UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-KSB/A
(Mark one)
[X] Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of
1934
For the fiscal year ended December 31, 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)
Securities registered under Section 12 (b) of the Exchange Act - None
Securities registered under Section 12(g) of the Exchange Act: - Common Stock -
$0.001 par value
Check whether the issuer has (1) filed all reports required to be files by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period the Company was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act): Yes [_] No [X]
The issuer's revenues for the fiscal year ended December 31, 2006 were
$2,241,399
The aggregate market value of voting common equity held by non-affiliates as of
September 17, 2007 was approximately $670,116.32.
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: As of September 17, 2007:, the
Transfer Agent's records indicate that there are 28,372,922 shares outstanding.
Of these shares, a total of 21,803,335 shares were subject to an escrow
agreement referenced in later filings.
Transitional Small Business Disclosure Format : Yes [_] No [X]
RESTATEMENT ISSUES
The December 31, 2006 and 2005 financial statements have been restated to
account for the derivative liability that was incurred in connection with the
common stock conversion features and the warrants issued with certain notes
payable (see Notes I and J to the accompanying consolidated financial
statements).
The Company accounts for debt with embedded conversion features and warrant
issues in accordance with EITF 98-5: "Accounting for convertible securities with
beneficial conversion features or contingency adjustable conversion" and EITF
No. 00-27: "Application of issue No 98-5 to certain convertible instruments".
Conversion features determined to be beneficial to the holder are valued at fair
value and recorded to additional paid in capital. The Company determines the
fair value to be ascribed to the detachable warrants issued with the convertible
debentures utilizing the Black-Scholes method. Any discount derived from
determining the fair value to the debenture conversion features and warrants is
amortized to financing cost over the life of the debenture. The unamortized
discount, if any, upon the conversion of the debentures is expensed to financing
cost on a pro rata basis.
Debt issues with the variable conversion features are considered to be embedded
derivatives and are accountable in accordance with FASB 133; "Accounting for
Derivative Instruments and Hedging Activities". The fair value of the embedded
derivative is recorded to derivative liability. This liability is required to be
marked each reporting period. The resulting discount on the debt is amortized to
interest expense over the life of the related debt.
CAUTION REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this annual filing, including, without
limitation, statements containing the words "believes", "anticipates", "expects"
and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
Such factors include, among others, the following: international, national and
local general economic and market conditions: demographic changes; the ability
of the Company to sustain, manage or forecast its growth; the ability of the
Company to successfully make and integrate acquisitions; raw material costs and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Form 10-KSB and investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
American Ammunition, Inc.
Annual Report on Form 10-KSB/A
Year ended December 31, 2006
Table of Contents
Page
PART I
ITEM 1 Description of Business 4
ITEM 2 Description of Property 14
ITEM 3 Legal Proceedings 14
ITEM 4 Submission of Matters to a Vote of Security Holders 15
Part II
ITEM 5 Market for Company's Common Stock and Related Stockholders Matters 15
ITEM 6 Management's Discussion and Analysis or Plan of Operation 16
ITEM 7 Financial Statements 20
ITEM 8 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 20
ITEM 8A Controls and Procedures 20
Part III
ITEM 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 21
ITEM 10 Executive Compensation 24
ITEM 11 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 24
ITEM 12 Certain Relationships and Related Transactions 25
ITEM 13 Exhibits and Reports on 8-K 25
ITEM 14 Principal Accountant Fees and Services 25
Index to Consolidated Financial Statements F-1
Signatures 59
PART I
ITEM 1 - Description of Business
American Ammunition, Inc. (the "Company") was incorporated on February 1,
2000 in accordance with the Laws of the State of California as
FirsTelevision.com. In 2001, we consummated a reverse acquisition transaction
with American Ammunition Inc., a then-privately held Florida corporation. Upon
completion of the reverse acquisition transaction with American Ammunition,
Inc., we have been engaged in the manufacture and sale of small-arms ammunition
for the wholesale and governmental markets.
Effective January 1, 2006, we changed our state of incorporation from
California to Nevada by means of a merger with and into a Nevada corporation
formed on December 28, 2005 solely for the purpose of effecting the
reincorporation. The Certificate of Incorporation and Bylaws of the Nevada
corporation are the Certificate of Incorporation and Bylaws of the surviving
Nevada corporation. There were no changes to the Company's capital structure as
a result of this action.
On or about January 9, 2006, we completed a previously approved 1 for 20
reverse split of our then issued and outstanding common stock. This action took
our issued and outstanding shares from 92,576,839 to 4,629,831. All share and
per share amounts reflect this action as of the first day of the first period
presented in our financial statements or discussed in our narrative(s).
We are an established small arms munition manufacturer with an existing
distribution network. The small-arms ammunition market is principally dominated
by three domestic and approximately ten international major manufacturers. Our
operations are geared to provide the highest quality product in quantities
significant to meet our developed wholesale and governmental market demands. We
began as an assembler and re-loader of ammunition in several calibers. As our
operations grew, our management realized that the only way to break into the
industry was to become a vertically integrated manufacturer. Our founders
invested heavily in research and development, equipment, and technology in prior
years to focus on increasing our market share. Our current product line consists
of various calibers with varying projectiles as follows: 9 millimeter, .45
automatic, .380 automatic, .32 automatic, .40 Smith and Wesson, 38 Special, .357
Magnum, 30 carbine, 223 Remington, 38 Super, .44 Special, 32 Smith and Wesson
Long, 44 special, 44 Magnum, .45 Colt and 6.8 SPC. We have identified these
products as having the largest share of the market for the next several years.
We sell our products to both retail consumers and governmental agencies
domestically and principally to governmental agencies internationally for
military use.
During Calendar 2005, 2004 and 2003, our sales were approximately 79.42%,
78.06% and 93.77% in domestic markets and approximately 20.58%, 21.94% and 6.23%
internationally, respectively.
Our principal executive offices are located at 3545 NW 71st Street, Miami,
Florida 33147 and our telephone number is (305) 835-7400.
Equipment and Production Line Capabilities
We own all the equipment necessary to take the raw material, consisting
primarily of brass, lead, primer and powder, to the finished product, a loaded
round of ammunition. The process of manufacturing diverse calibers of ammunition
is extremely complex and requires very tight tolerances to be maintained
throughout the process. Our technology and equipment enable us to produce a
large variety of handgun and rifle ammunition. We have a machine shop and
maintain our own testing and quality assurance equipment and program. Ammunition
is a performance-based product. Therefore, after the manufacturing process is
complete, the ammunition must comply with specific protocols such as velocity,
accuracy, and pressure. We purchase raw materials in bulk and strive to take
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advantage of prepayment discounts to produce significant savings in the
manufacturing process. There are and have been instances when discounts have
been and may be missed due to cash flow restrictions. We continue to evaluate
the addition of several products to our existing production lines, including the
addition of high speed projectile forming machines to supplement the existing
casting machines. This addition would effectively double or triple projectile
production capacity, while improving projectile quality and performance. We also
are making provisions to increase other aspects of production capacity, which
would complement long term goals of both production volume and product
diversity.
In prior years, we acquired equipment which will allowed us to expand our
production capacity in areas which they have traditionally been slower than
other areas of our manufacturing process. The acquisition of additional presses,
for example, has helped us to balance out our assembly line process so that all
portions of our projectiles are manufactured in time with each other. We hope
this will cut our manufacturing and labor costs and as a result, make us more
efficient at producing small arms ammunition.
Business Strategy
We are an autonomous manufacturer of ammunition, with the technology and
equipment to take advantage of the growing small-arms ammunition market. The
barrier to entry into the ammunition market is extremely high, however, we are
an established small arms munitions manufacturer, with an existing distribution
network. We manufacture our ammunition utilizing purchased raw materials to
fabricate the necessary components in our own production facility. In
management's opinion, the consumer and governmental ammunition market has grown
each year and it appears that supply is not keeping up with demand, thus
allowing for companies like American Ammunition to make a significant impact in
sales through our dealer direct program, established in the first quarter of
2004, and our historically strong relationships with various domestic and
foreign governmental agencies.
We continue to seek the necessary working capital to allow us to enlarge
our operations to take advantage of our technological capacities, equipment and
the existing marketplace.
Marketing and Sales Distribution
In first quarter 2004, we launched our Dealer Direct Program. In doing so,
we completely revamped the way we distribute and sell our products domestically.
This program allowed us to eliminate the "middle man" distributor by offering
our products directly to and soliciting orders directly from the 66,000 licensed
dealers in the United States. In doing this, we may offer our products to
dealers cheaper than dealers would otherwise obtain them from distributors,
while increasing our profit margins as well. It also eliminates a second freight
charge from the distributor to the dealer, as product is shipped directly from
our facility to the ultimate seller of our products.
Our marketing strategy consists of several key features to attract dealers
directly to our company, rather than to a distributor. First, we are offering
"net 60" day credit terms to smaller dealers, who would ordinarily be forced to
pay for product up front. We have developed a screening process for qualifying
these smaller dealers on an individual basis. Although offering net 60 credit
terms to dealers results in increased risk to our company in our account
receivables as compared to payment in advance, we have exponentially diversified
our receivables (and therefore our credit risk) from 13 main distributors to
potentially thousands of individual dealers. Secondly, we now offer free freight
(shipping) to dealers on certain orders which exceed a specified dollar volume.
Shipping of small arms ammunition has always been a large portion of the cost
passed to consumers as the product is considered "dense" by shipping companies,
5
such as UPS, and requires extra care in shipping. We have determined that we can
ship our products at a reduced rate in quantity and can offer free shipping as
an incentive on qualified orders. As previously explained, a second freight
charge has also been avoided by eliminating the distributor from the
transaction. Additionally, our increasing automation and dealer direct program
have considerably sped up the time we take to provide a dealer with demanded
product. Our management has become aware of an unfulfilled need of dealers to be
provided with almost instant gratification when demand at retail establishments
increases. Many dealers have communicated with our company complaining that we
took their distributors too long to provide them with additional product supply
when demand dictated. We believe that our new distribution strategy complimented
with recent automation has cut the time it takes a dealer to receive our
products by more than half. We only recently upgraded our website to include
e-commerce capacity, wherein licensed dealers who are pre-registered with our
company can order online direct from us. Sales in this manner have been slow to
develop, primarily due to the documentation requirements for pre-qualification
of dealers; however, management is hopeful that our dealers will begin to take
advantage of the ease of use and time savings related to placing orders directly
via electronic means. We anticipate further automation in the way in which our
qualified dealers place product orders from our company. We plan to continue to
aggressively pursue new customers through promotions, advertising and trade
shows. We intend to solicit original equipment manufacturer subcontract work
from the three major domestic manufacturers; seek additional means of commercial
distribution; seek further Department of Defense and other governmental agency
contracts and new relationships; contracts; solicit further export sales and,
potentially, develop relationships with various mass merchandisers/chain stores.
Pricing and Value
We have been able to price our products competitively at a price lower than
any of the three major domestic manufacturers: Remington, ATK, and Winchester.
We strive to capitalize on the fact that these three competitors have very large
corporate infrastructures and, in management's opinion, have to pay much higher
labor costs to their manufacturing plant personnel. We believe that our
production cost structure and, accordingly, our pricing strategy permits our
customers to purchase our product and sell it at a retail price that is lower
than competitive distribution channels for our competitors' products.
Advertising & Promotion
We intend to gear our advertising towards magazine and print media, focused
on the gun and ammunition, handgun and shooting markets. We believe that such
advertising will result in greater name recognition among individual consumers.
Currently, our sales are generated with very little advertising and we believe
that advertising could significantly improve retail/mass merchandiser sales and
increase market share.
Status of Publicly Announced Products and Services Israeli Military Industries
Ltd
We have developed a relationship with Israeli Military Industries Ltd.
