UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-QSB
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(Mark one)
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended March 31, 2005
[_] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ______________ to _____________
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Commission File No.: 000-32379
American Ammunition, Inc.
---------------------------------
(Name of small business registrant in its charter)
California 91-2021594
------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3545 NW 71st Street
Miami, FL 33147
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (305) 835-7400
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange
on which registered
None
----------------------------- ------------------------------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
------------------------
(Title of class)
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [_]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: May 21, 2005: 74,851,691
Transitional Small Business Disclosure Format (check one): YES [_] NO [X]
American Ammunition, Inc.
Form 10-QSB for the Quarter ended March 31, 2005
Table of Contents
Page
Part I - Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 19
Item 3 Controls and Procedures 22
Part II - Other Information
Item 1 Legal Proceedings 22
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3 Defaults Upon Senior Securities 22
Item 4 Submission of Matters to a Vote of Security Holders 22
Item 5 Other Information 23
Item 6 Exhibits 23
Signatures 23
Part I - Financial Information
Item 1 - Financial Statements
American Ammunition, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2005 and 2004
(Unaudited)
March 31, March 31,
2005 2004
------------- ------------
ASSETS
Current Assets
Cash on hand and in bank $ 377,922 $ 111,595
Accounts receivable - trade, net of
allowance for doubtful accounts of $-0- and $-0-, respectively 289,559 306,709
Inventory 857,552 1,345,586
Prepaid expenses 59,497 38,067
------------- ------------
Total Current Assets 1,584,530 1,801,957
------------- ------------
Property and Equipment - at cost
Manufacturing equipment 8,006,483 7,416,352
Office furniture and fixtures 69,889 77,381
Leasehold improvements 190,277 187,397
------------- ------------
8,266,649 7,681,130
Accumulated depreciation (4,990,261) (4,241,372)
------------- ------------
Net Property and Equipment 3,276,388 3,439,758
------------- ------------
Other Assets
Patents, Trademarks and Noncompetition agreement,
net of accumulated amortization of approximately $22,974 252,716 -
Deposits and other 83,660 77,860
------------- ------------
Total other assets 336,376 77,860
------------- ------------
TOTAL ASSETS $ 5,197,294 $ 5,319,575
============= ============
- Continued -
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part
of these consolidated financial statements.
3
American Ammunition, Inc. and Subsidiaries
Consolidated Balance Sheets - Continued
March 31, 2005 and 2004
(Unaudited)
March 31, March 31,
2005 2004
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of leases payable $ - $ 4,905
Customer deposits 440,906 4,100
Accounts payable - trade 693,980 248,798
Accrued salaries and wages payable 166,492 -
Accrued interest expense 15,000 -
Accrued dividends payable 29,509 11,021
------------- ------------
Total Current Liabilities 1,345,887 268,824
Long-Term Liabilities - -
------------- ------------
Total Liabilities 1,345,887 268,824
------------- ------------
Commitments and Contingencies
Convertible Debenture 266,365 341,365
------------- ------------
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 69,331,666 shares
issued and outstanding, respectively 74,852 69,332
Additional paid-in capital 24,472,709 22,467,723
Accumulated deficit (20,789,529) (17,827,773)
------------- ------------
3,760,042 4,709,386
Stock subscription receivable (175,000) -
------------- ------------
Total Stockholders' Equity 3,585,042 4,709,386
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,197,294 $ 5,319,575
============= ============
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part
of these consolidated financial statements.
