees) incurred in defending a civil or criminal
action, suit or proceeding may be paid by the Corporation in advance of the
final disposition of such action or proceeding if authorized by the Board of
Directors and upon receipt of an undertaking by or on behalf of the director or
officer to repay such amount unless it shall ultimately be determined that he is
entitled to be indemnified by the Corporation.
To the extent that a director or officer has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to above, or in
defense of any claim issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith without any further determination that he has met the
applicable standard of conduct set forth above."
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act" or "Securities Act") may be permitted to directors, officers or
persons controlling American Ammunition pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
77
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses, all of
which we will pay, in connection with the issuance and distribution of the
securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 1,158.34
Accounting fees and expenses 10,000.00*
Legal fees and expenses 35,000.00*
Miscellaneous 5,000.00
-----------
TOTAL $ 51,158.34*
===========
* Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, the Company sold securities without registration
under the Securities Act of 1933, as amended (the "Act") as follows:
SECURITIES NAMES OF CONSIDERATION EXEMPTION
SOLD INVESTORS RECEIVED FROM REGISTRATION
--------------- ----------------- ---------------------- ---------------------------
1,810,000 shares of Three (3) individuals $ 1,810 Section 4(2) of the Act
Common Stock (1)
140,000 shares of Two (2) individuals $ 140 Section 4(2) of the Act
Common Stock (2)
124,4000 (pre-acquisition) See footnote $ 125 Section 4(2) of the Act
916,000 (post acquisition) (3) $ 916 Section 4(2) of the Act
Common stock
21,000,000 Shares Nineteen (19) $ 3,998,650 Section 4(2) of the Act
of Common Stock individuals pursuant and Regulation D, Rule
to Share Exchange 506
(4)
222,600 Shares of Seven (7) individuals $ 1,113,000 Section 4(2) of the Act
$5.00 Series A (5) and Regulation D, Rule
Convertible Preferred 506
2,000 Shares of One (1) individual $ 10,000 Section 4(2) of the Act
$5.00 Series A (6)
Convertible Preferred
78
1,510,720 Shares of One (1) individual $ 7,553,600 Section 4(2) of the Act and
$5.00 Series A (7) Regulation D, Rule 506
Convertible Preferred
10% Senior One (1) company $ 135,000 Section 4(2) of the Act and
Convertible (8) Regulation D, Rule 506
Promissory Note
for $135,000
Option to Purchase One (1) company $ 15,000 Section 4(2) of the Act and
10% Senior (8) Regulation D, Rule 506
Convertible Promissory
Notes for up to $3,354,000
-----------------------------
(1) On February 1, 2000, a total of 805,000 shares of Common Stock were issued
to Artem Gotov in exchange for services valued at $805 and as founders
shares, 805,000 shares of Common Stock were issued to Agata Gotov, the
sister of Artem Gotov in exchange for services valued at $805 and as
founder shares, and 200,000 shares of Common Stock were issued to Kenneth
G. Eade in exchange for legal services valued at $200. Each of Mr. Gotov,
Ms. Gotov and Mr. Eade, as the husband of Ms. Gotov, may be deemed a
promoter of the Company. The Company claimed an exemption under the
Securities Act of 1933, pursuant to Section 4(2) of the Act. Mr. Gotov and
Ms. Gotov were both Officers and Directors of the Company, while Mr. Eade
is a sophisticated and accredited investor.
(2) In June 2001, a total of 70,000 shares of Common Stock were issued to
Jeffrey Volpe in exchange for clerical services rendered valued at $70 and
70,000 shares of Common Stock were issued to Richard Tearle in exchange for
Internet web services valued at $70.. The Company claimed an exemption
under the Securities Act of 1933, pursuant to Section 4(2) of the Act. Both
Mr. Volpe and Mr. Tearle had access to all corporate information and both
were sophisticated investors.