("IMI"), whereby we work together on individual projects. To date, we have
primarily focused their cooperation on federal contracts and on our dealer
direct program. In such contracts, projectiles manufactured by IMI have been
assembled by our company under IMI's strict quality control requirements. The
joint venture has benefited our company in several ways. First and foremost, IMI
has a distinct following as a result of offering very high quality products of
the course of many years. Associating our name with IMI's history has added
value to our brand and reputation in the small arms ammunition industry. Second,
IMI manufactures different calibers and products than us, thereby increasing the
6
catalogue of items we may offer to our dealers. IMI produces commercial
ammunition, similar to our company. However, we also specialize in the
production of law enforcement and military grade ammunition, which we currently
do not have the production capability to produce on our own. Lastly, on past and
current cooperation initiatives, IMI has shipped projectiles and materials for
future assembly on a consignment basis, thereby saving us the time value of such
costs were we to have produced such items or purchased such raw materials
ourselves. During 2005, we saw a downturn in this relationship and we are
focusing more on internally developed and manufactured products. During 2006,
the relationship continued to take a downturn and we terminated the
relationship. We are now focusing totally on more internally developed and
manufactured products.
Triton
On February 10, 2004, we executed a non-binding letter of intent to acquire
the assets of Triton Ammunition Corporation ("Triton"). This transaction closed
on October 19, 2004, with the issuance of 1,111,112 shares of restricted,
unregistered common stock valued at $500,000.
The assets acquired consisted of various pieces of manufacturing machinery,
raw materials and finished inventory and various intellectual property rights.
Triton conveyed the sole usage patent right agreements and various related
licenses for the Hi-Vel and Quik-Shok lines of ammunition.
The allocation of the purchase price was as follows: Manufacturing
equipment - approximately $134,000; Raw materials and finished inventory -
approximately $89,500; and Patents and a Covenant not-to-compete - approximately
$276,500. As the assigned patents, related licenses and the
covenant-not-to-compete have a combined remaining life and/or initial term of
approximately 5 years, the Company will amortize the approximate $276,500 to
operations over a 60-month period, commencing on the closing date of the
acquisition transaction.
We believe that with the acquisition of certain Triton specialty ammunition
and our cooperative relationship with IMI on certain ventures, we allow us to
offer an increased product line to our dealers.
ECO-AMMOTM
We are now manufacturing and distributing ECO-AMMO(TM). This product
utilizes a lead-free projectile with reduced lead pollutants sometimes referred
to as "green" ammo. ECO-AMMO(TM) is ideal for indoor ranges since it
disintegrates upon impact and, therefore, does not ricochet. We have been
acquiring and developing technology to market this environmentally friendly
ammunition for some time. The advent of the dealer direct program enables the
product to be distributed at a lower cost and should open up the market to more
consumers.
Frangible Aircraft Bullet
We were assigned a serial number (60/325,046) from the U.S. Patent and
Trademark Office for our provisional patent application filed on September 26,
2001 for a projectile that will not pierce an aircraft fuselage but will
penetrate human soft tissue. The product has been specifically designed for use
inside the cabin of a commercial aircraft; however, we have additional
applications for use in other environments with similar containment issues, such
as security at nuclear power plants, hazardous materials storage facilities, and
for consumer home defense. We departed completely from standard ballistics for
the design of this projectile to meet what American Ammunition perceives as a
growing and unfilled need. Two of the basic design criteria in ballistics are
penetration and expansion of the projectile. In this design, these two factors
7
have been controlled to meet the specific requirements of weapons discharged
inside a confined space while ensuring the integrity of the surrounding
environment. This design is a new concept in close quarter ammunition: a bullet
capable of incapacitating an assailant without damaging surrounding structure.
Design and material selection allows for the inverted expansion and aft internal
collapse of the projectile mass. Our initial testing, using test sections of a
commercial airliner fuselage, has revealed that upon impact with the aircraft
fuselage, the bullet internally collapses; therefore not allowing for the
transfer of kinetic energy forward or penetration above that required for soft
tissue penetration. Further, our testing has been successful in ballistic
testing using both ordinance gelatin and bovine tissue. This performance
criterion is accomplished without sacrificing the standard velocity and accuracy
of the caliber being used. A video of those tests can be viewed on our website
at www.a- merc.com in the New Product Section. We believe that these research
and development efforts will provide a new product to the public safety and
security marketplace.
Industrial Plating Enterprise Company
Industrial Plating Enterprise Company (IPE), a wholly owned subsidiary of
the Company, is a high volume "barrel plating" facility currently operating at
below 50.0% of its designed capacity. IPE is meeting all of our projectile
plating needs at this time. As our projectile plating requirement grows, IPE has
the surplus capacity to increase production to meet that need. IPE's innovative
hazardous materials and hazardous waste management and treatment system is fully
capable of meeting increased production requirements. IPE management has
attempted to add additional metal and coating processes to diversify its
services to the parent company as well as offering its services to other
industries, to generate additional revenue. To date, the company has been unable
to accomplish this objective. Also the market has changed and third parties are
offering the same or similar services and products to the company at a cost
competitive with the cost to the company manufacturing such products.
Considering increase costs of the company, and competitive pricing of third
parties in the market, the company is evaluating whether to continue the IPE
operation or whether to acquire such services and products from competitive
third parties. The company anticipates a final evaluation and decision on or
before June 30, 2007.
Competition
The market for small arms ammunition is extremely competitive. Companies
such as Remington, Federal and Winchester are all better equipped, more
experienced and better financed than us. For years, the large manufacturers have
supplied the component parts of the manufacturing process to smaller companies
to assemble and distribute. A company making its own components, can produce and
market a quality lower cost product. This concept, coupled with technology and
progressive and environmentally sound manufacturing practices (i.e. cans and
recycled plastic packaging), has resulted in a quality, affordable product
reaching the marketplace.
Management undertook a study of the production process and our equipment
utilization during December 2004 and the first quarter of 2005. As a result of
this study, our management continues to believe that we can our production
capacity through the renovation and restructuring of our plant flow utilizing
our existing equipment and increasing only labor, material and other incidental
costs.
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Sources and Availability of Raw Materials
We manufacture our ammunition by creating most of the components ourselves.
The materials needed to produce our ammunition products are widely available
from numerous third parties. While we believe that no critical shortages of our
key raw material components, such as brass, lead and powder. We are cognizant of
recent press related to the availability of lead as no new mines have opened in
many years due to environmental regulations. We have experienced limited,
infrequent delays in receiving lead; however, we have always been able to meet
our production requirements from our normal sources. Current demand for our raw
material components in the domestic and international markets, principally
driven by international military conflicts, may work to our advantage in our
contracts and relationships with various domestic and foreign governmental
agencies. However, we cannot state with any certainty that any disruption of
supply may or may not occur.
Research and Development
We believe that research and development is an important factor in our
future growth. The small arms ammunition industry is closely linked to the
latest technological advances. Therefore, we must continually invest in the
technology to provide the best quality product to the public and to effectively
compete with other companies in the industry. No assurance can be made that the
Company will have sufficient funds to purchase technological advances as they
become available.
Patents, Copyrights and Trademarks
We intend to protect our original intellectual property with patents,
copyrights and/or trademarks as appropriate. Our head stamp "A-MERC " was
registered as a trademark on May 10,1994.
We were assigned a serial number (60/325,046) from the U.S. Patent and
Trademark Office for our provisional patent application filed on September 26,
2001 for a bullet that will not pierce an aircraft fuselage but will penetrate
human soft tissue.
Our October 2004 acquisition of certain intellectual technology property
from Triton Ammunition Corporation included the assignment of the following
patents related to the design and manufacture of certain fragmentable
projectiles: 4,836,110, dated June 6, 1989; 4,882,822, dated November 28, 1989;
and 4,947,755, dated August 8, 1990.
Governmental Regulation
In accordance with the provisions of Title 1, Gun Control Act of 1968, we
are required to be licensed to import firearms and manufacture ammunition for
firearms. Such licensing is subject to limitations in Chapter 44, Title 18,
United States Code. In the event such licenses are not renewed for any reason,
we would have to cease our operations. In accordance with these requirements, we
carry two licenses issued by the Department of Treasury, Bureau of Alcohol,
Tobacco and Firearms: * License No. 1-59-025-06-39D 69152 for "06 - Manufacturer
of Ammunition for Firearms", which license expires on April 1, 20079; and *
License No. 1-59-025-08-39D-69454 for "08-Importer of Firearm other than
Destructive Devices", which license expires on April 1, 20079. We are not aware
of any other license requirements or government regulation at a state or federal
level specific to their business and believe that we are in full compliance with
our existing licenses.
Effect of Probable Governmental Regulation on the Business
We are not aware of any pending legislation at either the State or Federal
level that would change the requirements under which it is licensed and is not
aware of any reason why the existing licenses cannot be renewed at their
9
expiration dates. There can be no assurance that legislation will not be
proposed and enacted at some time in the future that would preclude us from
continuing our operations. Should such legislation be enacted, and should we be
precluded from continuing our operations, it would have a materially adverse
effect upon our business and future.
Cost and Effects of Compliance with Environmental Laws
As a manufacturer, we are subject to general Local, State and Federal
regulations governing environmental concerns. We believe that we have always
been and continue to be in compliance with all such laws. Special precautions
have been taken us to ensure that adequate ventilation exists for the portion of
our operations that utilize lead and/or brass. Additionally, our gunpowder
supply is humidity and temperature controlled in a secure and environmentally
controlled facility
Employees
At December 31, 2006, we employ approximately 45 persons. None of our
employees are represented by a labor union for purposes of collective
bargaining. We consider our relations with our employees to be excellent. We may
employ additional personnel, as necessary, to accommodate future sales and
production requirements and believe that an ample supply of qualified labor
exists in our geographic area to facilitate any required growth.
Risk Factors
An investment in our common stock has a high degree of risk. Before you
invest you should carefully consider the risks and uncertainties described below
and the other information in this prospectus. If any of the following risks
actually occur, our business, operating results and financial condition could be
harmed and the value of our stock could go down. This means you could lose all
or a part of your investment.
RISKS RELATING TO OUR BUSINESS: We may never become profitable and continue
as a going concern because we have had losses since our inception. We may never
become profitable and continue as a going concern because we have incurred
losses and experienced negative operating cash flow since our formation. We have
incurred losses and experienced negative operating cash flow since our
formation. For our fiscal years ended December 31, 2006, 2005, 2004 and 2003, we
had a net loss of approximate$8,561,975), (5,941,669),$(3,361,000) and
$(2,968,000), respectively. We may continue to incur significant operating
expenses as we maintain our current line of small-arms ammunition and continue
research and development toward improving projectile quality and performance. We
cannot estimate exactly when our operating expenses will not outpace revenues
and result in significant losses in the near term. We may never be able to
reduce these losses, which will require us to seek additional debt or equity
financing. If such financing is available you may experience significant
additional dilution.
THERE MAY EXIST AN UNCERTAINTY AS TO OUR CONTINUATION AS A GOING CONCERN:
Our audited financial statements for the fiscal years ended December 31, 2006,
2005, 2004 and 2003 reflect an accumulated deficit from our inception of
approximately $(34,737,352), $(26,113,212), $(19,989,875) and $(16,629,044);
working capital of approximately $866,460, $(432,660), $872,000 and $2,028,000,
and stockholders' equity of approximately $(4,939,197), $(845,264), $4,385,000
and $4,508,000. Our auditor issued a going concern opinion on our financial
statements for the year ended December 31, 2006. Our ultimate survivability is
dependent upon our being able to generate sufficient cash flows from operations
10
to support its daily operations as well as provide sufficient resources to
retire existing liabilities and obligations on a timely basis. We anticipate
that our available cash and future commitments for equity placements will be
sufficient to meet our operating expenses and capital expenditures through 2007.
If we continue to incur operating losses, we may not be able to fund continuing
business operations, which could lead to the limitation or closure of some or
all of our operations.
