UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-QSB
(Mark one)
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended: September 30, 2006
[_] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ______________ to _____________
Commission File Number: 0-32379
American Ammunition, Inc.
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(Exact name of small business issuer as specified in its charter)
Nevada 91-2021594
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(State of incorporation) (IRS Employer ID Number)
3545 NW 71st Street, Miami, FL 33147
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(Address of principal executive offices)
(305) 835-7400
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(Issuer's telephone number)
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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 [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act): YES[_] NO [X]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: November 21, 2006: 5,845,803
Transitional Small Business Disclosure Format (check one): YES[_] NO [X]
American Ammunition, Inc.
Form 10-QSB for the Quarter ended September 30, 2006
Table of Contents
Part I - Financial Information
Item 1 Financial Statements
Item 2 Management's Discussion and Analysis or Plan of Operation
Item 3 Controls and Procedures
Part II - Other Information
Item 1 Legal Proceedings
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits
Signatures
Part I
Item 1 - Financial Statements
American Ammunition, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2006 and 2005
(Unaudited)
September 30, September 30,
2006 2005
------------- --------------
ASSETS
Current Assets
Cash on hand and in bank $ 127,986 $ 107,972
Accounts receivable - trade, net allowance for
doubtful accounts of $12,463 and $-0-, respectively 141,844 105,773
Inventory 404,457 566,870
Prepaid expenses 71,362 61,684
------------- -------------
Total Current Assets 745,649 842,299
------------- -------------
Property and Equipment - at cost or contributed value - 2,993,031
------------- -------------
Other Assets
Restricted cash 700,000 -
Patents, Trademarks and Noncompetition agreement,
net of accumulated amortization of approximately
$105,681 and $50,543, respectively 170,009 225,147
Loan costs, net of accumulated amortization
of approximately $51,765 and $2,620, respectively 13,485 21,380
Deposits and other 77,860 83,660
------------- -------------
Total Other Assets 961,354 330,187
------------- -------------
TOTAL ASSETS $ 1,717,003 $ 4,135,517
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Loans payable to stockholders $ 1,075,000 $ -
Customer deposits 232,690 201,890
Accounts payable - trade 725,787 957,487
Other accrued liabilities 495,001 186,792
------------- -------------
Total Current Liabilities 2,528,478 1,346,169
Long-Term Liabilities
Loans payable to stockholders - 650,000
------------- -------------
Total Liabilities 2,528,478 1,996,169
------------- -------------
Commitments and Contingencies
Convertible Debenture 2,150,000 266,365
------------- -------------
Shareholders' Equity (Deficit)
Preferred stock - $0.001 par value
20,000,000 shares authorized.
2,022,902 and 3,833,205 shares issued and outstanding 2,023 2,010
Common stock - $0.001 par value.
300,000,000 shares authorized.
, 5,495,803 and 4,108,324 shares issued and outstanding 5,496 4,108
Additional paid-in capital 25,758,828 25,084,467
Accumulated deficit (28,737,622) (13,154,209)
------------- -------------
(2,971,475) 1,936,376
Stock subscription receivable - (38,393)
------------- -------------
Total Shareholders' Equity (2,971,475) 1,897,983
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,717,003 $ 4,135,517
============= =============
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 Statements of Operations and Comprehensive Income (Loss)
Nine and Three months ended September 30, 2006 and 2005
(Unaudited)
Nine months Nine months Three months Three months
ended ended ended ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
-------------------------------------------------------------------
Revenues $ 1,685,302 $ 2,233,336 $ 305,805 $ 378,326
-------------------------------------------------------------------
Cost of Sales
Materials, Direct Labor
and other direct costs 2,707,237 3,447,036 695,067 944,194
Depreciation 31,024 573,466 - 191,155
-------------------------------------------------------------------
Total Cost of Sales 2,738,261 4,020,502 695,067 1,135,349
-------------------------------------------------------------------
Gross Profit (1,052,959) (1,787,166) (389,262) (757,023)
-------------------------------------------------------------------
Operating Expenses
Research and development expenses - 2,615 - 804
Marketing and promotion expenses 94,266 161,502 20,191 49,750
Other operating expenses 1,188,357 1,108,423 335,967 278,902
Bad debt expense - - - -
Interest expense 117,486 26,639 40,865 16,508
Depreciation and amortization 41,354 45,305 13,785 15,102
-------------------------------------------------------------------
Total Operating Expenses 1,441,463 1,344,484 410,808 361,066
-------------------------------------------------------------------
Loss from Operations (2,494,422) (3,131,650) (800,070) (1,118,089)
Other Income (Expense)
Interest and other income 189,897 8,146 405 1,914
Prepayment penalty on early
redemption of Series E 8%
Convertible Preferred Stock (25,000) - (25,000) -
Settlement fees on restructuring
of convertible debentures (354,450) - (354,450) -
-------------------------------------------------------------------
Loss before Income Taxes (2,683,975) (3,131,650) (1,179,115) (1,116,175)
Provision for Income Taxes - - - -
-------------------------------------------------------------------
Net Loss (2,683,975) (3,131,650) (1,179,115) (1,116,175)
Other Comprehensive Income - - - -
-------------------------------------------------------------------
Comprehensive Loss $ (2,683,975) $ (3,131,650) $ (1,179,115) $(1,116,175)
===================================================================
Net Loss $ (2,683,975) $ (3,131,650) $ (1,179,115) $(1,116,175)
Preferred Stock dividends (66,050) (40,830) (22,558) (13,610)
-------------------------------------------------------------------
Net Loss available to
Common Shareholders $ (2,750,025) $ (3,172,480) $ (1,201,673) $(1,129,785)
===================================================================
Loss per weighted-average share of
common stock outstanding, computed
on net loss - basic and fully diluted $ (0.58) $ (0.83) $ (0.23) $ (0.28)
===================================================================
Weighted-average number of
common shares outstanding 4,760,317 3,833,205 5,199,890 4,005,024
===================================================================