(3) In 2001, a total of 284,600 shares (pre-acquisition) and 916,000 shares
(pre-forward split and post acquisition) to various consultants in exchange
for services rendered to the Company. This offering and sale was deemed to
be exempt under Rule 506 of Regulation D and Section 4(2) of the Securities
Act. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of
persons, all of whom were accredited investors and transfer was restricted
by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
(4) In September 2001 the Company issued 21,000,000 shares of its Common Stock
to nineteen (19) shareholders of F.&F. Equipment, Inc. d/b/a American
Ammunition, ("AA") pursuant to a Share Exchange Agreement. The shares were
valued at $3,998,650. The transaction resulted in AA becoming a wholly
owned subsidiary of the Company in a transaction that was treated as a
reverse merger for accounting purposes. Of such shares, the current
officers and directors of the Company were issued a total of 15,750,000
shares and 1,050,000 were issued to Donald F. Mintmire, sole owner of the
firm of Mintmire & Associates. This offering and sale was deemed to be
79
exempt under Rule 506 of Regulation D and Section 4(2) of the Securities
Act. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of
persons, all of whom were accredited investors and transfer was restricted
by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
(5) In September and October 2001 the Company issued 222,600 shares of $5.00
Series A Convertible Preferred Stock valued at $1,113,000 through an
ongoing private placement. For such offering, the Company relied on Section
4(2) of the Act and Regulation D, Rule 506 promulgated thereunder. All such
sales were to accredited investors. Of such shares, the Robert I. Escobio
Family Trust acquired 2,000 shares. Mr. Escobio is a Director of the
Company.
(6) In September 2001, a creditor, Key Packaging Company, agreed to converted
$10,000 of debt due from the Company into 2,000 shares of $5.00 Series A
Convertible Preferred stock. This offering and sale was deemed to be exempt
under Rule 506 of Regulation D and Section 4(2) of the Securities Act. No
advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of
persons, all of whom were accredited investors and transfer was restricted
by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
(7) In September 2001, a principal shareholder, Andres Fernandez, converted
$7,553,600 of unsecured debt due to him by the Company into 1,510,720
shares of $5.00 Series A Convertible Preferred Stock. Mr. Fernandez is an
Officer and Director of the Company and is an accredited investor. The
Company relied on Section 4(2) of the Act and Regulation D, Rule 506
promulgated thereunder.
(8) On November 5, 2001, the Company entered into an agreement with the
Placement Agreements in connection with the offering of the Notes. In
conjunction with such agreement, the Company received a payment in the
amount of $15,000.00 from Argo for the Option, which provided Argo with the
right to purchase up to $3,500,000.00 of the Notes to be offered by the
Company and simultaneously, Argo purchased $135,000.00 of such Notes. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D
and Section 4(2) of the Securities Act. No advertising or general
solicitation was employed in offering the securities. The offerings and
sales were made to a limited number of persons, all of whom were accredited
investors and transfer was restricted by American Ammunition in accordance
with the requirements of the Securities Act of 1933. These notes have been
redeemed and are not currently outstanding.
On February 27, 2002, the Company issued an aggregate 277,777 shares of
restricted, unregistered common stock, at $0.45 per share, to Forus Investments,
Inc., an existing shareholder, in satisfaction of a $100,000 short-term working
capital loan payable and $25,000 in agreed-upon interest payable to a
shareholder, thereby satisfying all outstanding short-term debt in full. The
valuation of this transaction was based on the discounted "fair value" of the
Company's common stock based upon the quoted closing price on the date of the
transaction. This offering and sale was deemed to be exempt under Rule 506 of
80
Regulation D and Section 4(2) of the Securities Act. No advertising or general
solicitation was employed in offering the securities. The offerings and sales
were made to a limited number of persons, all of whom were accredited investors
and transfer was restricted by American Ammunition in accordance with the
requirements of the Securities Act of 1933.
On March 25, 2002, the Company sold 611,110 shares of restricted, unregistered
common stock, at $0.36 per share, to Kissimmul, Inc., a Toronto, Ontario, Canada
corporation, for gross proceeds of approximately $220,000. The valuation of this
transaction was based on the discounted "fair value" of the Company's common
stock based upon the quoted closing price on the date of the transaction. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act.
No advertising or general solicitation was employed in offering the securities.