WE MAY HAVE TO CURTAIL OUR BUSINESS IF WE CANNOT FIND ADEQUATE FUNDING: We
currently have no legally binding commitments with any third parties to obtain
any material amount of additional equity or debt financing. We need funds and
may not be able to obtain any additional financing in the amounts or at the
times that we may require the financing or, if we do obtain any financing, that
it would be on acceptable terms because of the following:
* we have no assets to pledge as security for the loan; and
* we are in poor financial condition where we maybe viewed as a high
market risk
As a result, we may not have adequate capital to implement future
expansions, maintain our current levels of operation or to pursue strategic
acquisitions. Our failure to obtain sufficient additional financing could result
in the delay or abandonment of some or all of our development, expansion and
expenditures, which could harm our business and the value of our common stock.
Our competitive position may be harmed if we fail to respond to rapid changes in
the market for small arms ammunition.
Our future success will depend significantly on our ability to develop and
market new products that keep pace with technological developments and evolving
industry standards for hand gun and rifle ammunition. Our delay or failure to
develop or acquire technological improvements, adapt our products to
technological changes or provide higher quality product lines that appeals to
our customers may cause us to lose customers and may prevent us from generating
revenue which could ultimately cause us to cease operations.
Our revenues may decrease from production delays due to fire or explosive
incidents.
Our ammunition products, involve the manufacture and/or handling of a
variety of explosive and flammable materials. This manufacturing and/or handling
may result in incidents that will temporarily shut down or otherwise disrupt our
manufacturing, causing production delays and resulting in liability for
workplace injuries and fatalities. We cannot assure you that we will not
experience these types of incidents in the future or that these incidents will
not result in production delays, which can lead to a reduction in revenues.
We may incur substantial costs in complying with environmental laws and may
be subject to substantial liability resulting from the use of hazardous
substances or required cleanup of contaminated sites. Our operations and use of
real property are subject to a number of federal, state and local environmental
laws and regulations which, among other things, require us to obtain permits to
operate and to install pollution control equipment and regulate the generation,
storage, handling, transportation, treatment and disposal of hazardous and solid
wastes. Our operations, as well as historical operations at our sites, also
subject us to liability for the cleanup of releases of hazardous substances.
Environmental laws and regulations change frequently, and it is difficult to
predict whether and to what extent we may be subject to liability for compliance
with environmental laws and regulations.
11
Our business operations will be harmed if we are unable to obtain
additional funding. We do not know if additional financing will be available
when needed, or if it is available, if it will be available on acceptable terms.
Insufficient funds may prevent us from implementing our business strategy or may
require us to delay, scale back or eliminate certain contracts for the provision
of our technology and products.
Our competitors may misappropriate our intellectual property because we
have only one trademark and five patents.
We attempt to protect our limited proprietary property through trademark, trade
secret, nondisclosure and confidentiality measures. Such protections, however,
may not preclude competitors from developing similar technologies. Any inability
to adequately protect our proprietary technology could harm our ability to
compete.
Our future success and ability to compete depends in part upon our
proprietary technology and our trademark, which we attempt to protect with a
combination of trademark and confidentiality procedures and contractual
provisions. These legal protections afford only limited protection and are
time-consuming and expensive to obtain and/or maintain. Further, despite our
efforts, we may be unable to prevent third parties from infringing upon or
misappropriating our intellectual property.
RISKS RELATING TO OUR CURRENT FINANCING ARRANGEMENT: There are a large
number of shares underlying our convertible debentures and warrants that may be
available for future sale and the sale of these shares may depress the market
price of our common stock.
RISKS RELATING TO OUR COMMON STOCK: If We Fail to Remain Current on Our
Reporting Requirements, We Could be Removed From the OTC Bulletin Board Which
Would Limit the Ability of Broker-Dealers to Sell Our Securities and the Ability
of Stockholders to Sell Their Securities in the Secondary Market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
Our directors and executive officers beneficially own approximately 37.4%
of our stock; their interests could conflict with yours; significant sales of
stock held by them could have a negative effect on our stock price; stockholders
may be unable to exercise control.
As of December 31, 2006, our executive officers and directors, which
primarily includes the Fernandez family, beneficially own approximately 0.048%
of our common stock. As a result, our executive officers and directors will have
significant influence to:
* elect or defeat the election of our directors;
* amend or prevent amendment of our articles of incorporation or bylaws;
* effect or prevent a merger, sale of assets or other corporate
transaction; and
* control the outcome of any other matte submitted to the stockholders
for vote.
12
As a result of their ownership and positions, our directors and executive
officers collectively are able to significantly influence all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. In addition, sales of significant amounts of
shares held by our directors and executive officers, or the prospect of these
sales, could adversely affect the market price of our common stock. Management's
stock ownership may discourage a potential acquirer from making a tender offer
or otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock
price.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
* that a broker or dealer approve a person's account for transactions in
penny stocks; and
* the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny
stock to be purchased
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must:
* obtain financial information and investment experience objectives of
the person; and
* make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the
risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
* sets forth the basis on which the broker or dealer made the
suitability determination; and
* that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in
securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market
value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks
in both public offerings and in secondary trading and about the commissions
payable to both the broker-dealer and the registered representative, current
quotations for the securities and the rights and remedies available to an
investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
13
ITEM 2 - Description of Property
We lease our corporate office and manufacturing facility from our
controlling stockholder under a long-term operating lease agreement. The lease
requires a monthly payment of approximately $5,735, including applicable State
sales taxes. We are responsible for all utilities and maintenance expenses. The
lease expires on December 1, 2009 and contains a clause that upon expiration,
the Company and the controlling shareholder shall renegotiate the annual rental
amount.
Our subsidiary, IPE, leases it's manufacturing facility from an unrelated
third-party under a long-term operating lease agreement. This lease is for a
period of five (5) years and requires graduated monthly payments, changing on
the lease anniversary date, ranging from approximately $1,751 to $1,914, plus
the applicable sales taxes. The Company is responsible for all utilities and
maintenance expenses. The lease expires on June 30, 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 $23,057 and $22,176, respectively, for each of the years ended
December 31, 2006 and 2005.
In May 2004, we entered into a long-term lease agreement for a warehouse
facility in close proximity to our primary office and manufacturing facility
with an unrelated third-party.. This lease is for a period of two (2) years and
requires payments of approximately $6,206 per month for the first 12 months and
approximately $6,393 for the second 12 months, plus applicable sales taxes. We
are responsible for all utilities and maintenance expenses. This lease expired
and terminated on June 30, 2006, relieving the Company of any further obligation
under this agreement. We were also responsible for any incremental real estate
taxes and property insurance in excess of the amounts incurred by the landlord
for the calendar year immediately preceding the execution of the lease.
Future minimum rental payments on the above leases are as follows:
Year ended
December 31, Amount
------------ ----------
2007 72,643
2008 72,643
2009 68,815
2010 68,815
---------
Totals $ 137,630
=========
For the respective years ended December 31, 2006 and 2005, the Company paid
an aggregate of $125,862 and $158,947, respectively, for rent under these
agreements.
ITEM 3 - Legal Proceedings
The Company was a nominal defendant, stakeholder, \and affected party in a
civil action styled "Independent Banker's Bank v. Eduardo A. Godoy, et. al.",
Case Number 2003 CA 002466, currently pending in the Circuit Court of the
Fifteenth Judicial Circuit In And For Palm Beach County, Florida. The action was
filed by a creditor of shareholders of the Company, and as Issuer of shares to
other Defendants in the action the Company is named as a stakeholder and
affected party in the action. No monetary claim was asserted in this action
against the Company. The Company and its counsel were of the opinion that no
such monetary claims should be made, and if made, were without merit and
defensible. The claims were voluntarily dismissed at the end of 2006.
14
From time to time, the Company may be subject to various legal proceedings
which are incidental to the ordinary conduct of its business. The Company does
not consider any such proceedings to date, either individually or in the
aggregate, to be material to its business or likely to result in a material
adverse effect on its future operating results, financial condition, or cash
flows.
ITEM 4 - Submission of Matters to a Vote of Security Holders
On June 27, 2005, pursuant to a Written Consent of Shareholder(s) Pursuant
to California General Corporation Law, shareholders holding approximately
69,111,256 shares (or approximately 61%) of the then issued and outstanding
shares approved the merger of an entity to be formed under Nevada Law with
American Ammunition, Inc. (a California corporation) for the sole purpose of
effecting the reincorporation and change in corporate domicile. Effective
January 1, 2006, the transaction was effected and the Company was redomiciled in
the State of Nevada.
PART II
ITEM 5 - Market for Company's Common Stock and Related Stockholder Matters
Market for Trading
Our common stock of the Company currently is quoted on the NASDAQ Over the
Counter Bulletin Board since October 23, 2001. Our current symbol, as changed
for the January 2006 reverse stock split, is "AAMU". Prior to January 2006, our
common stock traded under symbol "AAMI". Our common stock, in prior years, was
approved for trading under the symbol "FBIB"; however, no trades were conducted
using this symbol.
The ask/high and bid/low information for each quarter since October 23,
2001 are as follows:
Quarter Ask/High Bid/Low
-------------------------------------------------------------------
1/1/2002 - 3/31/2002 0.81 0.33
4/1/2002 - 6/30/2002 0.65 0.36
7/1/2002 - 9/30/2002 0.57 0.31
10/1/2002 - 12/31/2002 0.47 0.38
1/1/2003 - 3/31/2003 0.78 0.53
4/1/2003 - 6/30/2003 0.85 0.42
7/1/2003 - 9/30/2003 0.55 0.37
10/1/2003 - 12/31/2003 0.42 0.22
1/1/2004 - 3/31/2004 0.50 0.27
4/1/2004 - 6/30/2004 0.42 0.17
7/1/2004 - 9/30/2004 0.27 0.17
10/1/2004 - 12/31/2004 0.24 0.15
1/1/2005 - 3/31/2005 0.17 0.09
4/1/2005 - 6/30/2005 0.14 0.07
7/1/2005 - 9/30/2005 0.14 0.08
10/1/2005 - 12/31/2005 0.15 0.30
1/1/2006 - 3/31/2006 1.18 0.30
4/1/06 - 6/30/06 0.40 0.28
7/1/06 - 9/30/06 0.80 0.25
10/1/06 - 12/31/06 0.65 0.36
15
Please note that over-the-counter market quotations have been provided
herein. The quotations reflect inter-dealer prices, without retail markup,
mark-down or commission and may not represent actual transactions.
As of December 31, 2006, we had approximately 240 shareholders of record,
exclusive of our stockholders with their holdings in street name.
Common Stock
The holders of the issued and outstanding shares of common stock are
entitled to receive dividends when, as and if declared by our Board of Directors
out of any funds lawfully available therefore. The Board of Directors intends to
retain future earnings to finance the development and expansion of our business
and does not expect to declare any dividends in the foreseeable future. The
holders of the common stock have the right, in the event of liquidation, to
receive pro rata all assets remaining after payment of debts and expenses. The
common stock does not have any preemptive rights and does not have cumulative
voting rights. The issued and outstanding shares of common stock are fully paid
and nonassessable. Holders of shares of common stock are entitled to vote at all
meetings of such shareholders for the election of directors and for other
purposes. Such holders have one vote for each share of common stock held by
them.
Transfer Agent
Our independent stock transfer agent for our common and preferred stock is
Atlas Stock Transfer Corporation. Their mailing address and telephone number is
5899 South State Street, Salt Lake City, Utah 84107; (801) 266-7151.
Reports to Stockholders
The Company plans to furnish its stockholders with an annual report for
each fiscal year ending December 31 containing financial statements audited by
its registered independent public accounting firm. In the event the Company
enters into a business combination with another Company, it is the present
intention of management to continue furnishing annual reports to stockholders.
Additionally, the Company may, in its sole discretion, issue unaudited quarterly
or other interim reports to its stockholders when it deems appropriate. The
Company intends to maintain compliance with the periodic reporting requirements
of the Securities Exchange Act of 1934.