4
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Loss
Three months ended March 31, 2005 and 2004
(Unaudited)
Three months Three months
ended ended
March 31, 2005 March 31, 2004
-------------- --------------
Revenues - net of returns and allowances $ 1,170,317 $ 281,507
-------------- --------------
Cost of Sales
Materials, Direct Labor and other direct costs 1,349,331 532,045
Depreciation 187,249 173,088
-------------- --------------
Total Cost of Sales 1,536,580 705,133
-------------- --------------
Gross Profit (366,263) (423,626)
-------------- --------------
Operating Expenses
Research and development expenses 1,732 -
Marketing and selling expenses 81,106 123,179
Other operating expenses 319,561 290,667
Bad debt expense - 27,819
Interest expense 6,520 260
Depreciation expense 1,317 1,894
Amortization expense 13,785 -
Compensation expense related to issuances of
common stock at less than "fair value" - 321,000
-------------- --------------
Total Operating Expenses 424,021 764,819
-------------- --------------
Loss from Operations (790,284) (1,188,445)
Other Income (Expense) 4,240 87
-------------- --------------
Loss before Income Taxes (786,044) (1,188,358)
Provision for Income Taxes - -
-------------- --------------
Net Loss (786,044) (1,188,358)
Other Comprehensive Income - -
-------------- --------------
Comprehensive Loss $ (786,044) $ (1,188,358)
============== ==============
Loss per weighted-average share of common
stock outstanding, computed on net loss -
basic and fully diluted $ (0.01) $ (0.02)
============== ==============
Weighted-average number of
common shares outstanding 74,851,691 67,769,150
============== ==============
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part
of these consolidated financial statements.
5
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three months ended March 31, 2005 and 2004
(Unaudited)
Three months Three months
ended ended
March 31, 2005 March 31, 2004
-------------- --------------
Cash flows from operating activities
Net loss for the period $ (786,045) $ (1,188,358)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization 202,351 174,982
Bad debt expense - 27,819
Compensation expense related to issuance
of common stock at less than "fair value" - 321,000
(Increase) Decrease in
Accounts receivable 349,885 186,307
Inventory 54,872 (232,830)
Prepaid expenses, deposits and other (651) (2,321)
Increase (Decrease) in
Accounts payable - trade (242,906) 119,933
Other accrued expenses 30,522 -
-------------- --------------
Net cash (used in) operating activities (391,972) (588,826)
-------------- --------------
Cash flows from investing activities
Purchase of property and equipment (35,571) (302,314)
-------------- --------------
Net cash (used in) investing activities (35,571) (302,314)
-------------- --------------
Cash flows from financing activities
Principal paid on long-term capital leases - (2,936)
Cash received from sale of common stock and warrant exercise - 500,000
-------------- --------------
Net cash provided by financing activities - 497,064
-------------- --------------
Increase (Decrease) in Cash (427,543) (394,076)
Cash at beginning of period 805,465 505,671
-------------- --------------
Cash at end of period $ 377,922 $ 111,595
============== ==============
Supplemental disclosure of interest and income taxes paid
Interest paid for the period $ 6,520 $ 260
============== ==============
Income taxes paid for the period $ - $ -
============== ==============
Supplemental disclosure of non-cash investing and financing activities
Conversion of convertible debenture
into common stock $ - $ 50,000
============== ==============
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part
of these consolidated financial statements.
6
American Ammunition, Inc. 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".
7
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.
5. Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. At March 31, 2005 and 2004, 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.
8
American Ammunition Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note C - Summary of Significant Accounting Policies - Continued
5. Income Taxes - continued
As of March 31, 2005 and 2004, 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 at the end of
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 March 31, 2005 and 2004, and subsequent thereto, the Company had no
options outstanding. The outstanding warrants and convertible preferred
stock and mandatorily convertible debentures are anti-dilutive due to the
Company's net operating loss position.
7. Advertising costs
The Company does not conduct any direct response advertising activities.
For non-direct response advertising, the Company charges the costs of these
efforts to operations at the first time the related advertising is
published.
Note D - Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximates fair value due to the short term nature of
these items and/or the current interest rates payable in relation to current
market conditions.
Interest rate risk is the risk that the Company's earnings are subject to
fluctuations in interest rates on either investments or on debt and is fully
dependent upon the volatility of these rates. The Company does not use
derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company's earnings are subject to
fluctuations in interest rates or foreign exchange rates and are fully dependent
upon the volatility of these rates. The company does not use derivative
instruments to moderate its exposure to financial risk, if any.
Note E - Concentrations of Credit Risk
The Company maintains its cash accounts in a single financial institutions
subject to insurance coverage issued by the Federal Deposit Insurance
Corporation (FDIC). Under FDIC rules, the Company and its subsidiaries are
entitled to aggregate coverage of $100,000 per account type per separate legal
entity per financial institution.