The offerings and sales were made to a limited number of persons, all of whom
were accredited investors and transfer was restricted by American Ammunition in
accordance with the requirements of the Securities Act of 1933.
On March 28, 2002, the Company sold 777,775 shares of restricted, unregistered
common stock, at $0.36 per share, to Tomina Associates, Ltd., a Vancouver, B.C.,
Canada corporation, for gross proceeds of approximately $280,000. The valuation
of this transaction was based on the discounted "fair value" of the Company's
common stock based upon the quoted closing price on the date of the transaction.
This offering and sale was deemed to be exempt under Rule 506 of Regulation D
and Section 4(2) of the Securities Act. No advertising or general solicitation
was employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
On March 5, 2002, the Company issued 32,000 shares of restricted, unregistered
common stock to Len Hale, amember of the Company's Board of Directors, for
consulting services related to the Company's reverse merger transaction and for
various marketing services. This transaction was valued at approximately
$11,520, or $0.36 per share, which approximates the discounted "fair value" of
the Company's common stock based on the quoted closing price of the Company's
common stock on the date of the respective transaction. This offering and sale
was deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of the
Securities Act. No advertising or general solicitation was employed in offering
the securities. The offerings and sales were made to a limited number of
persons, all of whom were accredited investors and transfer was restricted by
American Ammunition in accordance with the requirements of the Securities Act of
1933.
On March 5, 2002, the Company issued 41,665 shares of restricted, unregistered
common stock to D. P. Martin & Associates, an unrelated party for shareholder
and other public relation services. This transaction was valued at approximately
$15,000, or $0.36 per share, which approximates the discounted "fair value" of
the Company's common stock based on the quoted closing price of the Company's
common stock on the date of the respective transaction. This offering and sale
81
was deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of the
Securities Act. No advertising or general solicitation was employed in offering
the securities. The offerings and sales were made to a limited number of
persons, all of whom were accredited investors and transfer was restricted by
American Ammunition in accordance with the requirements of the Securities Act of
1933.
In April and May 2002, the Company issued an aggregate 432,721 shares of
restricted, unregistered common stock to Ammunition Accessories, Inc., Saunders
Lead Co. and Airco Plating Co., three unrelated trade creditors in settlement of
approximately $182,017 in open trade accounts payable. Each issuance was made at
a price of either $0.45 or $0.36 per share, which approximates the discounted
"fair value" of the Company's common stock based on the quoted closing price of
the Company's common stock on the date of each respective transaction. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
On June 21, 2002, the Company issued 347,223 shares of restricted, unregistered
common stock to Access Investments, Inc., an existing shareholder, to reimburse
said shareholder for the payment of legal fees associated with the bank related
litigation concluded in June 2001 and related consulting services. This
transaction was valued at approximately $125,000, or $0.36 per share, which
approximates the discounted "fair value" of the Company's common stock based on
the quoted closing price of the Company's common stock on the date of the
respective transaction. This offering and sale was deemed to be exempt under
Rule 506 of Regulation D and Section 4(2) of the Securities Act. No advertising
or general solicitation was employed in offering the securities. The offerings
and sales were made to a limited number of persons, all of whom were accredited
investors and transfer was restricted by American Ammunition in accordance with
the requirements of the Securities Act of 1933.
On June 26, 2002, the Company sold 277,778 shares of restricted, unregistered
common stock to Gala Investments, an unrelated investor, for aggregate proceeds
of approximately $100,000. This sale was made at a price of $0.36 per share,
which approximates the discounted "fair value" of the Company's common stock
based on the quoted closing price of the Company's common stock on the date of
the respective transaction. This offering and sale was deemed to be exempt under
Rule 506 of Regulation D and Section 4(2) of the Securities Act. No advertising
or general solicitation was employed in offering the securities. The offerings
and sales were made to a limited number of persons, all of whom were accredited
investors and transfer was restricted by American Ammunition in accordance with
the requirements of the Securities Act of 1933.