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 Cash Flows
Nine months ended September 30, 2006 and 2005
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
2006 2005
------------- -------------
Cash flows from operating activities
Net loss for the period $ (2,683,975) $ (3,123,504)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization 112,834 621,390
Consulting expense related to common stock
issuances at less than "fair value" 259,789 198,000
Common stock issued for fees and services 30,288 17,333
Prepayment penalty on early redemption of
Series E 8% Convertible Preferred Stock 25,000 -
Settlement fees on restructuring of convertible debentures 354,450 -
(Increase) Decrease in
Accounts receivable 429,583 533,671
Inventory 155,633 345,554
Prepaid expenses, deposits and other (8,773) (2,838)
Increase (Decrease) in
Accounts payable - trade (120,830) (29,398)
Other accrued expenses 198,961 15,773
Customer deposits - (239,016)
------------- -------------
Net cash used in operating activities (1,247,040) (1,663,035)
------------- -------------
Cash flows from investing activities
Increase in restricted cash (700,000) -
Purchse of property and equipment (31,024) (111,065)
------------- -------------
Net cash used in investing activities (731,024) (111,065)
------------- -------------
Cash flows from financing activities
Cash received on new convertible debenture 2,150,000 -
Cash received from loans payable to stockholders 100,000 650,000
Funding of working capital advance 50,000 -
Cash received on sale of preferred stock 500,000 -
Cash received on sale of common stock - 436,607
Cash paid to retire convertible debenture,
refund working capital advances and pay settlement fees (585,000) -
Cash paid to obtain capital (265,000) (10,000)
Cash paid to retire preferred stock,
including $25,000 prepayment penalty (275,000) -
------------- -------------
Net cash provided by financing activities 1,675,000 1,076,607
------------- -------------
Increase (Decrease) in Cash (303,064) (697,493)
Cash at beginning of year 431,050 805,465
------------- -------------
Cash at end of year $ 127,986 $ 107,972
============= =============
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 15,342 $ 10,753
============= =============
Income taxes paid for the period $ - $ -
============= =============
Supplemental disclosure of non-cash investing and financing activities
Common stock issued for payment of loan costs $ - $ 24,000
============= =============
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.
5
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
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
During interim periods, the Company follows the accounting policies set forth in
its annual audited financial statements filed with the U. S. Securities and
Exchange Commission on its Annual Report on Form 10-KSB for the year ended
December 31, 2005. The information presented within these interim financial
statements may not include all disclosures required by generally accepted
accounting principles and the users of financial information provided for
interim periods should refer to the annual financial information and footnotes
when reviewing the interim financial results presented herein.
In the opinion of management, the accompanying interim financial statements,
prepared in accordance with the U. S. Securities and Exchange Commission's
instructions for Form 10-QSB, are unaudited and contain all material
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the financial condition, results of operations and cash flows of
the Company for the respective interim periods presented. The current period
results of operations are not necessarily indicative of results which ultimately
will be reported for the full fiscal year ending December 31, 2006.
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.
6
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note B - Preparation of Financial Statements - Continued
The accompanying consolidated financial statements contain the accounts of
American Ammunition, Inc. and its wholly-owned subsidiaries, F&F Equipment, Inc.
and Industrial Plating Enterprise Co. All significant intercompany transactions
have been eliminated. The consolidated entities are collectively referred to as
"Company".
Note C - Summary of Significant Accounting Policies
1. Cash and cash equivalents
For Statement of Cash Flows purposes, the Company considers all cash on hand and
in banks, certificates of deposit and other highly-liquid investments with
maturities of three months or less, when purchased, to be cash and cash
equivalents.
Cash overdraft positions may occur from time to time due to the timing of making
bank deposits and releasing checks, in accordance with the Company's cash
management policies.
2. Accounts receivable and Revenue Recognition
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers which are located throughout the United States.
Because of the credit risk involved, management has provided an allowance for
doubtful accounts which reflects its opinion of amounts which will eventually
become uncollectible. In the event of complete non-performance, the maximum
exposure to the Company is the recorded amount of trade accounts receivable
shown on the balance sheet at the date of non-performance.
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.
7
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note C - Summary of Significant Accounting Policies - Continued
4. Property, plant and equipment - continued
In accordance with SFAS No. 144, the Company evaluates the accompanying
financial statements to determine if any impairment indicators are present
related to its fixed assets and other long-term assets. If impairment indicators
were present, future cash flows related to the asset group are estimated. The
sum of the undiscounted future cash flows attributable to the asset group was
then compared to the carrying amount of the asset group. The cash flows were
estimated utilizing various assumptions regarding future revenue and expenses,
availability of working capital, and proceeds, if any, from asset disposals on a
basis consistent with the Company's strategic plan. If the carrying amount
exceeded the sum of the future undiscounted future cash flows, the Company
discounted the future cash flows using a risk-free discount rate and recorded an
impairment charge as the difference between the discounted cash flows and the
carrying value of the asset group. Generally, the Company performed its testing
of the asset group at the overall corporate level, as this is the lowest level
for which identifiable cash flows are available. As a result of the impairment
testing described above, management is of the opinion that no impairment charge
is appropriate.