Dividend policy
No dividends have been paid to date and the Company's Board of Directors
does not anticipate paying dividends in the foreseeable future. It is the
current policy to retain all earnings, if any, to support future growth and
expansion.
ITEM 6 - Management's Discussion and Analysis or Plan of Operation
Caution Regarding Forward-Looking Information
Certain statements contained in this annual filing, including, without
limitation, statements containing the words "believes", "anticipates", "expects"
and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
16
Such factors include, among others, the following: international, national
and local general economic and market conditions: demographic changes; the
ability of the Company to sustain, manage or forecast its growth; the ability of
the Company to successfully make and integrate acquisitions; raw material costs
and availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Form 10-KSB and investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
Restatement issues
The December 31, 2006 and 2005 financial statements have been restated to
account for the derivative liability that was incurred in connection with the
common stock conversion features and the warrants issued with certain notes
payable (see Notes I and J to the accompanying consolidated financial
statements).
The Company accounts for debt with embedded conversion features and warrant
issues in accordance with EITF 98-5: "Accounting for convertible securities with
beneficial conversion features or contingency adjustable conversion" and EITF
No. 00-27: "Application of issue No 98-5 to certain convertible instruments".
Conversion features determined to be beneficial to the holder are valued at fair
value and recorded to additional paid in capital. The Company determines the
fair value to be ascribed to the detachable warrants issued with the convertible
debentures utilizing the Black-Scholes method. Any discount derived from
determining the fair value to the debenture conversion features and warrants is
amortized to financing cost over the life of the debenture. The unamortized
discount, if any, upon the conversion of the debentures is expensed to financing
cost on a pro rata basis.
Debt issues with the variable conversion features are considered to be
embedded derivatives and are accountable in accordance with FASB 133;
"Accounting for Derivative Instruments and Hedging Activities". The fair value
of the embedded derivative is recorded to derivative liability. This liability
is required to be marked each reporting period. The resulting discount on the
debt is amortized to interest expense over the life of the related debt.
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.
17
Results of Operations
Year ended December 31, 2006 compared to Year ended December 31, 2005
During the year ended December 31, 2006, we experienced aggregate net
revenues of approximately $2,241,000, with approximately $556,000 being realized
during the 4th quarter, as compared to approximately $3,244,000 in total net
revenues for the year ended December 31, 2005.
We experienced costs of goods sold of approximately $3,489,000 for the year
ended December 31, 2006 as compared to approximately $4,592,000 for the year
ended December 31, 2005.
During 2006 and 2005, we experienced negative trends off of our standard
production costs for material and labor due to difficulties in training new
employees, adding new products to our catalog and lower than expected orders 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 $31,000
and $770,000, 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.
In accordance with Statement of Financial Accounting Standards No. 144, due
to our lack of profitability and positive gross margins and the uncertainty of
the receipt of budgeted orders during future periods, management recognized an
adjustment in the 4th quarter of the year ended December 31, 2005 to fully
impair the undepreciated balance on all of our property and equipment. This
action resulted in a one-time non-cash charge to operations of approximately
$2,778,000.
For the year ended December 31, 2006 and 2005, respectively, we generated a
negative gross profit of approximately $(1,247,000), or (55.65%), and
approximately $(1,349,000), or (55.65%). While we have a backlog of orders and
future order commitments from governmental agencies, we anticipate that we
should be able to generate a positive gross profit in future periods; however,
there are no guarantees or any certainty that this will occur.
We experienced nominal research and development expenses of approximately
$-0- and $2,000, respectively, during the years ended December 31, 2006 and
2005, principally related to the expansion of our product line.
Other general and administrative expenses decreased by approximately
$127,000 from approximately $1,138,000 for the year ended December 31, 2005 as
compared to approximately $1,265,000 for the year ended December 31, 2005. The
most significant increases relate to salaries and wages and interest expense on
working capital loans.
During 2006 and 2005, respectively, we experienced charges to operations of
approximately $5,192,000 and $257,000 for consulting 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 $(8,561,000) and $(6,067,000) for
the respective years ended December 31, 2006 and 2005, respectively, or $(1.01)
and $(1.56) per share.
18
Liquidity
As of December 31, 2006 and 2005, respectively, we had working capital of
approximately $866,000 and $433,000. We have used cash in operating activities
of approximately $(1,715,000) and $(1,801,000) during the years ended December
31, 2006 and 2005, respectively.
Capital Requirements
During the years ended December 31, 2006 and 2005, respectively, we added
approximately $31,000 and $124,000 in new equipment. The equipment added in 2006
was related to our expansion of our rifle cartridges product line.
Depending on future demand for our products, we may need to further
increase our production capability and management is of the opinion that
adequate equipment, either new or used, will be available to facilitate any
future expansion.
Convertible Debenture
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.
On September 13, 2006, in accordance with the terms of a September 6, 2006
financing agreement between the Company and La Terraza Trading and Asset
Management, Ltd ("the Investor") (hereafter referred to as the "Financing
Agreement"), the Company received $2,150,000 from the Investor for the Company's
use and benefit, the funds of which were distributed on or about the same day,
as follows:
1. $585,000 was paid to La Jolla Cove Investors, Inc. ("La Jolla") to acquire
for the Investor a full and complete assignment of any and all of La
Jolla's right, title and interest in any and all of the Company's
indebtedness to La Jolla, specifically including La Jolla's rights under
the active SB-2 Registration Statement for the issuance and registration of
securities on the SB-2 thereunder; the Company's consent to the foregoing
was subject to its right to prepay any and all indebtedness thereunder in
the Company's common stock, without penalty, at any time before or after
default.
2. $275,000 to be used by the Company 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.
19
3. $215,000 payable as fees to Capital Investment Services, Inc. ("CIS") for
locating, negotiating and closing the Investor funding.
4. $100,000 to repay in full, without interest, an unsecured bridge loan from
the Investor to the Company dated and funded on August 25, 2006.
5. $275,000 for the Company's working capital.
6. $700,000 to be retained in escrow and disbursed to the Company for payment
in reduction of the assigned La Jolla debenture and required warrant
exercise, 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 the Company to deposit in escrow with
Capital Investment Services, Inc. ("CIS"), the escrow agent in the transaction,
a total of 11,470,000 shares of its common stock for later delivery (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
Escrow Agreement between the Company and CIS requires CIS, as the Escrow Agent,
to release such shares for delivery in accordance with the terms of the
Company's pending SB-2 Registration Statement currently on file with the
Securities and Exchange Commission and in accordance with the terms and
conditions of the Financing Agreement dated September 2006 between the Company
and the Investor, and only after reasonable notification to the Company prior to
delivery of any such certificates. Further, disbursement and distribution of the
shares may only be made in accordance with the terms of the applicable SB-2
registration - specifically, that the Investor and/or the selling stockholder
agreed to restrict its ability to convert or exercise its warrants and receive
shares of the Company's common stock such that the number of shares held by them
and their affiliates after such conversion or exercise does not exceed 4.9% of
the Company's then issued and outstanding shares of common stock. The Financing
Agreement also calls for an additional 5,000,000 shares of the Company's
restricted common stock 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
the Investor and the Company for future services to advance the Company's
overall business. In addition, the Company granted the 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 deposited into escrow
were in fact deposited in escrow on September 26, 2006, as required.
The Investor provided additional funding in the amount of $1,000,000 to the
Company on December 21, 2006 for an additional 5,333,335 shares. The sum of
$100,000 was paid as fees to CIS for locating, negotiating and closing the
additional funding. All other terms and conditions of the escrow agreement and
related financing agreement, including incorporation of the terms of the SB-2
requirements, remain the same.
ITEM 7 - Index to Financial Statements
The required financial statements begin on page F-1 of this document.
ITEM 8 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None
ITEM 8A - 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
20
is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of
1934, as amended (Exchange Act), for the quarter ended December 31, 2005. As of
the end of the period covered by this report, management, including the chief
executive officer and chief financial officer evaluated the effectiveness of the
design and operation of our disclosure controls and procedures. Based upon and
as of the date of that evaluation, our CEO and CFO concluded that the disclosure
controls and procedures were effective
(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 quarter ended December 31,
2005 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART III
ITEM 9 - Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The directors and executive officers serving the Company are as follows:
Name Age Position Held and Tenure
-------------------- --- -------------------------------
J. A. Fernandez, Sr. 68 Chairman of the Board and Director of Sales
Andres F. Fernandez 40 President and Chief Executive Officer
Emilio D. Jara 40 Vice-President of Operations, Secretary and Director
Maria A. Fernandez 45 Director
All directors hold office until the next annual meeting of the Company's
shareholders and until their successors have been elected and qualify. Officers
serve at the pleasure of the Board of Directors. The officers and directors will
devote such time and effort to the business and affairs of the Company as may be
necessary to perform their responsibilities as executive officers and/or
directors of the Company.
Family Relationships
J. A. Fernandez, Sr. is the father of Andres and Maria Fernandez. There are
no other family relationships between or among the executive officers and
directors of our company.
Business Experience
J. A. Fernandez, Sr. currently serves as the Chairman of the Board and
Director or Sales. He has been employed by us since our inception in 1983. Mr.
Fernandez is the founder F&F Equipment, which began as a family business, and is
responsible for our sales activities. Mr. Fernandez has over 40 years experience
in diverse industries including aerospace, advanced polymer manufacturing,
munitions, mining and processing of gemstones and metal ores and has utilized
such experience for the growth and development of the Company. He is fluent in
Spanish.
21
Andres Fernandez currently serves as President and Chief Executive Officer.
Mr. Fernandez has served in each of these capacities since September 2001. He
has been employed by our company for over a decade. Mr. Fernandez is responsible
for day to day operations. He studied physics and calculus at St. Thomas
University, FL and at the University of Miami, FL. He is a licensed pilot,
having graduated from the American Institute of Aeronautics, FL, and received
his certificate as a private pilot (fixed wing) as well as private helicopter
(rotary)in 1989. In 1989, Mr. Fernandez graduated from the Institute of Public
Service (Pan Am), GA as a tactical rappel instructor. In 1990, he graduated from
Omni Explosives, TN with a specialty in tactical explosives. Mr. Fernandez was
certified by the Florida Department of Law Enforcement Academy in special
operations/entry techniques in 1990. He has served as a tactical advisor to U.S.
Treasury Department, Bureau of Alcohol, Tobacco and Firearms, U.S. Customs
Service and the Florida Department of Law Enforcement. He has received numerous
commendations and letters of appreciation. He also served on the Board of
Veterans Affairs (Hialeah, FL) from 1990 to 1991. He is fluent in Spanish.
Emilio Jara currently serves as Vice President of Operations, Corporate
Secretary and a Director. Mr. Jara has served in each of these capacities since
September 2001. He has been employed with our company since 1988. He has been an
integral part of our technological growth. His abilities have contributed to our
research and development and subsequent increase in the number of production
lines. Mr. Jara is extremely well versed in metallurgical and ballistic issues.
He studied business administration at Miami- Dade Community College (1984/1985).
In 1989, he graduated from the Institute of Public Service (Pan Am), GA as a
Tactical Rappel Instructor. In 1990, Mr. Jara graduated from Omni Explosives, TN
with a specialty in Tactical Explosives. He is fluent in Spanish.
Maria A. Fernandez currently serves as a Director. Mrs. Fernandez has
served as a Director since September 2001. She has been the managing partner at
Fernandez Friedman Grossman & Kohn PLLC, a Louisville, KY law firm, since May
1998. Prior to that date, she was a partner at Taustine Post Sotsky Berman
Fineman & Kohn. She concentrates her legal practice in the areas of estate
planning, probate and administration. She also practices in the areas of
Medicaid and disability planning, corporate and individual taxation and
corporate law, with an emphasis in closely held corporations. She is a graduate
of the University of Miami, FL (Bachelor of Business Administration and Master
of Professional Accounting) and the Brandeis School of Law at the University of
Louisville, KY. Ms. Fernandez is licensed to practice in Kentucky and Florida.