9
American Ammunition Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note E - Concentrations of Credit Risk - Continued
During the period ended March 31, 2005 and the periods subsequent thereto,
respectively, the various operating companies maintained deposits in this
financial institution with credit risk exposures in excess of statutory FDIC
coverage. The Company incurred no losses during 2003 and 2004, and subsequent
thereto, as a result of any of these unsecured situations.
Note F - Inventory
As of March 31, 2005 and 2004, inventory consisted of the following components:
March 31, March 31,
2005 2004
---------- -----------
Raw materials $ 596,548 $ 428,611
Work in process 177,862 419,236
Finished goods 83,142 497,739
---------- ----------
Totals $ 857,552 $1,345,586
========== ==========
Note G - Property and Equipment
Property and equipment consist of the following components:
March 31, March 31, Estimated
2005 2004 useful life
------------- ---------------------------
Manufacturing equipment $ 8,006,483 $ 7,416,352 3-10 years
Office furniture and fixtures 69,889 77,381 3- 7 years
Leasehold improvements 190,277 187,397 8-20 years
------------ ------------
8,266,649 7,681,130
Accumulated depreciation (4,990,261) (4,241,372)
------------ ------------
Net property and equipment $ 3,276,388 $ 3,439,758
============ ============
Total depreciation expense charged to operations for the three months ended
March 31, 2005 and 2004 was approximately $188,566 and $171,982, respectively.
(Remainder of this page left blank intentionally)
10
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note H- Capital Leases Payable
Capital leases payable consist of the following as of March 31, 2005 and 2004,
respectively:
March 31, March 31,
2004 2003
--------------------------
Three capital leases, respectively, payable to various
equipment financing companies. Interest, at March 31, 2002,
ranging between 11.37% and 14.05%. Payable in aggregate
monthly installments of approximately $935, including
accrued interest. Final maturities occur between September
2004 and December 2004. Collateralized the underlying leased
manufacturing equipment. $ - $ 4,905
Less current maturities - (4,905)
--------- ----------
Long-term portion $ - $ -
========= ==========
Note I - 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 March 31, 2005, 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 March 31, 2005 $ 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 March 31, 2005, the warrant
is exercisable into 2,663,650 shares of common stock at an exercise price of
$1.00 per share.
11
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note I - Convertible Debenture - Continued
In December 2004, the Company entered into an addendum to the convertible
debenture and warrant whereby the Company agreed to the following:
* the discount multiplier was reduced from eighty percent to seventy six
percent;
* within five business days after this registration statement being declared
effective, La Jolla is required to submit a debenture conversion in the
amount of $10,000 and every ten business days thereafter La Jolla shall
submit three additional debenture conversion in the amount of $10,000 each;
* within five business days after this registration statement being declared
effective, La Jolla shall wire $400,000 to us as a prepayment towards the
exercise of its warrant; and
* immediately following the sale of all shares held by La Jolla in connection
with the debenture conversions in the aggregate amount of $40,000, La Jolla
shall wire $275,000 to us as a prepayment towards the exercise of its
warrant and shall submit a debenture conversion in the amount of $6,250 on
the first business day of each month until the debenture is no longer
outstanding.
LaJolla has contractually agreed to restrict its ability to convert or exercise
its warrants and receive shares of our common stock such that the number of
shares of common stock held by them and their affiliates after such conversion
or exercise does exceed 4.9% of the then issued and outstanding shares of common
stock.
Due to the contractually agreed mandatory conversion of this Debenture, the
Company has reflected this transaction in its balance sheet as a "mezzanine"
level debt obligation on its balance sheet, between "Total Liabilities" and
"Stockholders' Equity". Upon the respective mandatory conversion, the Company
will relieve the respective portion of the Debenture and the any related
accrued, but unpaid interest, and credit this amount to the respective "common
stock" and "additional paid-in capital" accounts in the stockholder's equity
section for the par value and excess amount over the par value of the respective
shares issued.