5. Income Taxes
The Company uses the asset and liability method of accounting for income taxes.
At September 30, 2006 and 2005, the deferred tax asset and deferred tax
liability accounts, as recorded when material to the financial statements, are
entirely the result of temporary differences. Temporary differences represent
differences in the recognition of assets and liabilities for tax and financial
reporting purposes, primarily accumulated depreciation and amortization,
allowance for doubtful accounts and vacation accruals.
As of September 30, 2006 and 2005, 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 September 30, 2006 and 2005, 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.
8
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
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.
During the period ended September 30, 2006 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 through September 30, 2006,and
subsequent thereto, as a result of any of these unsecured situations.
Note F - Inventory
As of September 30, 2006 and 2005, inventory consisted of the following
components:
September 30September 30,
2006 2005
--------------- ----------------
Raw materials $ 366,725 $ 434,305
Work in process 30,268 122,561
Finished goods 7,464 10,004
---------- ----------
Totals $ 404,457 $ 566,870
========== =========
Note G - Property and Equipment
Property and equipment consist of the following components:
September 30, September 30, Estimated
2006 2005 useful life
-------------------------------------------
Manufacturing equipment $ 7,944,673 $ 8,096,289 3-10 years
Office furniture and fixtures 69,889 55,577 3- 7 years
Leasehold improvements 184,939 190,277 8-20 years
----------------------------------------
8,199,501 8,342,143
Accumulated depreciation (5,575,782) (5,379,112)
Impairment of recoverability of carrying value (2,623,719) -
----------------------------
Net property and equipment $ - $ 3,963,031
===========================
9
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note G - Property and Equipment - Continued
Total depreciation expense charged to operations for the nine months ended
September 30, 2006 and 2005 was approximately $31,024 and $577,417,
respectively.
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", the Company
follows the policy of evaluating all property and equipment as of the end of
each reporting quarter. At December 31, 2005, pursuant to the requirements of
this accounting standard, management recorded an impairment for the future
recoverability of these assets of approximately $2,777,829.
Note H - Loans from Shareholders
Fourteen and Four separate notes payable to three separate
stockholders. Interest at 8.0%, payable monthly. Principal
due at maturity on December 31, 2006. Shareholder/lender has
the option to convert the principal amount into common stock
of the Company at the lesser of 66-2/3% of the average
closing bid and ask price on the date of conversion or $0.07
per share. Each note is unsecured. $1,075,000 $650,000
========= =======
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 September 30, 2006, the outstanding balance on the La Jolla convertible
debenture has been retired. 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)
2005 redemptions (40,000) (400,000)
2006 retirement (226,365) (2,263,650)
---------- ----------
Balances outstanding at September 30, 2006 $ - -
========== ===========
In addition to retiring the debenture, the Company repaid $200,000 in prepaid
warrant exercises and approximately $158,635 in negotiated prepayment and
penalty fees for an aggregate payment of $585,000.
Additionally, the Company recognized a charge to operations, including the
aforementioned $158,635 cash payment, of approximately $354,450 for the issuance
of 56,003 shares of common stock to La Jolla and the forgiveness of $175,000 in
monies due from La Jolla for common stock issued on warrant exercises in prior
periods.
10
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note I - Convertible Debenture - Continued
On September 13, 2006, La Terraza Trading and Asset Management Ltd. ("Investor")
deposited a total of $2,150,000 in escrow for the use and benefit of the
Company. The escrow deposit was for the following:
1. The sum of $585,000 was paid to La Jolla Cove Investors, Inc. ("La Jolla")
to acquire for Investor a full and complete assignment of any and all of La
Jolla's right, title and interest in any and all of AAMU indebtedness to La
Jolla and specifically including La Jolla's rights under the active SB-2
Registration Statement for the issuance and registration of securities
thereunder; the consent of AAMU to the foregoing subject to the right of
AAMU to prepay any and all indebtedness thereunder in AAMU common stock,
without penalty, at any time before or after default.
2. The sum of $275,000 to be used by AAMU to redeem and satisfy in full the
Series E Preferred Stock funded by third party investors on or about July
12, 2006, including a prepayment redemption penalty of $25,000.
3. The sum of $215,000 payable as fees to Capital Investment Services, Inc.
for locating, negotiating and closing the funding.
4. The sum of $100,000 to repay in full, without interest, an unsecured bridge
loan from Investor to AAMU dated and funded on August 25, 2006.
5. The sum of $275,000 released to AAMU for working capital.
6. The balance of $700,000, to be retained in escrow and disbursed to AAMU for
payment in reduction of the assigned La Jolla debenture and required
warrant exercised thereunder, until the debenture and warrant obligations
are satisfied in full in accordance with the terms of the assigned La Jolla
documents.