She has lectured in the areas of estate planning and probate, Medicaid planning
and elder law. She is a member of the Louisville, Florida, Kentucky and American
Bar Associations and is fluent in Spanish. Ms. Fernandez is the past President
of the Women Lawyers Association of Jefferson County, Kentucky and current Board
Member of the Louisville Bar Association. A Graduate of the Kentucky Women's
Leadership Network, she is active in various civic organizations and is on the
board of several non-profit corporations.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors, certain officers and persons holding 10% or more of our common stock
to file reports regarding their ownership and regarding their acquisitions and
dispositions of the Registrant's common stock with the Securities and Exchange
Commission ("SEC"). Such persons are required by SEC regulations to furnish our
company with copies of all Section 16(a) forms they file. Based solely upon a
review of Forms 3 and 4 and amendments thereto furnished to us under Rule
16a-3(d) during fiscal 2003, and certain written representations from executive
officers and directors, we are unaware that any required reports that have not
been timely filed.
22
Code of Ethics
We have adopted a code of ethics which has been filed as an exhibit to this
report.
Committees of the Board of Directors
We presently have not established an audit committee, compensation
committee, nominating committee, an executive committee of our board of
directors, stock plan committee or any other committees. Our Board of Directors,
as defined in Sarbanes-Oxley Act of 2002, is the defacto composition of any and
all committees.
Terms of Office
Our directors are appointed for a one year term to hold office until the
next annual general meeting of the holders of our Common Stock or until removed
from office in accordance with our by-laws. Our officers are appointed by our
Board of Directors and hold office until removed by our Board of Directors.
Conflicts of Interest
We know of no identified or disclosed conflicts of interest among our
officers or directors and the affairs of the Company.
Indemnification for Securities Act Liabilities
The Company's By-Laws provide for the indemnification of its, directors,
officers, employees, and agents, under certain circumstances, against attorney's
fees and other expenses incurred by them in any litigation to which they become
a party arising from their association with or activities on behalf of the
Company. The Company will also bear the expenses of such litigation for any of
its directors, officers, employees, or agents, upon such persons promise to
repay the Company therefore if it is ultimately determined that any such person
shall not have been entitled to indemnification. This indemnification policy
could result in substantial expenditures by the Company, which it may be unable
to recoup.
[Balance of this page intentionally left blank.]
23
ITEM 10 - Executive Compensation
The following summary compensation table sets forth the aggregate cash
compensation paid or accrued in excess of $100,000 by the Company to each of the
Company's executive officers for services rendered to the Company during the
Company's fiscal years ended December 31, 2005, 2004 and 2003 and all plan and
non-plan compensation awarded to, earned by or paid to certain designated
executive officers.
Long-Term
Compensation
Annual Compensation Awards Payouts
-------------------------- ------------------- -------
Other Restricted Securities All
Salary/ Annual Stock Underlying LTIP Other
Name/Title Year Bonus Compensation Awards Options/SARs Payouts Compensation
---------- ---- -- ------ ------------ ------ ------------ ------- ------------
J. A. Fernandez, Sr. 2005 $104,000 $-0- $-0- $-0- $-0- $-0-
Chairman and Vice President 2004 $104,000 $-0- $-0- $-0- $-0- $-0-
of Sales 2003 $104,000 $-0- $-0- $-0- $-0- $-0-
Andres F. Fernandez 2005 $132,600 $-0- $-0- $-0- $-0- $-0-
President and Chief 2004 $132,600 $-0- $-0- $-0- $-0- $-0-
Executive Officer 2003 $132,600 $-0- $-0- $-0- $-0- $-0-
Compensation of Directors
We have no existing arrangements for compensating our directors for their
attendance at meetings of the Board of Directors. Depending upon market forces
and regulatory mandates, we may find it necessary to implement a formal
compensation plan in future periods to obtain and retain qualified members of
our Board of Directors.
ITEM 11 - Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of the date of this Registration
Statement, the number of shares of Common Stock owned of record and beneficially
by executive officers, directors and persons who hold 5% or more of the
outstanding Common Stock of the Company. Also included are the shares held by
all executive officers and directors as a group.
Security Ownership of Beneficial Owners
Shares of
Common Stock Percent of Common
Name and Address of Beneficial Owner Beneficially Owned Stock Outstanding
--------------------------------------------------------------------------------
Capital Investment Services
Irrevocable Trust Escrow*
145 Almeria
Coral Gables FL 33134 21,803,335 76.8%
National Business Investors
2300 Palm Beach Lakes Blvd., Suite 218
West Palm Beach, FL 33409 1,268,181 8.4%
----------
Total 23,071,516 85.2% * In our Form 10-KSB and Form 10-KSB/A for the
period ending December 31, 2006, that had been filed on April 16, 2007 and May
1, 2007, respectively, we listed Alistair Tait Snowie as holding 5,900,000 of
our shares of common stock or 25.643% of our issued and outstanding shares of
common stock. As detailed under Item 5, Other Information, of our Form 10-QSB
24
for the period ending June 30, 2007, we commenced an inquiry in our about June
2007 to determine whether the terms of both the La Terraza Agreement and the
Escrow Agreement had been adhered to by La Terraza and Capital Investment, and
to determine whether the terms of our SB-2 Registration Statement had been
complied with. As part of that inquiry and based on records we received from our
transfer agent, we determined that Capital Investment Services had improperly
and illegally instructed our transfer agent to issue, among other such
issuances: (a) 5,500,000 free trading shares to Alistair Snowie in certificated
form, which had been so issued on December 4, 2006; (b) 1,835,000 free trading
shares to RFP Development in certificated form, which had been so issued on
December 4, 2006; (c) 689,545 free trading shares to Revim Development in
certificated form, which had been so issued on December 4, 2006; (d) 4,800,000
restricted shares to La Terraza, which had been so issued on June 7, 2007; and
(e) 45,455 restricted shares to Manuel Lugo, which had been so issued on June 7,
2007. All of the share issuances specified in (a) - (e) immediately above, which
in the aggregate equal 21,803,335 shares, constitute unauthorized and illegal
issuances because: (i) the September 6, 2006 financing agreement between La
Terraza and us specified that such shares would be issued only in connection
with expenses and as compensation to third parties, the use of which would be
agreed upon by La Terraza and us for services to advance our business; and (ii)
La Terraza never agreed with us in advance regarding any of the matters
specified in (i) including the expenses, compensation to third parties, and the
services; and (iii) no consideration or any services were tendered by La Terraza
or any third party on their behalf to us in connection with the 4,800,000
restricted shares issued to La Terraza. As further detailed in our Form 10-QSB
for the period ending June 30, 2007, we further determined that among other such
issuances, the issuances specified in (a) - (e) constituted breaches of the
terms of our agreements with La Terreza and Capital Investment Services,
including that we received no notification prior to such issuances or
thereafter, and each of the issuances violated the terms of our SB-2, which La
Terraza and Capital Investment had agreed to -- most importantly, that each such
issuance from September 26, 2006 to June 7, 2007, individually and cumulatively,
had violated the term of our SB-2 that prohibited distribution and disbursement
of 4.9% or more of our outstanding common stock. Based on the foregoing, we have
amended the above Beneficial Ownership Chart to eliminate all of the share
issuances specified in (a) - (e) that had previously been reflected in the
Beneficial Ownership Charts contained in our Form 10-KSB and Form 10-KSB/A for
the period ending December 31, 2006, that had been filed on April 16, 2007 and
May 1, 2007, respectively, and included such shares under the Capital Investment
Services Irrevocable Trust Escrow ownership.
25
Security Ownership of Management
Shares of
Name and Address of Common Stock Percent of Common
Director or Executive Officer Beneficially Owned Stock Outstanding
--------------------------------------------------------------------------------
Andres F. Fernandez,
President/Chief Executive Officer 277,932 0.009%
J. A. Fernandez, Sr.,
Chairman of the Board (1) 819,534 0.029%
Maria A. Fernandez, Director 13,000 0.001%
Emilio D. Jara, Secretary/Director 2,713 0.000%
All executive officers and directors
as a group (4) persons 1,113,179 0.039%
-----------------------
(1) Includes 605,000 shares owned by our Chairman of the Board, J.A. Fernandez,
Sr. and 214,095 owned by his wife, Amelia C. Fernandez, both of whom live
in the same household.
The contact address for each of our officers and directors is 3545 NW 71st
Street, Miami, FL 33147.
Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of December 31, 2006 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person. J. A. Fernandez,
Sr. is the father of Andres and Maria Fernandez. The table above does not
include the 19,225 shares Maria Fernandez holds as a Trustee for an Irrevocable
Trust in which neither she nor any of the other Officers or Directors is the
beneficial owner.
Ownership of securities has been restated to reflect ownership pursuant to
the terms of the escrow and financing agreements entered in to by AAMU and La
Terraza in September 2006 and December 2006.
ITEM 12 - Certain Relationships and Related Transactions
We lease our corporate office and manufacturing facility from our
controlling stockholder under a long-term operating lease agreement. The lease
requires a monthly payment of approximately $5,735, including applicable State
sales taxes. We are responsible for all utilities and maintenance expenses. The
lease expires on December 1, 2009 and contains a clause that upon expiration,
the Company and the controlling shareholder shall renegotiate the annual rental
amount.
ITEM 13 - Exhibits and Reports on Form 8-K
(a) The following sets forth those exhibits filed pursuant to Item 601 of
Regulation S-K:
Exhibit Descriptions
-------- -----------------------
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.
(b) The following sets forth the Company's reports on Form 8-K that have
been filed during the quarter for which this report is filed:
None.
26
ITEM 14 - Principal Accountant Fees and Services
The Company paid or accrued the following fees in each of the prior two
fiscal years to it's principal accountant, S. W. Hatfield, CPA of Dallas, Texas.
Year ended Year ended
December 31, December 31,
2006 2005
----------- -----------
1. Audit fees $ 56,869 $ 49,724
2. Audit-related fees - -
3. Tax fees 3,881 4,972
4. All other fees - -
----------- -----------
Totals $ 60,570 $ 57,636
=========== ===========
We have considered whether the provision of such non-audit services is
compatible with S. W. Hatfield, CPA maintaining its independence and determined
that these services do not compromise their independence. Financial Information
System Design and Implementation: S. W. Hatfield, CPA did not charge the Company
any fees for financial information system design and implementation fees.
The Company has no formal audit committee. However, the entire Board of
Directors (the "Board") is the Company's defacto audit committee. In discharging
its oversight responsibility as to the audit process, the Board obtained from
the independent auditors a formal written statement describing all relationships
between the auditors and the Company that might bear on the auditors'
independence as required by Independence Standards Board Standard No. 1,
"Independence Discussions with Audit Committees." The Board discussed with the
auditors any relationships that may impact their objectivity and independence,
including fees for non-audit services, and satisfied itself as to the auditors'
independence. The Board also discussed with management, the internal auditors
and the independent auditors the quality and adequacy of the Company's internal
controls.
The Company's principal accountant, S. W. Hatfield, CPA, did not engage any
other persons or firms other than the principal accountant's full-time,
permanent employees.
Financial statements follow beginning on Page F-1
27
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
CONTENTS
Page
Report of Registered Independent Certified Public Accounting Firm F-2
Consolidated Financial Statements
Consolidated Balance Sheets
as of December 31, 2006 and 2005 F-3
Consolidated Statement of Operations and Comprehensive Loss
for the years ended December 31, 2006 and 2005 F-5
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 2006 and 2005 F-6
Consolidated Statement of Cash Flows
for the years ended December 31, 2006 and 2005 F-8
Notes to Consolidated Financial Statements F-9
F-1
Letterhead of S. W. Hatfield, CPA
Report of Registered Independent Certified Public Accounting Firm
Board of Directors and Stockholders
American Ammunition, Inc.