As the warrant is non-detachable from the Debenture and requires simultaneous
exercise upon conversion of the Debenture, no value was assigned to the issued
warrant. Upon exercise of the warrant, the Company will record the issuance of
the underlying shares as a new issuance of common stock on the date of each
respective exercise.
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.
12
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note J - Preferred Stock Transactions
Preferred stock consists of the following as of March 31, 2005 and 2004,
respectively:
March 31, 2005 March 31, 2004
-------------- --------------
# shares value # shares value
--------- --------- --------- ---------
Series A Cumulative
Convertible Preferred Stock 12,000 $ 60,000 12,000 $ 60,000
Series B Cumulative
Convertible Preferred Stock 91,700 458,500 91,700 458,500
Series C Convertible
Preferred Stock 1,905,882 324,000 - -
--------- --------- --------- ---------
2,009,582 $ 842,500 103,700 $ 518,500
========= ========= ========= =========
Series A Convertible Preferred Stock
In September, October and November 2001, the Company sold an aggregate 222,600
shares of $5.00 Series A Convertible Preferred Stock (Series A Preferred Stock)
for total proceeds of approximately $1,113,000 through a Private Placement
Memorandum. The Series A Convertible Preferred Stock provides for cumulative
dividends at a rate of 8.0% per year, payable quarterly, in cash or shares of
the Company's common stock at the Company's election. Each share of Series A
Preferred Stock is convertible into 11 shares of the Company's common stock
initially at any time after 6 months of the date of issue and prior to the
notice of redemption at the option of the holder, subject to adjustments for
customary anti-dilution events. In December 2001, at the request of the holders
of the Series A Preferred Stock, the Company and the individual holders modified
the holding period for conversion to allow for conversion in December 2001.
In September 2001, the Company's principal stockholder converted approximately
$4,007,327 of unsecured debt and approximately $3,546,273 of cumulative and
unpaid accrued interest into 1,510,710 shares of Series A Preferred Stock.
In September 2001, a creditor of the Company agreed to convert approximately
$10,000 of trade accounts payable into 2,000 shares of Series A Preferred Stock.
In December 2001, concurrent with a modification in the holding period prior to
conversion, certain holders of the Series A Preferred Stock orally notified the
Company of their intent to exercise the conversion features on 1,749,720 issued
and outstanding shares of Series A Preferred Stock into 19,246,920 shares of
common stock prior to December 31, 2001. Due to the timing of the requisite
documentation, the clerical activities related to this conversion were not
completed until February 2002.
In conjunction with the Series A Preferred Stock, certain shares were sold after
the Company's common stock was approved for trading by the National Association
of Securities Dealers on the OTC Bulletin Board in October 2001. The shares of
Series A Preferred Stock sold subsequent to this date had an equivalent per
share value of common stock below the ending quoted market price of the
Company's common stock on their respective issue dates. This difference created
a Beneficial Conversion Feature Discount of approximately $1,207,993. This
discount was then amortized over the unexpired time period between the date of
issue of the eligible shares and the eligible conversion date, as amended. All
of the shares sold subsequent to the initial trading date were converted in
December 2001 and, accordingly, the approximate $1,207,993 in Beneficial
Conversion Feature Discount was fully amortized to operations.
In December 2002, a holder of 5,000 shares of Series A Preferred Stock exercised
his conversion rights and converted these shares of Series A Preferred Stock
into 55,000 shares of restricted, unregistered common stock.
In January 2003, three separate holders of 9,000 shares of Series A Preferred
Stock exercised their conversion rights and converted these shares of Series A
Preferred stock into 99,000 shares of restricted, unregistered common stock.
13
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note J - Preferred Stock Transactions - Continued
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
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.
14
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note K - Common Stock Transactions - Continued
Calendar 2003 transactions - continued
In March 2003, the Company issued 972,222 shares of restricted, unregistered
common stock for cash proceeds of approximately $350,000. These sales were made
at a price of $0.36 per share, which was in excess of the discounted "fair
value" of the Company's common stock based on the quoted closing price of the
Company's common stock on the date of the respective transaction. The proceeds
of this transaction were used to reduce the Company's outstanding long-term
debt.