The financing transaction requires AAMU to deposit in escrow for later delivery
a total of 11,470,000 shares of its common stock (to be held as unissued and not
outstanding) to guarantee availability of stock as required for the reduction of
the debenture and satisfaction of warrant obligations. The agreement also calls
for an additional 5,000,000 shares of the restricted common stock of AAMU to be
deposited in a separate escrow to be used for any other expenses and
compensation to third parties that may be agreed upon between Investor and AAMU
for future services to advance the overall business of AAMU. In addition AAMU
granted Investor 600,000 warrants exercisable at the lesser of $0.1875 per share
or the average closing price per share for the common stock during the twelve
(12) month period prior to the date of exercise, such warrants exercisable at
any time on or before five (5) years from and after July 24, 2006. All shares
required to be escrowed have in fact been deposited in escrow on September 26,
2006 as required.
Note J - Preferred Stock Transactions
Preferred stock consists of the following as of September 30, 2006 and 2005,
respectively:
September 30, 2006 September 30, 2005
------------------ ------------------
# shares value # shares value
-------- ---------- -------- ----------
Series A Cumulative Convertible Preferred Stock 12,000 $ 60,000 12,000 $ 60,000
Series B Cumulative Convertible Preferred Stock 55,020 275,100 91,700 458,500
Series C Convertible Preferred Stock 1,905,882 324,000 1,905,882 324,000
Series E 8% Convertible Preferred Stock 50,000 250,000 - -
--------- ------------ --------- ----------
2,022,902 $ 909,100 2,009,582 $ 842,500
========= ============ ========= ==========
11
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note J - 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.
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.
In September and December 2004, respectively, the Holders of the Series B
Preferred Stock exercised their conversion rights and exchanged an aggregate
18,340 shares of Series B Preferred Stock for 66,810 post-reverse split shares
of restricted, unregistered common stock.
12
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note J - Preferred Stock Transactions - Continued
Series B Convertible Preferred Stock - continued
On March 31 and June 30, 2006, respectively, the holders of the Series B
Preferred Stock exercised their conversion rights and exchanged an aggregate
18,340 shares (9,170 shares per conversion) of Series B Preferred Stock for
415,706 shares of restricted, unregistered common stock.
Series C Convertible Preferred Stock
In November 2004, the Company sold 1,905,882 shares of Series C Convertible
Preferred Stock to an existing stockholder 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.
Series E 8% Convertible Preferred Stock
On March 1, 2006, the Company issued a Private Placement Memorandum offering up
to 200,000 shares of 8% Convertible Preferred Stock at an offering price of
$5.00 per share on a "best efforts" basis through an unrelated placement agent.
The Series E 8% Convertible Preferred Stock provides for cumulative dividends at
the rate of 8% per year, payable quarterly, 50% in cash and 50% in shares or
100% in cash at the Company's election. In the event the Company elects to pay
such dividends in shares of the Company's Common Stock, the number of shares to
be issued shall be based on the average of the closing prices of the Company's
Common Stock, as reported on the NASDAQ Over the Counter Bulletin Board (or such
other market on which the Company's Common Stock is then traded) for the 10
consecutive trading days preceding the record date for each such dividend, with
such record date being the 14th day preceding the end of each calendar quarter.
Each share of Series E Convertible Preferred Stock shall be convertible into
shares of the Company's Common Stock at any time after March 1, 2007. The number
of shares to be issued on a conversion shall be based on 80% of the average
closing price of the Common Stock of the Company; as reported on the NASDAQ OTC
Bulletin Board (or such other market on which such stock is traded) for ten (!0)
consecutive trading days preceding the date the Company received notice of such
conversion. Subject to certain restrictions, the Series E 8% Convertible
Preferred Stock shall automatically convert into shares of the Company's Common
Stock upon any of the following events: (I) the sale by the Company of all or
substantially all of its assets; (ii) the consummation of a merger or a
consolidation in which the Company is not the survivor; or (iii) the sale or
exchange of all or substantially all of the outstanding shares of the Company's
common stock (including by way of merger, consolidation, or other similar
action).
In the event of the liquidation, dissolution or winding up of the Company, the
holders of Series E Convertible Preferred Stock shall have a liquidation
preference over holders of common stock and shares junior to the Series E 8%
Convertible Preferred Stock equal to $5.50 per share. Additionally, the Company
shall not impose or allow any additional liens on it's existing fixed assets in
excess of $1,000,000; provided that at such time as total gross proceeds from
the offering equal or exceed $2,000,000, the Company shall satisfy such existing
liens on its existing fixed assets and shall not impose or allow any additional
liens on its existing fixed assets unless subordinated to the interest of the
Series E 8% Convertible Preferred Stock, with such preference on the fixed
assets equal to the fixed asset value, as determined in accordance with the
United States Generally Accepted Accounting Principles ("GAAP"), of 150% of the
stated value of the aggregate of the outstanding shares of Series E Convertible
Preferred Stock except for fixed assets of the Company that were otherwise
purchased pursuant to a security interest.
13
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note J - Preferred Stock Transactions - Continued
Series E 8% Convertible Preferred Stock - continued
The Series E 8% Convertible Preferred Stock shall be redeemable, at the option
of the Company, for cash in the amount of $5.50 per share of Series E
Convertible Preferred Stock or for shares of the Company's Common Stock in
accordance with the Conversion Rate, at any time after March 1, 2007, or in the
event the closing sale price of the Company's Common Stock, as reported on the
NASDAQ Over the Counter Bulletin Board (or such other market on which the
Company's Common Stock is then traded), is greater than or equal to $7.00 after
March 1, 2007 for any consecutive five trading days. In addition, the Series E
8% Convertible Preferred Stock shall be redeemable, at the option of the holder,
at any time for shares of the Company's Common Stock in accordance with the
Conversion Rate. At any time after March 1, 2007, at the option of the holder,
the Series E 8% Convertible Preferred Stock shall be redeemable for cash in the
amount of $5.10 per share of Series E Convertible Preferred Stock or for shares
of the Company's Common Stock in accordance with the Conversion Rate. After such
date, if redemption is for cash, shares will be redeemed at the rate of 1/10 of
such aggregate shares per quarterly period for any 10 consecutive quarters
commencing after March 1, 2007. Any redemption by either the Company or the
holder shall be subject to 15 days written notice.