On July 25, 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to Gala Enterprises, Ltd., an existing shareholder, for cash
proceeds of approximately $100,000. This sale was made at a price of $0.26 per
share, which approximates the discounted "fair value" of the Company's common
stock based on the quoted closing price of the Company's common stock on the
date of the respective transaction. The proceeds were used to reduce the
82
Company's outstanding balance on a long-term note payable to a bank. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
On August 14, 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to Gala Enterprises, Ltd., an existing shareholder, for cash
proceeds of $100,000. This sale was made at a price of $0.26 per share, which
was below the discounted "fair value" of the Company's common stock based on the
quoted closing price of the Company's common stock on the date of the respective
transaction. The differential between the discounted "fair value" (approximately
$0.29 per share) and the selling price resulted in a charge to operations of
approximately $11,346 for compensation expense related to common stock issuances
at less than "fair value". The proceeds were used to reduce the Company's
outstanding balance on a long-term note payable to a bank. This offering and
sale was deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of
the Securities Act. No advertising or general solicitation was employed in
offering the securities. The offerings and sales were made to a limited number
of persons, all of whom were accredited investors and transfer was restricted by
American Ammunition in accordance with the requirements of the Securities Act of
1933.
On August 21, 2002, the Company sold 20,506 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$6,152. This sale was made at a price of $0.30 per share, which approximates the
discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds were used to retire trade accounts payable to a New
Mexico law firm for legal services rendered to the Company. This offering and
sale was deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of
the Securities Act. No advertising or general solicitation was employed in
offering the securities. The offerings and sales were made to a limited number
of persons, all of whom were accredited investors and transfer was restricted by
American Ammunition in accordance with the requirements of the Securities Act of
1933.
On September 20, 2002, the Company sold 277,778 shares of restricted,
unregistered common stock to Access Investments, Inc., an existing shareholder,
for cash proceeds of approximately $100,000. This sale was made at a price of
$0.36 per share, which approximates the discounted "fair value" of the Company's
common stock based on the quoted closing price of the Company's common stock on
the date of the respective transaction. The proceeds were used to reduce the
Company's outstanding balance on a long-term note payable to a bank. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
83
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
On September 26, 2002, the Company sold 277,778 shares of restricted,
unregistered common stock to Access Investments, Inc., an existing shareholder,
for cash proceeds of approximately $100,000. This sale was made at a price of
$0.26 per share, which approximates the discounted "fair value" of the Company's
common stock based on the quoted closing price of the Company's common stock on
the date of the respective transaction. The proceeds were used to provide
working capital liquidity for future periods. This offering and sale was deemed
to be exempt under Rule 506 of Regulation D and Section 4(2) of the Securities
Act. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were accredited investors and transfer was restricted by American
Ammunition in accordance with the requirements of the Securities Act of 1933.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with La Jolla Cove Investors, Inc. ("La Jolla") on October 4,
2002 for the sale of (i) $250,000 in convertible debentures and (ii) warrants to
buy 2,500,000 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 and a
warrant to purchase 3,500,000 shares of common stock. We currently have $266,365
of our convertible debentures and 2,663,650 warrants still outstanding. This
prospectus relates to the resale of the common stock underlying these
convertible debentures and warrants.
The debentures bear interest at 8%, mature on June 30, 2006, and are convertible
into our common stock, at the selling stockholder's option except for the four
conversions immediately following the effective date of this registration
statement, which must be submitted to us on a weekly basis.. The convertible
debentures are convertible into the number of our shares of common stock equal
to the dollar amount of the debentures being converted multiplied by 11, less
the product of the discounted market price multiplied by 10 times the dollar
amount of the debenture being converted, which is divided by the discounted
market price. The discounted market price for the convertible debentures is the
lesser of (i) $1.00 or (ii) seventy six percent of the average of the volume
weighted average prices of our common stock during the five 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. Upon conversion of
the convertible debenture, the selling stockholder must concurrently exercise
the warrant into shares of our common stock equal to ten times the dollar amount
of the debenture being converted divided by the exercise price, which is $1.00.
Currently, the warrant is exercisable into 2,663,650 shares of common stock at
an exercise price of $1.00 per share.