We have audited the accompanying consolidated balance sheets of American
Ammunition, Inc. (a Nevada corporation) and Subsidiaries (Florida corporations)
as of December 31, 2006 and 2005 and the related consolidated statements of
operations and comprehensive loss, changes in stockholders' equity and cash
flows for each of the two years ended December 31, 2006 and 2005, respectively.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Ammunition, Inc. and Subsidiaries as of December 31, 2006 and 2005 and
the results of their consolidated operations and consolidated cash flows for
each of the two years ended December 31, 2006 and 2005, respectively, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note C to the
consolidated financial statements, the Company experiences negative gross profit
margins, losses from operations and negative cash flows from operations.
Further, liquidity in prior periods was provided by equity securities sales
related to the redemption of a convertible debenture and mandatory exercise of
attached warrants. During 2006, the Company, in a new securities transaction,
retired the outstanding balance on the convertible debenture and cancelled the
remaining attached warrants. As a result of this transaction, the Company's
"safety net" for future liquidity no longer exists. These circumstances create
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not contain any adjustments that might
result from the outcome of these uncertainties.
We initially issued a Report of Independent Certified Public Accountants
(Report) on the above listed financial statements on April 10, 2007. Subsequent
to the date of that Report, Management determined that the Company's accounting
for certain notes payable to shareholders and other affiliated parties with
embedded conversion features and warrant issues. Conversion features determined
to be beneficial to the holder are valued at fair value and recorded to
additional paid in capital and debt issues with the variable conversion features
are considered to be embedded derivatives and are accountable in accordance with
FASB 133; "Accounting for Derivative Instruments and Hedging Activities".
Accordingly, these matters created a situation requiring the restatement of the
Company's financial statements as of and for the year ended December 31, 2006
and 2005. The results of these findings resulted in an additional charges of
approximately $462,000 and $125,000 to operations, with which we concur.
Accordingly, no further reliance should be placed on our Report dated April 10,
2007.
/s/ S. W. HATFIELD
S. W. HATFIELD, CPA
Dallas, Texas
September 17, 2007
F-2
The December 31, 2006 and 2005 financial statements have been restated to
account for the derivative liability that was incurred in connection with the
common stock conversion features and the warrants issued with certain notes
payable.
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2006 and 2005
(Restated) (Restated)
December 31, December 31,
2006 2005
------------- -------------
ASSETS
Current Assets
Cash on hand and in bank $ 1,209,116 $ 431,050
Accounts receivable - trade,
net of allowance for doubtful accounts
of $-0- and $12,463, respectively 396,638 571,427
Inventory 510,104 560,090
Prepaid interest 182,037 452,337
Prepaid expenses 59,059 56,789
------------- -------------
Total Current Assets 2,356,954 2,071,693
------------- -------------
Property and Equipment - at cost or contributed value
Manufacturing equipment 7,945,125 8,095,110
Office furniture and fixtures 71,437 69,889
Leasehold improvements 184,939 190,277
------------- -------------
8,199,501 8,355,276
Accumulated depreciation (5,575,782) (5,577,447)
Impairment of recoverability of carrying value (2,623,719) (2,777,829)
------------- -------------
Net Property and Equipment - -
------------- -------------
Other Assets
Patents, Trademarks and Noncompetition agreement,
net of accumulated amortization of approximately
$119,466 and $64,328, respectively 156,224 211,362
Loan costs and fees, net of accumulated amortization
of approximately $65,250 and $11,309, respectively - 53,941
Deposits and other 83,660 83,660
------------- -------------
Total Other Assets 239,884 348,963
------------- -------------
TOTAL ASSETS $ 2,596,838 $ 2,420,656
============= =============
- Continued -
F-3
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, 2006 and 2005
(Restated) (Restated)
December 31, December 31,
2006 2005
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to shareholders $ - $ 975,000
Working capital advance - 150,000
Customer deposits 189,840 232,690
Accounts payable - trade 735,261 846,618
Accrued salaries and wages 414,164 245,929
Federal excise taxes payable 45,806 -
Accrued interest payable 34,787 26,388
Accrued dividends payable 70,636 27,729
------------- -------------
Total Current Liabilities 1,490,494 2,504,354
Long-Term Liabilities
Notes payable to shareholders 1,075,000 -
Federal excise taxes payable 273,000 -
Convertible debenture - 226,365
Derivative liabilities from note conversion feature 4,697,541 535,202
------------- -------------
Total Long-Term Liabilities 6,045,541 761,567
------------- -------------
Total Liabilities 7,536,035 3,265,921
------------- -------------
Commitments and Contingencies
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
100,000 shares allocated to Series E 2,004 1,991
Common stock - $0.001 par value.
300,000,000 shares authorized.
23,007,902 and 4,173,378 shares issued and outstanding 23,008 4,173
Additional paid-in capital 33,701,314 25,394,233
Accumulated other comprehensive income (expense) (3,928,171) 42,550
Accumulated deficit (34,737,352) (26,113,212)
------------- -------------
(4,939,197) (670,264)
Stock subscription receivable - (175,000)
------------- -------------
Total Stockholders' Equity (4,939,197) (845,264)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,596,838 $ 2,420,656
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Years ended December 31, 2006 and 2005
(Restated) (Restated)
Year ended Year ended
December 31, December 31,
2006 2005
------------- -------------
Revenues $ 2,241,399 $ 3,243,633
------------- -------------
Cost of Sales
Materials 1,680,755 2,001,076
Direct Labor 894,381 1,193,259
Other direct costs and expenses 412,650 627,813
Federal Excise taxes 469,930 -
Depreciation 31,024 770,062
------------- -------------
Total Cost of Sales 3,488,740 4,592,210
------------- -------------
Gross Profit (1,247,341) (1,348,577)
------------- -------------
Operating Expenses
Research and development expenses - 2,251
Marketing and promotion expenses 109,976 184,566
Salaries, wages and related expenses 529,512 583,000
Other operating expenses 608,095 681,969
Bad debt expense 12,089 12,463
Interest expense 615,642 167,882
Depreciation expense - 5,691
Amortization of intangibles 55,138 55,138
Consulting expense related to common stock
issuances at less than "fair value" 5,191,533 257,213
------------- -------------
Total Operating Expenses 7,121,985 1,950,173
------------- -------------
Loss from Operations (8,369,326) (3,298,750)
Other Income (Expense)
Other income (expense) 186,801 9,495
Prepayment penalty on Series E redemption (25,000) -
Settlement fees on debenture restructuring and retirement (354,450) -
Impairment charge against carrying value of property and equipment - (2,777,829)
------------- -------------
Loss before Income Taxes (8,561,975) (6,067,084)
Provision for Income Taxes - -
------------- -------------
Net Loss (8,561,975) (6,067,084)
Other Comprehensive Income
Change in derivative related to note conversion (3,970,721) 42,550
------------- -------------
Comprehensive Loss $ (12,532,696) $ (8,100,057)
============= =============
Preferred Stock Dividends (62,165) (56,253)
------------- -------------
Net Loss available to Common Shareholders $ (8,624,140) $ (6,123,337)
============= =============
Loss per weighted-average share of common stock outstanding,
computed on net loss - basic and fully diluted $ (1.01) $ (1.57)
============= =============
Weighted-average number of common shares outstanding 8,524,241 3,907,499
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2006 and 2005
Mandatory Convertible
Preferred Stock Common Stock Additional
----------------------- -------------------- paid-in
Shares Amount Shares Amount capital
------------ ----------- ------------ ---------- -----------------
Balances at January 1, 2005 2,009,582 $ 2,010 3,743,516 $ 3,743 $ 24,543,820
Conversion of Preferred Stock into
Common Stock (19,420) (19) 66,810 67 (47)
Issuance of common stock forCash - - 293,603 294 476,312
Compensation expense for value of
common stock sold at less than "fair value" - - - 257,213
Less cost of capital - - - (10,000)
Loan fees and costs - - 37,500 38 65,212
Employee bonus - - 8,334 8 17,325
Payment of preferred stock dividends - - 23,615 24 44,400
Dividends declared on Preferred Stock - - - - -
Change in derivative related to
note conversion - - - - -
Net loss for the year - - - - -
------------ ----------- ------------ ---------- -----------------
Balances at December 31, 2005-Restated 1,990,162 1,990 4,172,983 4,173 25,394,233
Conversion of preferred stock
into common stock (36,680) (37) 831,412 831 (794)
Issuance of preferred stock for cash 100,000 100 - - 499,900
Cash redemption of preferred stock (50,000) (50) - - (249,950)
Issuance of common stock for
Cash for retirement of convertible
debenture, working capital advances
and settlement of stock subscription
receivable - - 16,859,338 16,859 3,161,702
Employee bonus - - 41,666 42 17,458
Payment of preferred stock dividends - - 50,135 50 19,127
Payment of accrued interest payable and
reimbursement of expenses paid by
shareholder - - 1,051,973 1,052 83,106
Cost of capital for preferred and
common stock sales - - - - (415,000)
Consulting expense for value of common
stock issued at less than "fair value" - - - - 5,191,531
Dividends declared on preferred stock - - - - -
Change in derivative related to note conversion - - - - -
Net loss for the year - - - - -
---------------- ----------- ---------
Balances at December 31, 2006-Restated 2,004,562 $ 2,004 23,007,902 $ 23,008 $ 33,701,314
============ =========== ============ ========== =================
- Continued -
F-6
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2006 and 2005
(Continued)
Accumulated
other
comprehensive Accumulated
income deficit Total
------------ ---------------- -------------
$ - $ (19,989,875) $ 4,559,698
- - -
- - 436,607
- - 257,213
- - (10,000)
- - 65,250
- - 17,333
- - 44,424
- (56,253) (56,253)
42,550 - 42,550
- (6,067,084) (6,067,084)
------------ ---------------- -------------
42,550 (26,113,212) (845,264)
- - -
- - 500,000
- - (250,000)
- - 3,178,561
- - 17,500
- - 19,177
- - 84,158
- - (415,000)
- - 5,191,531
- (62,165) (62,165)
(3,970,721) - (3,970,721)
- (8,561,975) (8,561,975)
$ (3,928,171) $ (34,757,352) $ (4,939,197)
============ ================ =============
Stock subscription receivable at December 31, 2006 and 2005, respectively was
$-0- and $175,000.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2006 and 2005
(Restated) (Restated)
Year ended Year ended
December 31, December 31,
2006 2005
------------- -------------
Cash flows from operating activities
Net loss for the year $ (8,561,975) $ (6,067,084)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 602,021 967,612
Bad debt expense 12,089 12,463
Payment of expenses with common stock 412,732 17,333
Consulting expense related to common stock issuances
at less than "fair value" 5,191,533 257,213
(Increase) Decrease in
Accounts receivable 162,700 55,554
Inventory 49,986 352,334
Prepaid expenses, deposits and other (2,270) 2,057
Increase (Decrease) in
Accounts payable and other accrued liabilities 207,448 (90,269)
Accrued payroll payable 168,235 109,959
Accrued interest payable 84,441 11,388
Customer deposits (42,850) (208,216)
------------- -------------
Net cash provided by (used in) operating activities (1,715,910) (1,801,824)
------------- -------------
Cash flows from investing activities
Purchase of property and equipment (31,024) (124,198)
------------- -------------
Net cash used in investing activities (31,024) (124,198)
------------- -------------
Cash flows from financing activities
Proceeds from loans from stockholders 100,000 975,000
Cash paid to retire convertible debenture (585,000) -
Cash received on working capital advances 2,200,000 150,000
Cash received on sale of preferred stock 500,000 -
Cash paid to retire preferred stock (275,000) -
Cash received on issuance of mandatory convertible debenture - 436,607
Cash received on sale of common stock 1,000,000 -
Cash paid to acquire capital (415,000) (10,000)
------------- -------------
Net cash provided by financing activities 2,525,000 1,551,607
------------- -------------
INCREASE (DECREASE) IN CASH 788,066 (374,415)
Cash at beginning of year 431,050 805,465
------------- -------------
Cash at end of year $ 1,209,116 $ 431,050
============= =============
Supplemental disclosure of interest and income taxes paid
Interest paid for the period $ 34,227 $ 19,770
============= =============
Income taxes paid for the period $ - $ -
============= =============
Supplemental disclosure of non-cash investing and financing activities
Conversion of working capital advances into common stock $ 2,200,000 $ 40,000
============= =============
Payment of accrued dividends on preferred
stock with common stock $ 19,177 $ 44,424
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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.