The Company warrants and agrees that if, at any time within the period
commencing on the date of the final closing of the Offering and expiring on the
5 th anniversary of the date thereof, the Company should file a registration
statement with the SEC under the Securities Act (other than in connection with a
merger or other business combination transaction or pursuant to Form S-8), it
will give written notice at least 30 calendar days prior to the filing of each
such registration statement to the holders of the Series E 8% Convertible
Preferred Stock and the holders of the shares of the Common Stock issued upon
the conversion or redemption of the shares of Series E Convertible Preferred
Stock, or their permitted assigns (Holders) of its intention to do so. If the
Holders notify the Company within 30 calendar days after receipt of any such
notice of its or their desire to include any such shares of Common Stock issued
or issuable upon the conversion or redemption of the Series E 8% Convertible
Preferred Stock in such proposed registration statement, the Company shall use
its "best efforts" to have any such shares of Common Stock is issued or issuable
upon the conversion or redemption of the Series E 8% Convertible Preferred Stock
registered under such registration statement. Notwithstanding the foregoing, the
Company shall have the right at any time after it shall have given written
notice (irrespective of whether a written request for inclusion of any such
securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof. If the managing underwriter of an offering to which
the above "piggyback registration rights" apply, in good faith and for valid
business reasons, objects to such rights, such objection shall preclude such
inclusion. All expenses incurred by the Company in registration of the shares of
Common Stock issued or issuable upon the conversion or redemption of The Series
E 8% Convertible Preferred Stock, including with out limitation all registration
and filing fees, listing fees, printing expenses, fees and disbursements of all
independent accounts, or counsel for the Company and the expense of any special
audits incident to or required by any such registration and the expenses of
complying with the securities or blue sky laws of any jurisdiction shall be paid
by the Company.
The Company has agreed to pay the Placement Agent a cash commission equal to 10%
of the aggregate Purchase Price of the shares of Series E Convertible Preferred
Stock sold by the Placement Agent in the Offering (Placement Agent Fee). The
Company shall also pay the Placement Agent reasonable expenses associated with
the Offering, which expenses shall not exceed $50,000 (Expense Allowance). In
addition, the Company shall issue to the Placement Agent 500 warrants for each
$50,000 of Series E Convertible Preferred Stock sold by the Placement Agent in
the Offering (Placement Agent Warrants), each warrant entitling the holder to
purchase 1 share of the Company's Common Stock at an exercise price of $0.90 per
share exercisable at any time for a period of 3 years from date of issuance.
Upon completion of the Maximum Offering, the Company will receive net proceeds
of approximately $900,000.00. The Company intends to use the net proceeds for
potential acquisitions, working capital, general corporate purposes and
repayment of outstanding debt.
The Company and the Placement Agent shall have discretion to increase the
Maximum Offering to $2,000,000.00, without notice to investors..
14
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note J - Preferred Stock Transactions - Continued
Series E 8% Convertible Preferred Stock - continued
Through June 30, 2006, the Company sold 100,000 shares in a two separate
transactions under this Private Placement Memorandum and has received the gross
sales proceeds of $500,000 and has paid an aggregate of $50,000 to the Placement
Agent for the 10% fees due on these transactions.
On September 13, 2006, the Company exercised it's repurchase rights and retired
50,000 shares of the Series E 8% Convertible Preferred Stock, including a 10%
prepayment penalty, for $275,000 cash.
Note K - Common Stock Transactions
On January 9, 2006, by written consent in lieu of meeting, a majority of the
Company's stockholders approved a recommendation by the Company's Board of
Directors to effect a one share for twenty shares (1 for 20) reverse stock split
of our common stock, par value $.001 per share, with fractional shares rounded
up to the nearest whole share. The reverse split became effective on that date.
As a result of the reverse split, the total number of issued and outstanding
shares of the Company's common stock decreased from 92,576,839 to
4,629,381shares, after giving effect to rounding for fractional shares. The
effect of this action is reflected in the Company's financial statements as of
the first day of the first period presented.
In conjunction with the above discussed reverse stock split, all share
references in the following paragraphs reflect the January 9, 2006 reverse split
action.
Calendar 2005 Transactions
On various dates between June 28, 2005 and August 10, 2005, the Debenture Holder
elected to convert an aggregate $40,000, through 4 separate transactions, in
outstanding Debenture principal into registered common stock. This election
caused the Company to issue 293,602 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 400,000
shares of the Company's common stock for gross proceeds of $400,000.
In September and December 2004, respectively, the Holders of the Series B
Preferred Stock exercised their conversion rights and exchanged an aggregate
18,340 shares of Series B Preferred Stock for 66,810 shares of restricted,
unregistered common stock.
Jn July 2005, the Company issued approximately 8,333 shares of unregistered,
restricted common stock to Paul Goebel, the Company's Director of Domestic
Sales, as an employee bonus. These shares were valued at approximately $17,166,
which approximated the market value of the shares on the transaction date. The
Company relied upon Section 4(2) of the Securities Act of 1933, as amended, for
an exemption from registration of these shares and no underwriter was used in
this transaction.