84
The aggregate effect of the concurrent conversion of the debentures at the
applicable conversion price and the exercise of the warrants at $1.00 per share
will result in the issuance of shares of common stock to the selling stockholder
at a 24% discount to the market. For example, if the selling stockholder
converts $10,000 of the debenture on April 26, 2005, we are required to issue
1,347,368 shares assuming a market price of $.10 and a conversion price of
$.076. However, the selling stockholder is also required to convert the warrant
into 100,000 shares of common stock or ten times the dollar amount of the
debenture being converted at $1.00 per share. The end result is that we will
receive $110,000 that has been previously funded through the debenture or that
will be funded upon exercise of the warrant and we are required to issue
1,447,368 shares of common stock.
In December 2004, we entered into an addendum to the convertible debenture and
warrant whereby we agreed to the following:
* the discount multiplier was reduced from eighty percent to seventy six
percent;
* within five business days after this registration statement being
declared effective, La Jolla is required to submit a debenture
conversion in the amount of $10,000 and every ten business days
thereafter La Jolla shall submit three additional debenture conversion
in the amount of $10,000 each;
* within five business days after this registration statement being
declared effective, La Jolla shall wire $400,000 to us as a prepayment
towards the exercise of its warrant (such prepayment shall be applied
towards future mandatory exercises of La Jolla's warrant); and
* immediately following the sale of all shares held by La Jolla in
connection with the debenture conversions in the aggregate amount of
$40,000, La Jolla shall wire $275,000 to us as a prepayment towards
the exercise of its warrant and shall submit a debenture conversion in
the amount of $6,250 on the first business day of each month until the
debenture is no longer outstanding.
* the selling stockholder agreed to dismiss, without prejudice, the
lawsuit entitled "La Jolla Cove Investors, Inc. v. American
Ammunition, Inc." filed in San Diego Superior Court as case number
GIC836693.
* in December 2004, we deposited 1,500,000 shares of common stock with
an escrow agent and La Jolla submitted a $10,000 conversion of the
debenture and provided us with $100,000 as a prepayment for the
warrant exercise. Upon completion of the sale by La Jolla of all
shares received in connection with this exercise and conversion, La
Jolla made a payment to our company equal to 76% of the net proceeds
from the sale of the shares less $100,000.
The selling stockholder has contractually agreed to restrict its ability to
convert or exercise its warrants and receive shares of our common stock such
that the number of shares of common stock held by them and their affiliates
after such conversion or exercise does not exceed 4.9% of the then issued and
outstanding shares of common stock.
85
In December 2002, we amended the above-referenced debenture and warrants as
follows: The number of common shares into which the debenture may be converted
is equal to the dollar amount of the debenture being converted multiplied by
eleven, minus the product of the discounted market price, multiplied by ten
times the dollar amount of the debenture being converted, divided by the
discounted market price. The Company issued 2,500,000 warrants that were
exercisable concurrently with the debenture at $1.00 per share. The warrant
holder is obligated to exercise the warrant concurrently with the conversion of
the debenture for a number of shares equal to ten times the dollar amount of the
debenture being converted.
In November 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$100,000. This sale was made at a price of $0.26 per share, which approximates
the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used to pay down an
equivalent portion of the Company's long-term note payable to a bank.
In December 2002, the Company sold an aggregate 120,170 shares of restricted,
unregistered common stock to an existing shareholder in three separate
transactions valued at an aggregate of approximately $31,244. These sales were
made at a price of $0.26 per share, which was in excess of the discounted "fair
value" of the Company's common stock on the date of each respective transaction.
The proceeds of this transaction were used to directly retire a trade account
payable to a specific vendor.
In December 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$100,000. This sale was made at a price of $0.26 per share, which was in excess
of the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used to pay down an
equivalent portion of the Company's long-term note payable to a bank.
In December 2002, the Company issued 55,000 shares of restricted, unregistered
common stock upon the exercise of 5,000 shares of outstanding Series A Preferred
Stock upon the exercise of the conversion option by the Holder of the Series A
Preferred Stock.
This offering and sale was deemed to be exempt under Rule 506 of Regulation D
and Section 4(2) of the Securities Act. No advertising or general solicitation
was employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
Except as expressly set forth above, the individuals and entities to whom we
issued securities as indicated in this section of the registration statement are
unaffiliated with us.