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 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.
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
F-9
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note B - Preparation of Financial Statements - Continued
internal accounting control is designed to assure, among other items, that 1)
recorded transactions are valid; 2) valid transactions are recorded; and 3)
transactions are recorded in the proper period in a timely manner to produce
financial statements which present fairly the financial condition, results of
operations and cash flows of the Company for the respective periods being
presented
For segment reporting purposes, the Company operated in only one industry
segment during the periods represented in the accompanying financial statements
and makes all operating decisions and allocates resources based on the best
benefit to the Company as a whole.
The accompanying consolidated financial statements contain the accounts of
American Ammunition, Inc. and its wholly-owned subsidiaries, F&F Equipment, Inc.
and Industrial Plating Enterprise Co. All significant intercompany transactions
have been eliminated. The consolidated entities are collectively referred to as
"Company".
Note C - Going Concern Uncertainty
The Company continues to experience fluctuating periodic revenues, as
demonstrated in Note P. The Company's operations consistently demonstrate a
negative cash flow position as evidenced by net cash used in operating
activities of approximately $(1,716,000), $(1,802,000), $(649,000),
$(2,918,000), $(1,236,000) and $(1,100,000) for each of the respective years
ended December 31, 2006, 2005, 2004, 2003, 2002 and 2001.
The Company has sustained liquidity through the sale of equity securities,
restricted and unrestricted, domestically and in international markets and
significant working capital advances have been made by members of management
and/or existing shareholders. Future liquidity may be dependent upon future
offerings of debt and/or equity securities; however, the availability of further
liquidity from these sources is uncertain.
The Company's continued existence is principally dependent upon its ability to
generate sufficient cash flows from operations to support its daily operations
on a timely basis. There is no assurance that the Company will be able to obtain
raw materials in sufficient quantity, due to its financial condition, to ensure
success of its business plan. Further the ability to obtain additional funding
through the sales of additional equity securities or, that such funding, if
available, will be obtained on terms favorable to or affordable by the Company
is uncertain.
The Company anticipates that additional working capital will be necessary to
support and preserve the integrity of the corporate entity. However, there is no
assurance that the Company will be able to obtain additional funding through
either bank lines-of-credit or the sale of additional equity securities or, that
such funding, if available, will be obtained on terms favorable to or affordable
by the Company.
If no additional operating capital is received during the next twelve months,
the Company will be forced to rely on existing cash in the bank, the cash
generated from operating activities and/or additional funds loaned by the
Company's management and/or shareholders to preserve the integrity of the
corporate entity. In the event, the Company is unable to acquire advances from
management and/or significant stockholders, the Company's ongoing operations
would be negatively impacted to the point that all operating activities are
ceased.
While the Company is of the opinion that good faith estimates of the Company's
ability to secure additional capital in the future to reach our goals have been
made, there is no guarantee that the Company will receive sufficient funding to
sustain operations or implement any future business plan steps.
F-10
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note D - 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.
In November 2004, Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("Statement") No. 151,
"Inventory Costs - an amendment of Accounting Research Bulletin No. 43,
Chapter 4." Statement No. 151 requires that abnormal amounts of costs,
including idle facility expense, freight, handling costs and spoilage,
should be recognized as current period charges. The provisions of this
Statement became effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. Statement No. 151 was adopted the Company on
January 1, 2006. There was no material impact resulting from the adoption
of Statement No. 151 on the Company's financial statements.
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.
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.
F-11
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note D - Summary of Significant Accounting Policies - Continued
5. Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. At December 31, 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.
As of December 31, 2006 and 2005, the deferred tax asset related to the
Company's net operating loss carryforward is fully reserved. In the event
that these carryforwards were not fully utilized, they began to expire in
2005.
6. Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing the net income
(loss) available to common shareholders by the weighted-average number of
common shares outstanding during the respective period presented in our
accompanying financial statements.
Fully diluted earnings (loss) per share is computed similar to basic income
(loss) per share except that the denominator is increased to include the
number of common stock equivalents (primarily outstanding options and
warrants).
Common stock equivalents represent the dilutive effect of the assumed
exercise of the outstanding stock options and warrants, using the treasury
stock method, at either the beginning of the respective period presented or
the date of issuance, whichever is later, and only if the common stock
equivalents are considered dilutive based upon the Company's net income
(loss) position at the calculation date.
As of December 31, 2006 and 2005, and subsequent thereto, the Company had
no options outstanding. The outstanding warrants, mandatory convertible
preferred stock and mandatory 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. Pending and/or New Accounting Pronouncements
The Company is of the opinion that any pending accounting pronouncements,
either in the adoption phase or not yet required to be adopted, will not
have a significant impact on the Company's financial position or results of
operations.
F-12
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note E - Correction of an Error
On August 22, 2007, our management concluded that the financial statements
included in our Forms 10-QSB for June and September 2005, the calendar year 2006
and for the period ending March 31, 2007, and the Forms 10-KSB for the periods
ending December 31, 2005 and December 31, 2006, all of which have been
previously filed with the Securities and Exchange Commission, need to be
restated, due to the failure to include the beneficial conversion feature
discount on unsecured convertible indebtedness.
Management discovered such changes needed to be made after consulting with
Pollard-Kelley Auditing Services, our independent registered public accounting
firm as of June 26, 2007, who have concurred with management as to the
reexamination of the above mentioned issues.
The Company has entered into certain notes payable to shareholders and other
affiliated parties with embedded conversion features and warrant issues. The
appropriate accounting is governed by EITF 98-5: "Accounting for convertible
securities with beneficial conversion features or contingency adjustable
conversion" and EITF No. 00-27: "Application of issue No 98-5 to certain
convertible instruments". Conversion features determined to be beneficial to the
holder are valued at fair value and recorded to additional paid in capital. The
fair value is determined to be ascribed to the detachable warrants issued with
the convertible debentures utilizing the Black-Scholes method. Any discount
derived from determining the fair value to the debenture conversion features and
warrants is amortized to financing cost over the life of the debenture. The
unamortized discount, if any, upon the conversion of the debentures is expensed
to financing cost on a pro rata basis.
Debt issues with the variable conversion features are considered to be embedded
derivatives and are accountable in accordance with FASB 133; "Accounting for
Derivative Instruments and Hedging Activities". The fair value of the embedded
derivative is recorded to derivative liability. This liability is required to be
marked each reporting period. The resulting discount on the debt is amortized to
interest expense over the life of the related debt.
[Balance of this page intentionally left blank.]
F-13
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note E - Correction of an Error - Continued
The errors discovered by management relate directly to the accounting for and
recording various conversion features and warrants as follows:
Year ended Year ended
December 31, December 31,
2006 2005
-------------- ---------------
Net Loss, as previously reported $(8,100,057) $(5,941,669)
Effect of the correction of an error
(Increase) Decrease in Net Loss by financial statement line item:
Operating expenses: Interest expense recognized
from beneficial conversion discount feature on
notes payable to shareholders and other affiliates (461,918) (125,415)
-------------- ---------------
Total effect of changes on Loss from Operations and Net Loss (461,918) (125,415)
-------------- ---------------
Net Loss, as restated $ (8,561,975) $ (6,067,084)
============== ===============
Net loss available to common stockholders,
as previously reported $ (8,162,222) $ (5,997,922)
Effect of the correction of an error
Total effect as shown above (461,918) (125,415)
-------------- ---------------
Net Loss available to common stockholders, as restated $ (8,624,140) $ (6,080,787)
============== ===============
Earnings per share, as previously reported $ (0.96) $ (1.53)
Total effect of changes (0.05) (0.03)
-------------- ---------------
Earnings per share, as restated $ (1.01) $ (1.56)
============== ===============
In light of the restatements to the financial statements disclosed above,
caused, in part, by a failure in the Company's internal control over financing
reporting due to the limitations in the Company's accounting resources to
identify and react in a timely manner to non-routine, complex and/or
transactions originated by other parties on the Company's behalf, as well as
gaining an adequate understanding of the disclosure requirements relating to
these types of transactions, we feel that the existing controls and procedures
were and remain effective. Because of said controls, which resulted in the
review, discovery and disclosure by amendment of filings to adequately disclose
required information, management also concludes that by requiring supplemental
reviews of financing transactions that its existing controls and procedures will
be more effective.
Note F - Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximates fair value due to the short term nature of
these items and/or the current interest rates payable in relation to current
market conditions.
Interest rate risk is the risk that the Company's earnings are subject to
fluctuations in interest rates on either investments or on debt and is fully
dependent upon the volatility of these rates. The Company does not use
derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company's earnings are subject to
fluctuations in interest rates or foreign exchange rates and are fully dependent
upon the volatility of these rates. The company does not use derivative
instruments to moderate its exposure to financial risk, if any.
F-14
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note G - 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 December 31, 2006 and 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 through December 31, 2006, and
subsequent thereto, as a result of any of these unsecured situations.
Note H - Inventory
As of December 31, 2006 and 2005, inventory consisted of the following
components:
December 31, December 31,
2006 2005
------------- ------------
Raw materials $375,732 $522,524
Work in process 119,851 30,103
Finished goods 14,521 7,463
-------- --------
Totals $510,104 $560,090
======== ========
Note I - Property and Equipment
Property and equipment consist of the following components:
December 31, December 31, Estimated
2006 2005 useful life
------------ ------------- ------------
Manufacturing equipment $ 7,944,673 $ 8,095,110 3-10 years
Office furniture and fixtures 69,889 69,889 3- 7 years
Leasehold improvements 184,939 190,277 8-20 years
------------ ------------
8,199,501 8,355,276
Accumulated depreciation (5,575,782) (5,577,447)
Impairment of recoverability
of carrying value (2,623,719) (2,777,829)
------------ ------------
Net property and equipment $ - $ -
============ ============
Total depreciation expense charged to operations for the years ended December
31, 2006 and 2005 was approximately $31,024 and$775,753, 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.
F-15
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note J - Loans from Shareholders
December 31, December 31,
2006 2005
------------ ------------
Four separate notes payable to three separate stockholders.
Interest at 8.0%, payable monthly. Principal due at maturity on
December 31, 2008. 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 $0.08 per share, whichever is less. Each
note is unsecured. $ 1,075,000 $ 650,000
============ ============
Note K - Federal Excise Taxes Payable
On March 29, 2007, the Company reached a settlement and executed a Payment
Agreement with the Department of the Treasury, Bureau of Alcohol, Tobacco and
Firearms, related to a audit of the Company's Federal Excise Taxes obligation.
The audit commenced during 2006. The Payment Agreement calls for the Company to
pay an aggregate total of $300,000, plus interest at the statutory rate starting
on March 29, 2007. The payment schedule is as follows: April 2007 through March
2008 - $3,000 per month; April 2008 - March 2009 - $4,000 per month; and April
2009 - March 2013 - $5,000 per month.
This obligation has been fully accrued in the accompanying financial statements
as of December 31, 2006.
Note L - Convertible Debenture
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.
F-16
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note L - 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.
("CIS") 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 with CIS 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. Escrow
agreement calls for Escrow Agent to release such shares for delivery in
accordance with the terms of the pending SB-2 Registration Statement of AAMU
currently on file with the SEC and in accordance with the terms and conditions
of the Financing Agreement dated September 2006 entered into between AAMU and
the Investor, and only after reasonable notification thereof to AAMU prior to
delivery of any such certificates. Disbursement and distribution of shares shall
only be made in accordance with the terms of the applicable SB-2 registration.