In February, August, September and December 2005, the Company issued an
aggregate 23,615 shares of restricted, unregistered common stock in payment of
approximately $44,124 in accrued dividends payable on the Company's outstanding
Series B Preferred Stock for the quarters ended December 31, 2004, March 31,
2005, June 30, 2005, September 30, 2005 and December 31, 2005, respectively. 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 Restated Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note K - Common Stock Transactions - Continued
Calendar 2005 Transactions - continued
In August, November and December 2005, respectfully, the Company issued an
aggregate 37,500 shares of restricted, unregistered common stock to an existing
stockholder as payment of various fees and costs associated with the funding of
approximately $875,000 short-term working capital loans to the Company. 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.
Calendar 2006 Transactions
In February 2006, the Company issued approximately 41,666 shares of
unregistered, restricted common stock to Paul Goebel, the Company's Director of
Domestic Sales, as an employee bonus. These shares were valued at approximately
$17,500, which approximated the market value of the shares on the transaction
date. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
In February 2006, the Company issued approximately 226,065 shares of restricted,
unregistered common stock, valued at approximately $18,325, to an existing
stockholder as for payment of accrued interest associated with approximately
$875,000 short-term working capital loans to the Company and reimbursement of
direct public relation expenses. 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. As the per share value
of this transaction was substantially less than the "fair value" of the
Company's common stock, per the closing price of the Company's common stock on
the transaction date, the Company recognized "consulting expense related to the
issuance of common stock at less than "fair value" in the amount of
approximately $70,080 on this transaction.
In May 2006, the Company issued approximately 266,511 shares of restricted,
unregistered common stock, valued at approximately $21,054, to an existing
stockholder as for payment of accrued interest associated with approximately
$975,000 short-term working capital loans to the Company and reimbursement of
direct public relation expenses. 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. As the per share value
of this transaction was substantially less than the "fair value" of the
Company's common stock, per the closing price of the Company's common stock on
the transaction date, the Company recognized "consulting expense related to the
issuance of common stock at less than "fair value" in the amount of
approximately $69,293 on this transaction.
In September 2006, the Company issued approximately 275,229 shares of
restricted, unregistered common stock, valued at approximately $22,018, to an
existing stockholder as for payment of accrued interest associated with
approximately $975,000 short-term working capital loans to the Company and
reimbursement of direct public relation expenses. 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. As
the per share value of this transaction was substantially less than the "fair
value" of the Company's common stock, per the closing price of the Company's
common stock on the transaction date, the Company recognized "consulting expense
related to the issuance of common stock at less than "fair value" in the amount
of approximately $118,348 on this transaction.
On September 13, 2006, the Company issued 56,003 shares of common stock to La
Jolla Cove Investors, Inc. to complete all obligations to La Jolla and assign
any and all of La Jolla's right, title and interest in any and all of AAMU
indebtedness to La Jolla and specifically including La Jolla's rights under the
active SB-2 Registration Statement for the issuance and registration of
securities thereunder; the consent of AAMU to the foregoing subject to the right
of AAMU to prepay any and all indebtedness thereunder in AAMU common stock,
without penalty, at any time before or after default to La Terraza Trading and
Asset Management, Inc.
In July and August 2006, the Company issued an aggregate 41,245 shares of
restricted, unregistered common stock in payment of approximately $13,675 in
accrued dividends payable on the Company's outstanding Series B Preferred Stock
for the quarters ended March 31, 2006 and June 30, 2006.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.
16
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
September 30, 2006 and 2005
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 expired on
May 31, 2006. The Company has no further responsibility under this lease
agreement.
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
========
Note M - Income Taxes
The components of income tax (benefit) expense for the respective nine month
periods ended September 30, 2006 and 2005 are as follows:
Nine months Nine months
ended ended
September 30, September 30,
2006 2005
------------ ------------
Federal:
Current $ - $ -
Deferred - -
------- ------
- -
------- ------
State:
Current - -
Deferred - -
------- ------
- -
------- ------
Total $ - $ -
======= ======
17
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note M - Income Taxes - Continued
As of December 31, 2005, the Company has a net operating loss carryforward of
approximately $10,500,000 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 nine months ended September
30, 2006 and 2005, respectively, differed from the statutory federal rate of 34
percent as follows:
Nine months Nine months
ended ended
September 30, September 30,
2006 2005
--------------------------
Statutory rate applied to loss before income taxes $(913,000) $(1,062,000)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Other, including reserve for deferred tax asset 913,000 1,062,000
--------------------------
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, 2005 and 2004, respectively:
Year ended Year ended
December 31, December 31,
2005 2004
------------------------------
Deferred tax assets - long-term
Net operating loss carryforwards $ 3,570,000 $ 2,669,000
Statutory depreciation differences 316,000 -
Deferred tax liabilities - long-term
Statutory depreciation differences - (690,000)
----------------------------
3,886,000 1,979,000
Less valuation allowance (3,886,000) (1,979,000)
----------------------------
Net Deferred Tax Asset $ - $ -
============================
During the years ended December 31, 2005 and 2004, respectively, the valuation
allowance increased (decreased) by approximately $1,907,000 and $(671,000)
18
Item 2 - Management's Discussion and Analysis or Plan of Operation
Caution Regarding Forward-Looking Information
Certain statements contained in this Quarterly Report 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 and investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
General
American Ammunition, Inc. is a holding company with two operating subsidiaries:
F&F Equipment, Inc. and Industrial Plating Enterprise Co.