During January 2003, we issued to existing preferred shareholders an aggregate
of 6,343 shares of restricted, unregistered common stock in accrued dividends
86
payable on our outstanding Series A Preferred Stock for the quarter ended
December 31, 2002. This offering and sale was deemed to be exempt under Rule 506
of Regulation D and Section 4(2) of the Securities Act. No advertising or
general solicitation was employed in offering the securities. The offerings and
sales were made to a limited number of persons, all of whom were accredited
investors and transfer was restricted by American Ammunition in accordance with
the requirements of the Securities Act of 1933.
In February 2003, we sold an aggregate 104,234 shares of restricted,
unregistered common stock to an existing shareholder in a separate transaction
valued at an aggregate of approximately $27,100. These sales were made at a
price of $0.26 per share. The proceeds of this transaction were used to directly
retire a trade account payable to a specific vendor. This offering and sale was
deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of the
Securities Act. No advertising or general solicitation was employed in offering
the securities. The offerings and sales were made to a limited number of
persons, all of whom were accredited investors and transfer was restricted by
American Ammunition in accordance with the requirements of the Securities Act of
1933.
In February 2003, we sold 384,615 shares of restricted, unregistered common
stock to an existing shareholder for cash proceeds of approximately $100,000.
This sale was made at a price of $0.26 per share. The proceeds of this
transaction were used to pay down an equivalent portion of our long-term note
payable to a bank. This offering and sale was deemed to be exempt under Rule 506
of Regulation D and Section 4(2) of the Securities Act. No advertising or
general solicitation was employed in offering the securities. The offerings and
sales were made to a limited number of persons, all of whom were accredited
investors and transfer was restricted by American Ammunition in accordance with
the requirements of the Securities Act of 1933.
In March 2003, we issued 99,000 shares of restricted, unregistered common stock
upon the exercise of 9,000 shares of outstanding Series A Preferred Stock upon
the exercise of the conversion option by the holder of the Series A Preferred
Stock. This offering and sale was deemed to be exempt under Rule 506 of
Regulation D and Section 4(2) of the Securities Act. No advertising or general
solicitation was employed in offering the securities. The offerings and sales
were made to a limited number of persons, all of whom were accredited investors
and transfer was restricted by American Ammunition in accordance with the
requirements of the Securities Act of 1933.
In March 2003, we sold 972,222 shares of restricted, unregistered common stock
to two (2) existing shareholders for cash proceeds of approximately $350,000.
This sale was made at a price of $0.36 per share. The proceeds of this
transaction were used to pay down an equivalent portion of our long-term note
payable to a bank. This offering and sale was deemed to be exempt under Rule 506
of Regulation D and Section 4(2) of the Securities Act. No advertising or
general solicitation was employed in offering the securities. The offerings and
sales were made to a limited number of persons, all of whom were accredited
investors and transfer was restricted by American Ammunition in accordance with
the requirements of the Securities Act of 1933.
87
In April 2003, in two separate transactions, we sold an aggregate 833,334 shares
of restricted, unregistered common stock to two (2) existing shareholders for
aggregate proceeds of $300,000. Each sale was made at a price of $0.36 per
share. These proceeds are to be used to supplement operational working capital.
This offering and sale was deemed to be exempt under Rule 506 of Regulation D
and Section 4(2) of the Securities Act. No advertising or general solicitation
was employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
In October 2003, in a separate transaction, the Company sold 2,200,000 shares of
restricted, unregistered common stock to the Debenture Holder for cash proceeds
of approximately $400,000, or approximately $0.18 per share, which was in excess
of the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The cash proceeds of this transaction were used to provide working
capital and support operations.
In October 2003, the Company issued an aggregate 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.
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.