In 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.
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.
15
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note K - Common Stock Transactions - Continued
Calendar 2004 transactions - Continued
On May 26, 2004, the Company issued 300,000 shares of restricted, unregistered
common stock to two separate corporations in payment and full satisfaction of
all amounts due for fees and/or commissions due in conjunction with the
Company's convertible debenture financing transaction. This transaction was
valued at approximately $36,000, which was less than the closing price on the
date of the respective transaction resulted in a charge to operations of
approximately $24,000. The Company relied upon Section 4(2) of the Securities
Act of 1933, as amended, for an exemption from registration of these shares and
no underwriter was used in this transaction.
In August 2004, the Company issued 29,746 shares of restricted, unregistered
common stock in payment of approximately $9,170 in accrued dividends payable on
the Company's outstanding Series B Preferred Stock for the quarter ended June
30, 2004. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
On October 19, 2004, the Company issued 1,111,112 shares of restricted,
unregistered common stock to acquire certain assets valued at an aggregate
$500,000. The assets consist principally of equipment (approximately $134,000),
inventory (approximately $89,500) and patents and a covenant not-to-compete
(approximately $276,500).
In November 2004, the Company issued 53,908 shares of restricted, unregistered
common stock in payment of approximately $9,170 in accrued dividends payable on
the Company's outstanding Series B Preferred Stock for the quarter ended June
30, 2004. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
Note L - Rental Commitments
The Company leases its corporate office and manufacturing facility from its
controlling stockholder under a long- term operating lease agreement. The lease
requires a monthly payment of approximately $5,735, including applicable sales
taxes. The Company is responsible for all utilities and maintenance expenses.
The lease expires on December 1, 2009 and contains a clause that upon
expiration, the Company and the controlling shareholder shall renegotiate the
annual rental amount.
The Company's subsidiary, IPE, leases it's manufacturing facility from an
unrelated third-party under a long-term operating lease agreement. This lease is
for a period of five (5) years and requires graduated monthly payments, changing
on the lease anniversary date, ranging from approximately $1,751 to $1,914, plus
the applicable sales taxes. The Company is responsible for all utilities and
maintenance expenses. The lease expires on February 28, 2007 and may be renewed
for an additional five (5) year term at a rental rate of approximately $1,971,
plus applicable sales taxes for the first renewal year and 3.0% increase on each
succeeding anniversary date. Total rent expense under this lease was
approximately $20,752 and $16,622, respectively, for each of the years ended
December 31, 2004 and 2003.
In May 2004, the Company entered into a long-term lease agreement for a
warehouse facility adjacent to the Company's primary office and manufacturing
facility. This lease is for a period of two (2) years and requires payments of
approximately $6,206 per month for the first 12 months and approximately $6,393
for the second 12 months, plus applicable sales taxes. The Company is
responsible for all utilities and maintenance expenses. This lease expires on
May 31, 2006. Further, the Company is responsible for any incremental real
estate taxes and property insurance in excess of the amounts incurred by the
landlord for the calendar year immediately preceding the execution of the lease.
16
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note L - Rental Commitments - Continued
Future minimum rental payments on the above leases are as follows:
Year ended
December 31, Amount
----------------------
2005 $ 166,974
2006 117,244
2007 72,643
2008 68,815
2007 68,815
---------
Totals $ 494,491
=========
For the respective years ended December 31, 2004, the Company paid an aggregate
of $131,804 and $87,826 for rent under these agreements.
Note M - Income Taxes
The components of income tax (benefit) expense for the respective three month
periods ended March 31, 2005 and 2004 are as follows:
Three months Three months
ended ended
March 31, 2005 March 31, 2004
---------------------------------
Federal:
Current $ - $ -
Deferred - -
------- ------
- -
------- ------
State:
Current - -
Deferred - -
------- ------
- -
------- ------
Total $ - $ -
======= ======
As of December 31, 2004, the Company has a net operating loss carryforward of
approximately $8,100,000 to offset future taxable income. Subject to current
regulations, components of this carryforward began to expire at the end of
Calendar 2003. The amount and availability of the net operating loss
carryforwards may be subject to limitations set forth by the Internal Revenue
Code. Factors such as the number of shares ultimately issued within a three year
look-back period; whether there is a deemed more than 50 percent change in
control; the applicable long-term tax exempt bond rate; continuity of historical
business; and subsequent income of the Company all enter into the annual
computation of allowable annual utilization of the carryforwards.