F&F Equipment, Inc. (F&F) was incorporated on October 4, 1983 under the laws of
the State of Florida. F&F was formed to engage principally in the "import,
export, retail & wholesale of firearms equipment, ammunition & other devices and
for the purpose of transacting any and/or all lawful business." F&F conducts its
business operations under the assumed name of "American Ammunition."
In June 2002, American Ammunition, Inc. formed a wholly owned subsidiary,
Industrial Plating Enterprise Co. (IPE), which started production on June 14,
2002. IPE is a fully licensed and approved electrochemical metallization
facility with significant capacity for processing our line of projectiles as
well as other products and services while employing environmentally sound water
conservation and proven waste treatment techniques.
Results of Operations
Nine months ended September 30, 2006 compared with the nine months ended
September 30, 2005.
During the nine months ended September 30, 2006, we experienced aggregate net
revenues of approximately $1,685,000 ($306,000 in the current quarter), as
compared to approximately $2,233,000 during the first nine months of Calendar
19
2005 ($378,000 in the current quarter). The decline in sales was attributable to
our curtailing of production during January 2006 to improve the operating
efficiency of our manufacturing equipment and better automate select machines so
we can rely upon lower labor requirements in future periods.
In 2004, the Company initiated a direct solicitation program for it's "dealer
direct" sales program. This endeavor has received a very positive initial
response from the qualified retail resellers of the Company's product. We are
realizing that the existence of previously announced contracts with various U.
S. Governmental agencies and orders from foreign governments are becoming more
erratic in their order placements. Accordingly, management is realizing that a
consistent demand from the U. S. retail segment will be our best source of
consistent sales. Further, we have identified certain production issues which
has inhibited the full realization of existing product demands and management
believes that the necessary steps are being taken to remedy any production
deficiencies.
We experienced costs of goods sold of approximately $2,738,000 for the nine
months ended September 30, 2006 as compared to approximately $4,021,000 for the
first nine months of Calendar 2005. Through September 30, 2006, and subsequent
thereto, we continue to experience negative trends with relation to our
calculated standard production costs for material and labor due to excess labor
capacity due to anticipated governmental orders which did not materialize as
management was led to believe from the various U. S. Governmental agencies
contracting officers. Management remains of the opinion that the production
labor force is stable and able to maintain a constant standard of quality in
future periods. We experience variable costs in the area of material consumption
and direct labor. In the second quarter of 2006, management took drastic steps
to reduce excess labor capacity through the elimination of the 2nd shift, which
was never able to reach full utilization. This action is not expected to have
any adverse impact on our ability to meet our existing and future product
demands.
For the nine month periods ended September 30, 2006 and 2005, we generated a
positive (negative) gross profit of approximately $1,053,000, or (62,5%), and
approximately $(1,787,000), or (80.0%).
We experienced nominal research and development expenses of approximately $-0-
and $2,600, respectively, during the respective nine month periods ended
September 30, 2006 and 2005.
During the nine months of Calendar 2006 and 2005, we expended approximately
$94,000 and $162,000, 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 were approximately $1,188,000 for the
nine months ended September 30, 2006 as compared to approximately $1,108,000 for
the nine months ended September 30, 2006. Included in these expenses are
non-cash charges of approximately $260,000 and $198,000 for consulting fees
related to the sale/issuance of common stock at less than "fair value".
Management is of the opinion that G&A expenses are relatively stable and should
not experience significant increases except for inflationary pressures caused
principally by increases in energy costs which are affecting all businesses in
all sectors of the U. S. economy.
20
We recognized a net loss of approximately $(2,684,000) and $(3,132,000) for the
respective nine month periods ended September 30, 2006 and 2005, respectively,
or $(0.58) and $(0.83) per share. We call to the reader's attention that the
loss per share calculation for the nine months ended September 30, 2005 has been
adjusted for the effect of our 1 for 20 reverse stock split on January 9, 2006.
Liquidity And Capital Resources
As of September 30, 2006, December 31, 2005 and September 30, 2005,
respectively, we had working capital of approximately $(1,783,000), $(885,000)
and $(504,000). 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. We
anticipate that we have sufficient inventory levels to support our order demand
and have access to raw material suppliers that will enable us to receive raw
materials for future periods. We also note that we have approximately $1,075,000
in short-term notes payable to existing stockholders which may or may not be
renegotiated, repaid in common stock of the Company or otherwise reclassified
prior to their maturity on December 31, 2006. This amount is a contributing
factor to our negative working capital position at September 30, 2006 and
December 31, 2005.
We have used cash in operating activities of approximately $(1,247,000) and
$(1,663,000) during the nine month periods ended September 30, 2006 and 2005,
respectively. Due to our history of operating losses, our resources for
additional working capital are becoming more scarce.
During the third quarter of 2006, we negotiated a settlement with La Jolla Cove
Investors, Inc. and the assignment of the existing debentures and outstanding
warrants to La Terraza Trading and Asset Management, Ltd. As a result of this
transaction, the Company received a net $700,000 in restricted cash to be held
for future exercise of outstanding warrants.