On May 26, 2004, the Company issued 300,000 shares of restricted, unregistered
common stock to two separate corporations in payment and full satisfaction of
all amounts due for fees and/or commissions due in conjunction with the
Company's convertible debenture financing transaction. This transaction was
valued at approximately $36,000, which approximated the "fair value" of the
underlying securities given in payment and the related charges for the services
provided. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
88
In August 2004, the Company issued 29,746 shares of restricted, unregistered
common stock in payment of approximately $9,170 in accrued dividends payable on
the Company's outstanding Series B Preferred Stock for the quarter ended June
30, 2004. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
* All of the above offerings and sales were deemed to be exempt under rule
506 of Regulation D and Section 4(2) of the Securities Act of 1933, as
amended. No advertising or general solicitation was employed in offering
the securities. The offerings and sales were made to a limited number of
persons, all of whom were accredited investors, business associates of our
company or executive officers of our company, and transfer was restricted
by Radix in accordance with the requirements of the Securities Act of 1933.
In addition to representations by the above-referenced persons, we have
made independent determinations that all of the above- referenced persons
were accredited or sophisticated investors, and that they were capable of
analyzing the merits and risks of their investment, and that they
understood the speculative nature of their investment. Furthermore, all of
the above-referenced persons were provided with access to our Securities
and Exchange Commission filings.
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2. References to
"the Company" in this Exhibit List mean American Ammunition, Inc., a California
corporation.
Exhibit # Exhibit Name
----------- ------------------
2.1 Share Exchange Agreement Between FBI Fresh Burgers International
and F&F Equipment, Inc., dated September 29, 2001 (Incorporated
by referenced to our Form 8-K filed with the SEC on October 4,
2001).
3.1 Articles of Incorporation (Incorporated by reference to our
registration statement on Form SB-2 filed with the SEC on
September 20, 2000, File No. 333-4660).
3.2 Certificate of Amendment of Articles of Incorporation
(Incorporated by referenced to our Form 8-K filed with the SEC on
October 4, 2001).
3.4 Certificate of Amendment of Articles of Incorporation
(Incorporated by reference to our registration statement on Form
SB-2 filed with the SEC on September 20, 2000, File No.
333-4660).
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3.5 Amended and Restated Bylaws (Incorporated by reference to our
Form 10QSB for the quarter ended September 30, 2001).
4.1* Common Stock Purchase Warrant with La Jolla Cove Investors, Inc.,
dated October 4, 2002.
4.2* Convertible Debenture with La Jolla Cove Investors, Inc., dated
October 4, 2002.
4.3* Addendum with La Jolla Cove Investors, Inc., dated October 4,
2002.
4.4* Letter Agreement with La Jolla Cove Investors, dated October 4,
2002.
4.5* Registration Rights Agreement with La Jolla Cove Investors, dated
October 4, 2002.
4.6* Letter Agreement with La Jolla Cove, dated December 2002.
4.7** Letter Agreement with La Jolla Cove, dated December 2004.
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent.
9.1 Ellet Brothers, Inc. Purchase Order (incorporated by reference to
our Form SB-2 filed May 13, 2003)
23.1 Consent of Smith & Company (filed herewith)
23.2 Consent of legal counsel (see Exhibit 5.1)
--------------------------
* Incorporated by reference to the Form SB-2 filed January 6, 2003.
** Incorporated by reference to the Form SB-2 filed January 14, 2005 file no.
333-122056.
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
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decrease in volume of securities offered (if the total dollar value of
the securities offered would not exceed that which was registered) and
any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with
the Commission pursuant to Rule 424(b) under the Securities Act if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement, and
(iii)Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of Miami,
State of Florida, on May 5, 2005.
AMERICAN AMMUNITION, INC.
By: /s/ Andres F. Fernandez
----------------------------
Andres F. Fernandez, President and CEO
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Signature Title Date
---------------------------- -------------------------- -------------
/s/ J.A. Fernandez, Sr.
---------------------------- Chairman of the Board May 5, 2005
J.A. Fernandez, Sr. and Director of Sales
/s/ Andres F. Fernandez
---------------------------- President, Chief Executive May 5, 2005
Andres F. Fernandez Officer, Chief Financial
Officer and Principal
Accounting Officer
/s/ Emilio D. Jara
---------------------------- Vice-President of Operations, May 5, 2005
Emilio D. Jara Secretary and Director
/s/ Maria A. Fernandez
---------------------------- Director May 5, 2005
Maria A. Fernandez
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