The Company's income tax expense (benefit) for the three months ended March 31,
2005 and 2004, respectively, differed from the statutory federal rate of 34
percent as follows:
Three months Three months
ended ended
March 31, 2005 March 31, 2004
-------------------------------
Statutory rate applied to loss
before income taxes $ (267,000) $ (295,000)
Increase (decrease) in income
taxes resulting from:
State income taxes - -
Other, including reserve for
deferred tax asset 267,000 295,000
---------- ----------
Income tax expense $ - $ -
========== ==========
17
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note O - Income Taxes - Continued
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:
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.
(Remainder of this page left blank intentionally)
18
Item 2 - Management's Discussion and Analysis or Plan of Operation
Caution Regarding Forward-Looking Information
Certain statements contained in this Registration Statement including, without
limitation, statements containing the words "believes", "anticipates", "expects"
and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
Such factors include, among others, the following: international, national and
local general economic and market conditions: demographic changes; the ability
of the Company to sustain, manage or forecast its growth; the ability of the
Company to successfully make and integrate acquisitions; raw material costs and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Quarterly Report on Form 10-QSB and
investors in our equity securities are cautioned not to place undue reliance on
such forward-looking statements. The Company disclaims any obligation to update
any such factors or to publicly announce the result of any revisions to any of
the forward-looking statements contained herein to reflect future events or
developments.
General
American Ammunition, Inc. is a holding company with two operating subsidiaries:
F&F Equipment, Inc. and Industrial Plating Enterprise Co.
F&F Equipment, Inc. (F&F) was incorporated on October 4, 1983 under the laws of
the State of Florida. F&F was formed to engage principally in the "import,
export, retail & wholesale of firearms equipment, ammunition & other devices and
for the purpose of transacting any and/or all lawful business." F&F conducts its
business operations under the assumed name of "American Ammunition."
In June 2002, American Ammunition, Inc. formed a wholly owned subsidiary,
Industrial Plating Enterprise Co. (IPE), which started production on June 14,
2002. IPE is a fully licensed and approved electrochemical metallization
facility with significant capacity for processing our line of projectiles as
well as other products and services while employing environmentally sound water
conservation and proven waste treatment techniques.
Results of Operations
Three months ended March 31, 2005 compared with the three months ended March 31,
2004.
During the three months ended March 31, 2005, we experienced aggregate net
revenues of approximately $1,170,000, as compared to approximately $282,000
during the comparable quarter of 2004. The first quarter 2005 sales compare
comparably to the 4th quarter 2004 sales of approximately $1,535,000.
During the first quarter of 2004, the Company commenced a direct solicitation
program for it's "dealer direct" sales program. As this endeavor has received a
very positive initial response from the qualified retail resellers of the
Company's product, the announcement of this program had a significantly
detrimental impact on the Company's relationship with wholesale distributors
and, accordingly, had a significant negative impact on first quarter 2004 sales.
The Company continues to experience high demand for small arms ammunition from
both the retail channel market and domestic and foreign governments. The Company
has identified certain production issues which has inhibited the full
realization of existing product demands and has begun to take the necessary
steps to add specific machinery to counteract these issues.
19
We experienced costs of goods sold of approximately $1,536,580 for the three
months ended March 31, 2005 as compared to approximately $705,000 for the three
months ended March 31, 2004.
Through March 31, 2005, and subsequent thereto, we continue to experience
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
$190,000 and $173,000, respectively, in the above cost of goods expense totals.