On March 1, 2006, the Company issued a Private Placement Memorandum offering up
to 200,000 shares of Series E 8% Convertible Preferred Stock at an offering
price of $5.00 per share on a "best efforts" basis through an unrelated
placement agent. As of September 30, 2006, the Company has sold an aggregate of
100,000 shares for gross proceeds of $500,000 in two separate transactions
pursuant to this Private Placement Memorandum. Management continues to undertake
all prudent measures to assure that the Company can be self-supporting.
On September 13, 2006, the Company exercised it's repurchase rights related to
50,000 shares of Series E 8% Convertible Preferred Stock for $275,000, including
a prepayment penalty of $25,000.
We anticipate that our 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 existing orders and accept
existing and future inquiries.
During the nine months ended September 30, 2006 and 2005, respectively, we added
approximately $31,000 and $111,000 in new equipment. Any equipment to be added
in future periods 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. 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.
21
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. This Agreement was transferred by La
Jolla to La Terraza Trading and Asset Management, Ltd. on September 13, 2006.
The Company paid an aggregate of $585,000 to retire the outstanding principal
balance on the debentures, repayment of prepaid warrant exercises and all
penalties, prepayment fees and other items contractually agreed to between the
Company and La Jolla.
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)
2005 redemptions (40,000) (400,000)
2006 retirement (226,365) (2,263,650)
---------- ----------
Balances outstanding at September 30, 2006 $ - -
========== ===========
The debentures bear interest at 8%, mature on June 31 [sic], 2007, and are
convertible into the Company's common stock, at the selling stockholder's
option. The convertible debentures are convertible into the number of the
Company's 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 $0.30 per share, the
Company 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 June 30, 2006, the warrant is exercisable into
2,263,650 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
22
* 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.
In May 2005, we entered into an additional addendum to the convertible debenture
and warrant whereby the Company agreed to the following:
* The Company shall deposit 4,000,000 unregistered shares in the name of
LaJolla with the Company's Escrow Agent and, upon confirmation of receipt,
LaJolla will wire the Company $150,000 as an advance on the $400,000 amount
that LaJolla was obligated to fund pursuant to the December 2004 Addendum.
In the event that the Company's Registration Statement was not declared
effective within nine (9) months of the date of this Addendum, the
4,000,000 shares in escrow will be released to LaJolla and sold by LaJolla
pursuant to Rule 144. If LaJolla sells these shares for net sales proceeds
of more than $150,000 (without interest accruing on this amount), the
excess over $150,000 will be refunded to the Company.
* The maturity date of the convertible debenture and warrant was extended to
June 31, [sic], 2007.
* All other terms and conditions remain in full force and effect.
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.
23
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 $175,000 from the
Debenture Holder. As of June 30, 2006, this amount remains unpaid.
On various dates between June 28, 2005 and August 10, 2005, the Debenture Holder
elected to convert an aggregate $40,000, through 4 separate transactions, in
outstanding Debenture principal into registered common stock. This election
caused the Company to issue 5,872,048 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 400,000
shares of the Company's common stock for gross proceeds of $400,000.
Item 3 - Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of
1934, as amended (Exchange Act), as of September 30, 2006. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in alerting
them on a timely basis to material information relating to our Company required
to be included in our reports filed or submitted under the Exchange Act.
(b) Changes in Internal Controls
There were no significant changes (including corrective actions with regard
to significant deficiencies or material weaknesses) in our internal controls
over financial reporting that occurred during the second quarter of Calendar
2006 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
24
Part II - Other Information
Item 1 - Legal Proceedings
The Company may become involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact either
individually or in the aggregate on consolidated results of operations,
financial position or cash flows of the Company.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
On September 13, 2006, the Company exercised it's repurchase rights and retired
50,000 shares of the Series E 8% Convertible Preferred Stock, including a 10%
prepayment penalty, for $275,000 cash.
In July and August 2006, the Company issued an aggregate 41,245 shares of
restricted, unregistered common stock in payment of approximately $13,675 in
accrued dividends payable on the Company's outstanding Series B Preferred Stock
for the quarters ended March 31, 2006 and June 30, 2006.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 September 2006, the Company issued approximately 275,229 shares of
restricted, unregistered common stock, valued at approximately $22,018, to an
existing stockholder as for payment of accrued interest associated with
approximately $975,000 short-term working capital loans to the Company and
reimbursement of direct public relation expenses. 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. As
the per share value of this transaction was substantially less than the "fair
value" of the Company's common stock, per the closing price of the Company's
common stock on the transaction date, the Company recognized "consulting expense
related to the issuance of common stock at less than "fair value" in the amount
of approximately $118,348 on this transaction.
On September 13, 2006, the Company issued 56,003 shares of common stock to La
Jolla Cove Investors, Inc. to complete all obligations to La Jolla and assign
any and all of La Jolla's right, title and interest in any and all of AAMU
indebtedness to La Jolla and specifically including La Jolla's rights under the
active SB-2 Registration Statement for the issuance and registration of
securities thereunder; the consent of AAMU to the foregoing subject to the right
of AAMU to prepay any and all indebtedness thereunder in AAMU common stock,
without penalty, at any time before or after default to La Terraza Trading and
Asset Management, Inc.
Item 3 - Defaults on Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
25
Item 5 - Other Information
None
Item 6 - Exhibits
Exhibits
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.
--------
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: November 21, 2006 By: /s/ Andres F. Fernandez
----------------- -----------------------------
Andres F. Fernandez
Chief Executive Officer and
Chief Financial Officer
26