The Investor and/or the selling stockholder has contractually agreed to restrict
its ability to convert or exercise its warrants and receive shares of AAMU
common stock such that the number of shares held by them and their affiliates
after such conversion or exercise does not exceed 4.9% of the then issued and
outstanding shares of common stock. 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 deposited into
escrowed have in fact been deposited in escrow on September 26, 2006 as
required.
The Investor provided additional funding in the amount of $1,000,000 to AAMU on
December 21, 2006 for an additional 5,333,335 shares. The sum of $100,000 was
paid as fees to CIS for locating, negotiating and closing the additional
funding. All other terms and conditions of the escrow agreement and related
financing agreement, including in corporation of the terms of the SB-2
requirements, remain the same.
F-17
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note L - Convertible Debenture - Continued
Discussion of retired debenture
The debentures bore interest at 8% and were scheduled to mature on June 31
[sic], 2007, and were convertible into the Company's common stock, at the
selling stockholder's option. The convertible debentures were 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 December 31,
2006, the warrant has been cancelled due to the repayment and final settlement
on the convertible debenture.
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.
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.
F-18
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note L - Convertible Debenture - Continued
Discussion of retired debenture - continued
* 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.
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 December 31, 2005, 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.
As of December 31, 2006, the Company has no continuing obligation under the
convertible debenture and attached warrant.
F-19
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note M - Derivative Liability arising from Warrants
The Company accounts for debt with embedded conversion features and warrant
issues in accordance with EITF 98-5: "Accounting for convertible securities with
beneficial conversion features or contingency adjustable conversion" and EITF
No. 00-27: "Application of issue No 98-5 to certain convertible instruments".
Conversion features determined to be beneficial to the holder are valued at fair
value and recorded to additional paid in capital. The Company determines the
fair value to be ascribed to the detachable warrants issued with the convertible
debentures utilizing the Black-Scholes method. Any discount derived from
determining the fair value to the debenture conversion features and warrants is
amortized to financing cost over the life of the debenture. The unamortized
discount, if any, upon the conversion of the debentures is expensed to financing
cost on a pro rata basis.
Debt issues with the variable conversion features are considered to be embedded
derivatives and are accountable in accordance with FASB 133; "Accounting for
Derivative Instruments and Hedging Activities". The fair value of the embedded
derivative is recorded to derivative liability. This liability is required to be
marked each reporting period. The resulting discount on the debt is amortized to
interest expense over the life of the related debt.
Note N - Preferred Stock Transactions
Preferred stock consists of the following as of December 31, 2006 and 2005,
respectively:
December 31,2006 December 31, 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 36,680 183,400 73,360 366,800
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 - -
--------- --------- ---------- ---------
2,004,562 $ 817,400 1,991,242 $ 750,800
========= ========= ========== =========
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.
F-20
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note N - Preferred Stock Transactions - Continued
Series A Convertible Preferred Stock - continued
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.
F-21
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note N - Preferred Stock Transactions - Continued
Series B Convertible Preferred Stock
On March 31, June 30, October 23, and December 27, 2006, respectively, the
holders of the Series B Preferred Stock exercised their conversion rights and
exchanged an aggregate 36,680 shares (9,170 shares per conversion) of Series B
Preferred Stock for 831,412 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.
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.
Series E 8% Convertible Preferred Stock
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
F-22
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note N - Preferred Stock Transactions - Continued
Series E 8% Convertible Preferred Stock - continued
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.
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
5th 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
F-23
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note N - Preferred Stock Transactions - Continued
Series E 8% Convertible Preferred Stock - continued
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..
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 O - 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 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.
F-24
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note O - Common Stock Transactions
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 2005,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.
In July 2005, the Company issued approximately 8,333 shares of unregistered,
restricted common stock to Paul Goebel, the Company's former 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.
In August, November and December 2005, respectfully, the Company issued an
aggregate 37,500 shares of restricted, unregistered common stock to an existing
shareholder 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.
F-25
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note O - Common Stock Transactions
Calendar 2006 Transactions - continued
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.
In December 2006, the Company issued approximately 284,168 shares of restricted,
unregistered common stock, valued at approximately $22,733, 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 $90,934 on this transaction.
F-26
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note O - Common Stock Transactions
Calendar 2006 Transactions - continued
On March 31, June 30, October 23, and December 27, 2006, respectively, the
holders of the Series B Preferred Stock exercised their conversion rights and
exchanged an aggregate 36,680 shares (9,170 shares per conversion) of Series B
Preferred Stock for 831,412 shares of restricted, unregistered common stock.
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 the
Company's 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 the Company to the foregoing subject to
the right of the Company to prepay any and all indebtedness thereunder in the
Company's common stock, without penalty, at any time before or after default to
La Terraza Trading and Asset Management, Inc.
In July, August and October 2006, in three separate transactions, the Company
issued an aggregate 50,135 shares of restricted, unregistered common stock in
payment of approximately $19,177 in accrued dividends payable on the Company's
outstanding Series B Preferred Stock for the quarters ended March 31, June 30
and September30, 2006, 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.
On December 27, 2006, effective as of September 13, 2006, the Company and La
Terraza agreed that all pertinent conditions had been met and the Company
released the aforementioned 11,470,000 shares of common stock issued pursuant to
the Company's active Registration Statement on Form SB-2 to La Terraza in
exchange for the previous receipt of approximately $2,150,000 in cash proceeds,
the use of which has previously be discussed. The Company paid placement fees of
approximately $215,000 in connection with the sale of these securities and the
retirement of the La Jolla convertible debentures. 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 $3,704,810 on this transaction.
On December 27, 2006, the Company issued an additional 5,333,335 shares of
common stock to La Terraza for gross proceeds of approximately $1,000,000. The
Company paid placement fees of approximately $100,000 in connection with the
sale of these securities. 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 $1,136,000 on this transaction.
F-27
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note P - Stock Warrants
In conjunction with the Company's Private Placement Memorandum for the sale of
Series E Convertible Preferred Stock, the Company agreed to issue to the
Placement Agent warrants to purchase up to 500 shares of the Company's common
stock 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.
On September 6, 2006, in conjunction with the $2,150,000 Financing Agreement
with La Terraza, the Company issued warrants to purchase 600,000 shares of
common stock at the lesser of $0.1875 per share or the average closing price per
share for the Company's common stock over the twelve (12) month period prior to
the date of such exercise, with the warrants being exercisable at any time from
the issue date through July 24, 2011. The following table presents warrant
activity through December 31, 2006:
Weighted
Average
Number of Exercise
Shares Price
----------- ------------
Balance at January 1, 2005 2,663,650 $ 1.00
Issued - -
Exercised (40,000) $ 1.00
Expired - -
----------- ------------
Balance at December 31, 2005 2,263,650 $ 1.00
Issued
Placement agent warrants 1,000 $ 0.90
La Terraza warrants 600,000 $ 0.1875
Exercised - -
Expired (2,263,650) $ 1.00
----------- ------------
Balance at December 31, 2006 601,000 $ 0.1887
========== ============
Note Q - 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
F-28
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note Q - Rental Commitments - Continued
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 $23,057 and 22,176, respectively, for each of the years ended
December 31, 2006 and 2005.
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 was for a period of two (2) years and required 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 was
responsible for all utilities and maintenance expenses. This lease expired on
May 31, 2006 and 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
------------ ----------
2007 $ 72,643
2008 68,815
2007 68,815
----------
Totals $ 210,273
==========
For the respective years ended December 31, 2006 and 2005, the Company paid an
aggregate of $125,862 and $158,947 in rent under these agreements.
Note R - Income Taxes
The components of income tax (benefit) expense for the years ended December 31,
2006 and 2005, respectively, are as follows:
Year ended Year ended
December 31, December 31,
2006 2005
-------------- ----------------
Federal:
Current $ - $ -
Deferred - -
------- ------
- -
------- ------
State:
Current - -
Deferred - -
------- ------
- -
------- ------
Total $ - $ -
====== ======
As of December 31, 2006, the Company has a net operating loss carryforward of
approximately $14,500,000 to offset future taxable income. Subject to current
regulations, components of this carryforward began to expire in 2005. 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.
F-29
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note R - Income Taxes - Continued
The Company's income tax expense (benefit) for the years ended December 31, 2006
and 2005, respectively, differed from the statutory federal rate of 34 percent
as follows:
Year ended Year ended
December 31, December 31,
2006 2005
-------------- ----------------
Statutory rate applied to loss before income taxes $ (2,840,000) $ (2,062,600)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Non-deductible items
Impairment of recoverability of carrying value
of fixed assets - 944,000
Imputed interest on derivative liability from
warrants and convertible notes 157,000 42,600
Compensation expense related to common
stock issuances at less than "fair value" 1,765,000 87,000
Other, including reserve for deferred tax asset 918,000 989,000
-------------- ---------------
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, 2006 and 2005, respectively:
Year ended Year ended
December 31, December 31,
2006 2005
------------ ------------
Deferred tax assets - long-term
Net operating loss carryforwards $ 4,930,000 $ 4,080,000
Deferred tax liabilities - long-term
Statutory depreciation differences (500,000) (525,000)
------------ ------------
4,430,000 3,555,000
Less valuation allowance (4,430,000) (3,555,000)
------------ ------------
Net Deferred Tax Asset $ - $ -
============ =============
During the years ended December 31, 2006 and 2005, respectively, the valuation
allowance increased (decreased) by approximately $875,000 and $1,576,000.
[Balance of this page intentionally left blank.]
F-30
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2006 and 2005
Note S - Revenue Concentrations
The Company sells to both commercial and governmental customers, in both
domestic and foreign markets. The following table shows the Company's gross
revenue composition:
Year ended Year ended
December 31, 2006 December 31, 2005
----------------- -----------------
Amount % of total Amount % of total
---------- ---------- ---------- ----------
Domestic
Commercial
Customer A $ 713,429 31.83 $ 222,272 6.85
Others 1,140,334 50.88 958,813 29.56
---------- ---------- ---------- ----------
1,853,762 82.71 1,181,085 46.41
---------- ---------- ---------- ----------
Private Label 268,129 11.96 407,063 12.55
---------- ---------- ---------- ----------
Governmental
Customer B 51,089 2.28 541,392 16.69
Customer C - - 399,860 12.33
Others 10,256 0.46 44,963 1.39
---------- ---------- ---------- ----------
61,345 2.74 986,215 30.41
---------- ---------- ---------- ----------
Foreign
Governmental
Customer D - - 644,180 19.86
Others 58,163 2.59 25,090 0.77
---------- ---------- ---------- ----------
58,163 2.59 669,270 20.63
---------- ---------- ---------- ----------
Totals $2,241,399 100.00 $3,243,633 100.00
========== ========== ========== ==========
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(Signatures follow on next page)
F-31
SIGNATURES
In accord with Section 13 or 15(d) of the Securities Act of 1933, as amended,
the Company caused this report to be signed on its behalf by the undersigned,
thereto duly authorized.
American Ammunition, Inc.
Dated: November 16, 2007 By: /s/ Andres F. Fernandez
------------------ -----------------------------------
Andres F. Fernandez
President, Chief Executive Officer,
Chief Financial Officer and Director
In accordance with the Securities Exchange Act of 1934, as amended, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the date as indicated.
Dated: November 16, 2007 By: /s/ Andres F. Fernandez
------------------ -----------------------------------
Andres F. Fernandez
President, Chief Executive Officer,
Chief Financial Officer and Director
Dated: November 16, 2007 By: /s/ J. A. Fernandez, Sr.
------------------ ------------------------------------
J. A. Fernandez, Sr.
Chairman, Director of Sales,
and Director
Dated: November 16, 2007 By: /s/ Emilio D. Jara
------------------ ------------------------------
Emilio D. Jara.
Vice President - Operations,
Corporate Secretary and Director
Dated: November 16, 2007 By: /s/ Maria A. Fernandez
------------------ ----------------------------------
Maria A. Fernandez,
Director
59