These depreciation levels are anticipated to fluctuate nominally in future
periods based upon either the full depreciation of older equipment and/or the
addition of new equipment to expand capacity. For the three month periods ended
March 31, 2005 and 2004, we generated a negative gross profit of approximately
$(366,000), or (31.3%), and approximately $(424,000), or (150.5%). 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, management continues to believe that the Company should be able to
generate a positive gross profit in future periods..
We experienced nominal research and development expenses of approximately $1,700
and $-0-, respectively, during the respective three month periods ended March
31, 2005 and 2004, principally related to refinements in and the expansion of
our product line.
During the first quarters of 2005 and 2004, we expended approximately $81,000
and $123,000, respectively, in advertising and marketing expenses, principally
in developing and promoting our retail dealer direct program. We anticipate to
continue our marketing efforts in this area in future periods; however, the
volume and frequency of our expenditures may fluctuate as management allocates
available capital to these efforts.
Other general and administrative expenses increased by approximately $29,000
from approximately $320,000 for the three months ended March 31, 2005 as
compared to approximately $291,000 for the three months ended March 31, 2004.
These increases are not identifiable by one specific area; however, relate to
general corporate expenses, office and administrative wages and salaries and
other related office overhead.
Included in our results of operations for the first quarter of 2004 are certain
non-cash expenditure charges to operations of approximately $321,000 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.
We recognized a net loss of approximately $(786,000) and $(1,188,000) for the
respective three month periods ended March 31, 2005 and 2004, respectively, or
$(0.01) and $(0.02) per share.
Liquidity And Capital Resources
As of March 31, 2005, December 31, 2004 and March 31, 2004, respectively, we had
working capital of approximately $239,000, $872,000 and $1,533,000. Our working
capital position continues to fluctuate based on collections on our trade
accounts receivable and investments from the mandatory exercise of our
outstanding warrant related to our convertible debenture. Further, we anticipate
that we have sufficient inventory levels to support our retail dealer direct
program and our existing and anticipated U. S. Government contracts.
We have used cash in operating activities of approximately $(392,000) and
$(589,000) during the quarters ended March 31, 2005 and 2004, respectively.
The most significant use of cash in operations during the quarter ended March
31, 2004 was for the increase in on-hand inventory to support the anticipated
demand on our retail dealer direct program and our existing and anticipated U.
S. Government contracts.
We anticipate that our improved liquidity position will continue to improve as
management is of the opinion that, with the current changes to our production
capacity, the Company will be in a position to better support all
20
existing orders and accept existing inquiries which have previously been denied
due to the lack of production capacity and liquidity.
During the quarters ended March 31, 2005 and 2004, respectively, we added
approximately $36,000 and $302,000 in new equipment. Based on communicated
future demand for our products, we have instituted a program to expand our
production capacity through the addition of additional equipment from the open
market. The equipment ultimately to be added is fully dependent upon the
Company's cash position, the availability of either new equity or debt capital
and the ultimate realization of communicated future product sales demand.
Management is of the opinion that sufficient demand will be present, as
supported by new product development and increased product marketing efforts, to
justify this expansion. However, we may not be able to obtain additional funding
or, that such funding, if available, will be obtained on terms favorable to or
affordable by us.
Convertible Debenture
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 March 31, 2005, the outstanding balance on the convertible debenture is
approximately $266,365 and we have approximately 2,663,650 warrants outstanding.
The debentures bear interest at 8%, mature on June 30, 2006, and are convertible
into our common stock, at the selling stockholder's option. The convertible
debentures are convertible into the number of our shares of common stock equal
to the principal amount of the debentures being converted multiplied by 11, less
the product of the conversion price multiplied by 10 times the dollar amount of
the debenture. The conversion price for the convertible debentures is the lesser
of (I) $1.00 or (ii) seventy six percent of the average of the five lowest
volume weighted average prices during the twenty (20) trading days prior to the
conversion. Accordingly, there is in fact no limit on the number of shares into
which the debenture may be converted. However, in the event that our market
price is less than $.30, we will have the option to prepay the debenture at 125%
rather than have the debenture converted. In addition, the selling stockholder
is obligated to exercise the warrant concurrently with the submission of a
conversion notice by the selling stockholder. As of December 31, 2004, the
warrant is exercisable into 2,663,650 shares of common stock at an exercise
price of $1.00 per share.
In December 2004, we entered into an addendum to the convertible debenture and
warrant whereby the Company agreed to the following:
* the discount multiplier was reduced from eighty percent to seventy six
percent;
* within five business days after this registration statement being declared
effective, La Jolla is required to submit a debenture conversion in the
amount of $10,000 and every ten business days thereafter La Jolla shall
submit three additional debenture conversion in the amount of $10,000 each;
* within five business days after this registration statement being declared
effective, La Jolla shall wire $400,000 to us as a prepayment towards the
exercise of its warrant; and
* immediately following the sale of all shares held by La Jolla in connection
with the debenture conversions in the aggregate amount of $40,000, La Jolla
shall wire $275,000 to us as a prepayment towards the exercise of its
warrant and shall submit a debenture conversion in the amount of $6,250 on
the first business day of each month until the debenture is no longer
outstanding.
LaJolla has contractually agreed to restrict its ability to convert or exercise
its warrants and receive shares of our common stock such that the number of
shares of common stock held by them and their affiliates after such conversion
or exercise does exceed 4.9% of the then issued and outstanding shares of common
stock.
Due to the contractually agreed mandatory conversion of this Debenture, the
Company has reflected this transaction in its balance sheet as a "mezzanine"
level debt obligation on its balance sheet, between "Total Liabilities" and
"Stockholders' Equity". Upon the respective mandatory conversion, the Company
will relieve the respective portion of the Debenture and the any related
accrued, but unpaid interest, and credit this amount to the respective "common
stock" and "additional paid-in capital" accounts in the stockholder's equity
section for the par value and excess amount over the par value of the respective
shares issued.
21
As the warrant is non-detachable from the Debenture and requires simultaneous
exercise upon conversion of the Debenture, no value was assigned to the issued
warrant. Upon exercise of the warrant, the Company will record the issuance of
the underlying shares as a new issuance of common stock on the date of each
respective exercise.
On various dates through December 31, 2003, the Debenture Holder elected to
convert an aggregate $208,635, through 24 separate transactions, in outstanding
Debenture principal into restricted, unregistered common stock. This election
caused the Company to issue 4,561,753 shares of restricted, unregistered common
stock to the Debenture Holder. Additionally, pursuant to the contract terms, the
Debenture Holder concurrently exercised a portion of the outstanding Warrant to
purchase 2,086,350 shares of the Company's restricted, unregistered common stock
for gross proceeds of $2,086,350.
On various dates between January 1, 2004 and December 31, 2004, the Debenture
Holder elected to convert an aggregate $150,000, through 6 separate
transactions, in outstanding Debenture principal into registered common stock.
This election caused the Company to issue 4,900,000 shares of common stock to
the Debenture Holder. Additionally, pursuant to the contract terms, the
Debenture Holder concurrently exercised a portion of the outstanding Warrant to
purchase 1,500,000 shares of the Company's common stock for gross proceeds of
$1,500,000. 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.
Item 3 - Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to
the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's President, Chief Executive and Chief
Financial Officer. Based upon that evaluation, the Company's President, Chief
Executive and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective. There have been no significant changes in
the Company's internal controls or in other factors, which could significantly
affect internal controls subsequent to the date the Company carried out its
evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding required disclosure.
Part II - Other Information
Item 1 - Legal Proceedings
None
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3 - Defaults on Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
22
Item 5 - Other Information
None
Item 6 - Exhibits
Exhibit # Description
------------ -------------------------------------------------
31.1 * Certification pursuant to Section 302 of Sarbanes-Oxley Act of
2002
32.1 * Certification pursuant to Section 906 of Sarbanes-Oxley Act of
2002.
-----------------------------
* Filed herewith
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
American Ammunition, Inc.
Date: May 21, 2005
By: /s/ Andres F. Fernandez
----------------------------------
Andres F. Fernandez
President, Chief Executive Officer
Chief Financial Officer and Director
23